Wow

I totally saw today's massive move! Did you? 

Just kidding!  It has been a while since my last post but if you look back at the last couple of entries those price levels were still very relevant.  Of course back then we had just hit all time highs so we had to maneuver the markets by looking at intraday levels and watch as they manifest themselves into higher timeframes.  Below is the SPX 15min PnF chart posted on November 21st entry.   You will notice that even back then the 1773 area was growing in importance as a significant level of support and resistance.


Fast forward to December 13.  The SPX 30min PnF chart paints the same picture of support and resistance.  Once again you can see 1773 area (this time 1772) acting as support as price dropped from all time highs.  I want to point out that the variance in support and resistance is due to volatility.  Just look at the box size and how it changes.   Again we are only taking about 1 or 2 points or fractions of a percent.

Fast forward to today's massive move triggered by the Feds announcing a reduction of the bond buying program.  I remember a time not too long ago that the mention of tapering would have trigger a decent decline but I guess times have changed.  Support and resistance does not change and once again 1773 (1771) reveals itself as a significant area of support and resistance.  Additionally, we can now see that 1810 is current resistance.  So we now have a boarder trading range between 1810-1773 which for a short term trader is a decent size trading range.   Today's volume was massive which at these nose bleed levels is either the start of a new uptrend or the beginning of distribution to those that honestly believe that tapering will lead to a continued move up for the markets (and lower bond yields).    I'm leaning towards the distribution option myself.  The market will reveal its intentions in the next couple of days since we are at a key inflection point.  So lets wait and see.

As for me, this will be the last post for the year for me.  The past couple of months have been tough personally which served to distract me from analyzing the markets and of course posting regularly.  This year has however, been one of the most educational for me in my journey to better understanding the markets which I plan on continuing into 2014 and beyond.  I've posted close to 70 entries and often find myself repeating the same content which is boring me and probably everyone else.  For 2014 I will be changing things up by posting only when I see a trade setup and initiate my own trades based on that analysis.  I think that will be much more interesting to write and read about.

I just want to say to all my readers and followers to have a wonderful holiday and enjoy the time with loved ones.  The markets will always be here tomorrow so spend quality time with those around you.  Acts of benevolence provide far greater rewards then monetary riches.

"Happy Christmas to all, and to all a good-night!"

It seems simple enough

Is the success to trading being able to identify a trading range and play the breakdown or breakup?  I honestly starting to believe that type of strategy is all it takes to make a few bucks at this stock market game.  I talked in the past about the break test and enter strategy which is really just the set up which begins with a break out of a range and looking for a test of the broke support/resistance area to confirm the break.  The entry is executed on a break of the previous high or for the more adventurous types (a.k.a impatience) after the test of broken support/resistance. Now that I am viewing the market in terms of trading ranges and breakouts there are a few things to understand.  First this is a high probability trade and not the holy grail you will get stopped out at times. That brings us to the next point.  Place your stop losses.  Use mental stops simple don't' work since we are greedy and fearful and highly unlikely to adhere to those mental stops. I use hard stops to take the emotion out of it. I would rather blame the market for stopping me out and taking a tiny loss than readjusting my 'mental' stop in my head a thousand times and losing big.  A mental stop is really no stop at all in my opinion.   To be successful at playing a breakout you first have to be able to identify the trading range.  PnF charts are excellent for that.  Even if you are looking for triangles or pennant patterns which I personally don't look for or use in my trading but they as valid as any other trade setup.   The awesome part about trading ranges is that you can see and trade them in anytime fame.  They are really just areas of accumulation/distribution before another directional move ensues.   The bigger the trading range and more volume transacted (think or it as fuel for the move) within the range the greater the ensuing directional move.

Lets look at the SPX 15min PnF chart below where I've highlighted the current trading range in green. You can see that the range only spans approximately 7 points therefore any breakout should move at least that much.  Remember this is a 15 min chart with an ATR of 1.15 but the point is this same logic can be applied to any time frame.  I encourage you to check out the PnF chart and look for these trading ranges and look for those breakouts.  They could prove quite profitable.

Thanks for reading.

Breakouts and Fakeouts

Oh what a tangled web we weave,
When first we practise to deceive!
Sir Walter Scott

In our last post we had expected a continued move down to our pre-defined support area of 1773.  We didn't quite get there before the market reversed and that might have been because the 10 day moving average (dma) which was slightly above our level of support.  The SPX 15min PnF chart below was taken at the close of November 20 when the markets closed lower but still above the 10dma.  Unfortunately, PnF charts can't plot daily moving averages taken from a typical bar or candlestick chart so we just need to be aware of them when analyzing the markets using just PnF charts.  What the below chart also reveals (which is why I find find these chart invaluable) is the small trading range which look to have resolved to the downside at the time until it found support (at the 10dma).   For the quick and nimble day trader they could of taken a short position on the break of the trading range and covered at the 10dma.  Yes, hindsight is a wonderful thing.

The current trading range highlighted in yellow (1795.2 - 1787) continues to develop today the SPX moving back into and to the top of the range (resistance).  Again this could be either accumulation or distribution but it is starting to look a lot more like accumulation.  We can take clues from the SPY candlestick chart below (last chart).  The move to the 10dma was transacted on an increase in volume.  This could of have been viewed as supply entering the market but when the 10dma failed to break and with today's move higher it looks to have been the large players accumulating from the weak hands.  I'm assuming the large volume had something to do with the FOMC meeting minutes that were released that same day but who knows and who cares.    Today's close was decisively bullish as we closed near the highs.  However, as we mentioned prices did move back to the top of the trading ranged so we are at an inflection point here.  Just remember the longer we stay in the trading range and the more volume that is transacted the larger the resulting move once the range is broken.  This should be interesting should we continue higher and back to all time highs.  I just want to hear more people talk about a crash as we move higher as I find it funny.

Thanks for reading!

Back from Outer Space

Its been awhile I know but it has been a busy week for me with work (yes I have a job as an underwear model) and family life (tragedy struck again this time on my wife's side of the family).  However, it was an interesting week to just simply observe the markets run to all time highs and read the headlines explaining why the markets are moving higher and of course why there will be a correction.  I don't usually follow financial news.  However, I do view the news as a meanings to an end.  How else can you convince the masses to buy or sell if not using 'reliable and dependable' news?  So lets see what the market is really doing.

Below are the SPX 30min and 15min PnF charts respectively.  Both show the same trading range which turned out to be an accumulation phase leading to a rally to all time highs.  That trading range is now our support level to watch.  The 30min chart highlights the relatively high volume transacted during the accumulation phase which will determine the strength of the rally.   The 15min chart provides a more granular view of the price action after the 1773.1 breakout.  A trip back down to this support area doesn't seem out of the question.

The SPX daily candlestick chart below shows that price is still above its 10 and 20 day moving average (dma) which are potential support areas as well.  Actually the 20dma is starting to converge with the top of the trading range at 1773.1 which would be a potential area to go long should we see demand come into the market if price makes its way down there.  We will definitely be accessing this when the time comes.

Thanks for reading.

Foot in the mouth

The rate at which a person can mature is directly proportional to the embarrassment he can tolerate.
Douglas Engelbart 

Okay so I forgot about the 20 day moving average (dma) on Thursday before Friday's big reversal.  Reversals like we saw on Friday are rare.   I've also found that at market highs there also bearish in nature.  The SPX daily candlestick chart below highlights what I missed on Thursday which is the 20dma acting at support on the downturn.  I'll be honest I thought Thursday's close was bearish enough to be the start of something bigger and it still might be but the point is that if you were short you could of used the 20dma as your line in the sand to cover shorts if we bounced.  Again I'll admit I was taken back my the massive bullish reversal on Friday and anyone that said they saw that coming is simply BSing.

So where is our line in the sand?  Looking at the SPX 15min PnF chart you can see that 1765.3 resulted in a significant move down when it was broken as support.   More importantly is the amount volume being transacted in and around that price level (1765-1762).  For now it is support.  However, if we continue to see more of these big swing days it would indicate to me that the big players are getting ready for another big move which if I had to 'guess' would be to the downside. We all know that guessing is just that guessing and we don't put our hard earned money in the market on guesses and hunches.  So we wait for a decent setup only after the market shows its hand.

Thanks for reading.

Resolved

I have a love hate relationship with stock and option picking services.  Many of them are just absolute rubbish.  Most of them are illegal since you have to be a licensed adviser to take payment for any type of financial advice. Having a silly disclaimer saying you are essentially paying for an 'educational purposes only' service does not absolve them from the crime they are committing.  I got this in my email inbox today from one of those Ms. Cleo option advisory services.  Here are the highlights before the market opened. 

"...I've been saying day over day that market would go higher and make NEW HIGHS"
"...updates were sent FREE and just hope you didn't fight it by shorting the market!"
"...BIG CONGRATS all!"

I'm sure they wished they didn't send out that email just as the SPX had its worst day since late August.  The worst part with these services is the mystery surrounding the analysis they use to make recommendations.  It is proprietary of course. Which is the draw to these services since many of us doubt our own analysis so why not use someone else's and rid ourselves of all accountability and just figure out how to spend all those potential profits that are coming our way.  Pinch yourself because you are dreaming.  

Enough of the bashing back to the markets.  Looks like we broke out of the trading range and it was distribution.  I was expecting accumulation but what I expect doesn't matter what the market does is what matters.  Which is why I react to the moves and don't anticipate the moves.

Looking at the SPX 15min candlestick chart below with the trading range overlaid the market breakdown out of the range was a textbook example.   Support is broken on an increase in volume with a test of broken support on lower volume (lack of demand) to confirm the level as now resistance with price continuing down.  Simple pattern and easy to execute on in real time.  

Lastly, today's close was down right ugly and with the close near the lows on increased volume it looks to be the start of something bigger.  Down days like today don't typically reverse back up the next day.  If the trading range was distribution then the large institutions have unloaded their shares and will only support the market when it seems lucrative.  A drop down to 1700 area is very possible and I will discuss the next levels of support on this move down in the coming days.  If you were short before today then congrats.  If you were a long sorry to here of your loss.  If you subscribe to a stock/option picking newsletter like the one I quoted above Lord have mercy on you! 

Thanks for reading. 

Another day and range

The market is back in another well defined trading range which is exciting news for us market nerds.  Trading ranges represent accumulation/distribution phases which precede a directional move.  The longer in the range and the more volume transacted the big the move.  Think of Ironman's hand replusor beam blaster powering up before blowing up his enemies weapons stockpile.   The important part, however, is identifying the upper (resistance) and lower (support) range of the trading range and then look to see where the market interest lies in that range to determine the probability of a break up or down out.  

The SPX 60min PnF chart does a great job of highlighting the trading range of 1767-1758 (rounded) as well as the volume associated with each box size (2.8 points).  You will also notice that the market interest represented by the volume appears to be at the lower end of the range (support) indicating to me that this may be an accumulation for another run higher.  The case for a move higher continues to build by looking at the price range and closes for the past few days.  They are closing in the middle to higher end of the price range indicating demand.  However, the safest play is to always wait for the trading range to resolve itself and jump on for the ride.  (Think surfing as you ride the wave and enjoy the adrenaline rush).  With the amount of volume being transacted in this range it should result in a decent move either way.   Be careful and trade well because its time to watch the Ironman trilogy.  

Thanks for reading.  

To be bullish or not to be bullish

As the bears tried to get more bear-er (I'm sure this isn't a word)  the bulls had other plans.  What is interesting when looking at the SPX daily candlestick chart is the the attempt to break our pre-defined level of support at 1757.  The trading session on Wednesday and Thursday were starting to look more and more bearish for the markets.  However, I did state that unless we break 1757 the bulls are still in control.  What I didn't notice was the 10 day moving average that was converging at our 1757 support level.  That just made for a better bullish case.  Friday session swept the bearish case under the rug for the time being as price broke below support only to close higher in the upper end of the trading range on increased volume.  It looked as though any supply (stop losses) that entered the market was overcome by demand pushing prices back above support.   Therefore, up is the path of least resistance until something changes.   However, should price decisively break support then a trip down to 1700 is certainly not out of the question.  More on that level in a future post.  For now lets watch and see where this market goes.

Thanks for reading.

Spooky

It's Halloween, everyone's entitled to one good scare.

Congratulations to the bears for finally giving the bulls a bit of a scare just before Halloween no doubt.  Lots of interesting things to observe today so lets start with our SPX 15min PnF chart once again to highlight our 1757.8 and 1764.6 support and resistance areas that we spoke about in our previous post.   To continue with our trade example we would have been stopped out today since price broke below the 1764.8 support which served as the stop loss trigger.  You will also notice that price hit support 1757.24 (shorting after the FOMC meeting) before rallying right back into 1764.6 area of resistance.  As you can see the 1757.24 area is becoming more and more significant.

The SPX 5 min candlestick chart shows the price action today around those areas of support and resistance.   You will also notice that as price hit an all time high earlier on in the day it appeared as distribution with the high volume associated with those price levels.  This is looking more and more bearish as supply appears to be entering the market as last.  

Switching to the SPX daily candlestick chart there are a number of bearish factors about today's session. First we had the largest price range in two weeks with price hitting an all time high only to close near the low of the range.  Second, volume increased slightly today (more so on the SPY) which indicates that supply is coming into the market.   However, we still have our 1757 area of support which is growing in importance so as long as price remains about that level the bulls are safe for another day.  However, if we do break support then you can with a certain level of confidence consider a short position and look for the next level of support.  Enjoy your Halloween!

Thanks for reading.