Thursday, March 5, 2009

Tipping over?

While yesterday worked out just as predicted it did not give us any great trade opportunities.

Of course there is the possibility for a short term double bottom here around 692 but it should be short lived - if we do end up getting some bulls to step in here the best chance I see is the 710 range. We have gone through the proper distribution the past 2 days and a 38% retracement off last thursdays peaks to be able to continue on the down path. If we do end up breaking the 692 I can see us trading towards the 679 range before we find a stop (expect it to halt at 686 first). Keep in mind that this would represent a significant drop.

Well we did have some bulls left but stalled out at 704 before reaching our targets . From here on out it was just down and down. There were no signs of a double bottom, not even a tiny rally there and we dropped to create new lows and halted half way to my target just as predicted. After hitting the 684 range we continued sideways before we made our decisions and dropped to my final low of the day target at 679 (actual 677.93). While its good that we were not caught by surprise it is frustrating not to make any money of this range - so time for a new trade lesson.

Trade Lesson
GAP's, we see them now pretty much on a daily basis and there is a bit of a different pattern that emerges from what I had used in the past. Previously GAPs were attributed primarily to market over raction and the probability of either a fill or reverse GAP open were fairly high. However, it seems in the recent months half of our days will gap and make trading difficult due to narrower intraday ranges and many of the gains (or losses) occuring in a non-tradable window. To make matters worse, if you do end up getting in a position, even with a good entry, its impossible to hold overnight as the GAP itself can eat up all of your profits if it goes in the wrong direction.

Yesterday was a perfect example of how we could have had a great short entry. Many times the GAP open combined with the first move (first hour) in the opposite direction of the GAP represents either the low of high of the day. While this is a pattern that existed before it seems much more applicable now.

For example GAP open down, some attempts at recovery, hit the high and trend lower. The opposite on a GAP open up, some sell off and hit the bottom to continue higher. When you combine this with the current overall trend and the previous day or two moves (down, up, sideways) you can make this work even better - not always but as another sign.

Lets try to analyse yesterday, we had a big GAP open down, attempted a rally and stalled exactly at 50% of the fill. How could we have determined that a fill would not occur? Take a look at the 5-min bars off the open. You see small open/close on top of wide ranges - thats indecision and hesitation. This was a great sign that it was going to be difficult to get a full fill here due to this hesitation and we could have used this as a perfect entry at the 50% level with a stop loss at the 62% level.

Of course, if we would have had a full fill it would have been a much easier trade but I have seen those half fill gaps run away from me too many times so I wanted to spend some time to determine how we could have made this a great entry. Of course one way to work with GAPs is to fade into the fill attempt at different levels but this leaves you with a much wider risk margin, a risk that quite fankly I am not willing to accept. (look up fade on google for more info but its pretty much buying/shorting against the trend with the assumption of reversal)

This week alone we had 3 days with partial fills with each of those attempts being the respective high or low of the day. I will be spending some more time on trying to perfect this a bit more so we can properly analyse the signs after we have a GAP to improve probability and ensure we have better protection then a fade. Enough is enough, too many times did we miss a great trade. As I do not see an end to GAPs at the moment due to the crazy overnight activity spured by world markets we need to ensure we can use this to our advantage. This is definitly something that differs quite a bit from what I had experienced before.

Well jobs report again, an important piece of fundamental information that will drive the markets on the short term. I think regardless of expectations, the job report will spur some buying at least into mid next week. At this point we have priced in the worst job report possible so if we see any sign of relief or even hit the expected numbers we should see some bulls step in. We have a lot of talk about bottoming processes now on many news sites, not sure where they are getting their information from (maybe they were reading this here lol) but this talk is what will bring back some confidence for buyers for the last fake rally before hitting our mid term lows.

Of course if we end up turning down from here, which is very possible we should be seeing VIX on the edge of the breakout. If VIX is to break out, which can occur today we should have a 3 days window where the bottom is formed. It is possible, and I would love to say that my original time frames holds true but we have seen too much continuation of the trend acceleration I have been talking about. When the market does not do what you think it should do, change your strategy. It is less likly to be honest today as we have friday but something to be considered.

In summary, as you can see today is quite difficult to forecast - its anyones game. I may post some more details after the report and after seeing the first 15 min to make a better call where we will go.

How to trade?
We missed the short, no need to chase, especially since we do not know where it will turn. Patience, Patience, our move will come soon.


  1. Chris,

    Thanks for the info about the GAPs and 50% retrace. Will keep that in mind from now on. Keep up the great work!

  2. Today marks the first time that I see CNBC posting an article about the 400 range as a bottom.

    "Charts Predict: 'Dangerous' S&P Could Hit 450"

    It seems news has finally caught up on what we have been saying for a year now.

  3. They must have noticed your blog ;-)

  4. is bounce in the making today?

  5. trade range narrowing as you can see here, unfortunately I do not see much upside here. Of course anything is possible but we have a weekend ahead of us, some big short covering this morning, and as I write this I see this HUGE down bar so I guess we have our answer.

  6. Is this fake bounce now that Q has made the low? or couple of days of rally? to what level?

  7. "How could we have determined that a fill would not occur? Take a look at the 5-min bars off the open. You see small open/close on top of wide ranges."

    Chauger, I want to ask if you have a screen shot of what this looks like. Have an idea, but not too certain if what I am thinking what you are thinking.:)

    A screenshot would be cool, especially on this mornings action. Thanks.

  8. here you go.

    WHen looking at candlesticks, if you have long lines but small boxes it marks indecision. We would have needed big boxes on top of the lines (meaning where the length of the box is the same or close to the same as the line).

    Long lines, small boxes are also called spinners, showing indecision, meaning neither bulls or bears are winning, if that is the case the previous trend wins most of the time.