So what can we take from today?

Well on the surface it seemed nothing really happened but I have to admit, being a bear now you want to take a side of caution. We did not get a breach of Mondays low and EURUSD seemed to have found support around the 50dma (hence my long position there). While we can all agree we will eventually resolve to the downside - at the moment, there really is no trade to take. If you have short exposure lighten up or hedge, if you are long - really take a good look at your positions and tighten stops.

Whats interesting to see is that many of the stocks I generally follow have dropped quite significant in the past 2-3 weeks and are very close to key support and previous month low points. Of course we have a chance for a break, ignoring technical oversold/overbought indicators like we had done during the rally when it seemed every overbought indicator did nothing.

Now whats really interesting on many daily charts is that indicators have come to a rather neutral level with many divergences. Here is where it gets interesting. Lets take a look at SPY.

Of course the standard MACD divergence we have been talking about for a while. Take a look at the last bottoms we have had. 2 spinners before the market took off for another leg up. Now whats even more interesting is the same divergence developing starting in May that made us all believe we will finally head lower back in July and what did it do? It powered through resistance and removed that divergence with a strong rally. I do not expect this to happen here because quite frankly the market had a chance towards mid October to take it higher and actually reversed adding more confirmation of a bearish pattern developing. From here the market would have to give us 100+ points on the upside to balance out the MACD again confirming a new high.

So overall - I am not sure what to make from here. All I know that if the last 2 weeks are signs of whats to come we should get ready for a very volatile month of November - up or down.

Overnight session !!!

What a day yesterday. Quite incredible come back off the Friday lows and a new low intraday. The market closed as we had anticipated in "limbo land" - meaning it did not give any clear direction though my assumption was a bullish continuation after we had formed a nice spinner. However, the overnight session really showed us what will be in store and reversed all the way back towards the lows of yesterday. My long that at one point almost had 20 points in gains was stopped out at break even at the bottom - could have managed that a little better but oh well.

I had identified low risk trade targets for either a short or a long yesterday - it seems we may get our chance at the long position anywhere from 1012 ES towards 1018 today. I entered a long on EURUSD based on the below daily chart.

As you can see we are right at the 50dma for the dollar here so if there is a bull left in this market it should happen here. The EURUSD is a bit ahead of SPX here and currently at key support while SPX is a few points away (well a bit more then a few but you get the point).

Of course I believe we will resolve to the downside here but I will not let my belief dictate what is in the charts anymore. From a pure risk reward perspective, the long side is more favorable now then the short side - at least on the short term. From a bearish perspective, this is quite an amazing setup to be honest, a breach of 1016 SPX (1012 ES) will confirm that we are at least making a move towards the 965-930 range and a retest of 1012 should be in order after the breach so there is no rush getting too short too soon yet. As you can see from the above EURUSD chart - it becomes even more obvious what will happen if we do end up breaching this range - LOTS of opportunities on the downside which we all know moves faster and stronger then a drawn out bull cycle (of course with the exception of the amazing last 6 months - I wonder how many times I am going to keep on saying that).

So for today - the market has shown us what it appears to be doing - a potential breach of yesterdays low at 1026 but lets not get ahead of ourselves and wait for cash hours.

Just an FYI - I did get stopped out of my long position during overnight hours, I had created a rule a few months back to not keep stops active overnight but I changed this back to my previous rules as I am trading with my old system again which is much lower risk (but less potential rewards).

So what comes next?

Well we have a few potential setups here.

Long between 1011-1013 with a stop at 1009. If that fails long at 1006 with stop at 998.

Short setups 1061-1062 with stop at 1064.50. If that fails short again at 1068 with stop at 1073.

I will pass on anything in between and use the price levels in between those ranges to determine the longer term direction. I am only going to purse the lowest risk trades at this point. Of course expect me to scalp in between but in terms of swing positions using futures and options will only be done at those levels.

What to do?

I had posted a mid term update yesterday and wanted to restate something again to make it crystal clear. I am not turning bullish - please do not misunderstand my statements yesterday as bullish - rather look at them and realize that I am totally unsure of the markets next move. Many other traders are calling for the "primary wave 3" to begin rather shortly which will lead to the 480 SPX targets I have been talking about for a good 2 years now. Based on my original long term review in 2008 I had called for those levels to be reached towards the turn of 2010 - and lets be honest we are far from it.

Just like many other traders, I am trying to determine how I can profit from this market and what strategies work best. As a result I have changed my trade plan slightly. As some of my long term readers remember I used to be a very short term trader, and switched to a much stronger IT focus in the beginning of the year. This is not worked at all for me and I am going back to change my trade style to what I was doing in the past that has always given me nice profits =)

I am in the process of reorganizing my cash distribution between accounts and will run the following setup going forward:

25% Futures Day Trades

25% Futures Swing Trade

30% Equities

10% options

10% Forex

I will also be limiting my capital to a much smaller amount on all those accounts. I will actually create another account where I will move the remainder of my capital not to be touched.

Trade wise I will focus again on short term scalps and day trades whenever applicable and swing trades with targets of a minimum of 12.5 SPX points and a maximum of 25 SPX points. I have spent a lot of time reviewing my trades in the past 6 months and realized that if I had used my old system more actively that losses would have been much smaller. Hindsight is 20/20 I know, but looking back and reviewing my entries and exits - I wish I had applied more of my old trade style.

So enough of what I am doing - market wise as mentioned we are at a key turning point. We are nearing important fib levels that also co-incide with what I called the previous largest pull back in June/July - we all know what happened after that. The key thing to remember is the distinction of a large ABC correction that started in March OR a full 5 wave pattern. The questions we have to ask ourselves now?

1) Did we finish the C of our ABC correction?

2) did we finish W3 of 5?

3) Did we finish W5 of 5?

Once we have confirmations of either of the above we can attempt to make some longer term projections (1-2 months) of market direction. Considering that we are close to key support we need to wait to see how the 1016 plays out before we can make further calls.

Pullback for new highs or finally a top?

Well, we are nearing the range where the bulls have to make a decision. The largest pull back during our incredible rally was back in june/July for a total of 87 SPX points. Our current pullback comes in at a total of 68 with a low of 1033. You all remember the significance I had mentioned for our 38% retracement level at 1016 SPX - if we do see a sell off towards this level we will be adding a total of 17 points for a grand total of .... wait for it ... wait for it ... yes 85 points pull back - which happens to the same size pull back we have had back in June/July. This important 1016 support level is not only the important FIB but is also october low point. I had talked about the importance of this important 1016 price level back towards end of august after we had breached it for the first time. And we are getting very close to this level again.

Overall, I am having difficulties trying to identify where the market will head long term. During my trading experience I have always had a long term picture of market direction and used that to be able to trade short and mid term. At this point I want to refrain from guessing - to restate, we have quite a bullish setup with a breach of the 1016 SPX levels. Even if we break this range to the downside we have 880 as extremely strong support. Everything looks bullish long term while my fundamental views are quite bearish still. Since both views do not mix I have no choice but to remain light and stay out of major trades. Yes we may get our push down now that I had been expecting for many months - but in the end, I am struggling to see how the market can resolve to the downside I was expecting after such a strong run. Lets be honest, who would not be a buyer at the 880 levels - even the most committed bear would either enter a large hedge or even throw his long term bearish views out the window to enter a long.

I will post some more short term details after the overnight session - FX markets have done quite a turn around since the open so a lot can happen with SPX.