Wednesday, December 31, 2008

Divergence Not Confirmed 12/31/08

Again, most of the big players are on holiday.

Just after 1030 ET, the market started to show a possible topping with a $TICK divergence as the market tested the overnight high. We also could not get 2 to 3 closes above the high pivot. It was a good bearish sign. However, the market then refused to close below the low pivot.

The Advance - Decline Line also was refusing to weaken much beyond the low pivot. Buying then came back into the market.

Compare today's action to the action of the bottoming process on 12/29/08. We got a good divergence followed by a series of closes above the high pivot. The Advance - Decline Line was also confirming possible strength. This led to the current short-term bullish trend.

The current market just isn't ready for a short-term downtrend just yet. The rule of 2 to 3 closes beyond the nearest pivot confirmed by the Advance - Decline Line is a good filter.


Tuesday, December 30, 2008

End-of-Day 12/30/08

At first, I was a little amazed at the magnitude of the finishing uptrend. In hindsight, however, I shouldn't have been surprised. During the midday, the market could not trade much below the 50% point of the morning's range. The finishing uptrend was just the completion of a 3-Wave market symmetry.

On the intra-day charts, I like to see at least 2 closes but preferably 3 closes above or below a pivot point to confirm the possibility of a trend to continue. Prior to 1000 ET, the market could not maintain more than 1 close below the early pivot on the above 5-minute chart, and the market then created a series of strong uptrend closes. During the midday trading, the market could not confirm the possibility of a downtrend, and the market just hovered at the 50% level of the morning's range. At the close of the market, we got confirmation of the continuation of a strong uptrend close.


Morning Observations 12/29/08

One of the good things about the 620 tick chart is that it is easier to see patterns, such as the A-B-C Wave formation or Bull Flag formation.
To support the formation is an uptrending $TICK and Advance - Decline Lines.


A reader last night asked if Point A is a valid $TICK divergence. I don't think that I gave a good answer in the email. I'm more of a morning person. However, it was a good question.
After sleeping on the question and looking at this again, this is my view. Let's compare Point A with Point B. I prefer to see a full up and down $TICK cycle as indicated by the yellow moving average, which is simply a 2-period SMA of the $TICK (H+L+C)/3. At Point A, the cycle is only half completed as the futures is testing a pivot low. Once the cycle has completed, the market has traded down. Therefore, I would say that Point A is not a good divergence signal. Whereas at Point B, the cycle is complete, and the $TICK is showing strength as the Futures is testing a pivot low. This is a much better divergent signal.
An interesting video of trading a reversal can be found on Paul Quillen's web site. At the top of the page click on "Trade Video". Pay attention to the $TICK divergence, the placement of the initial stop, the scaling out of the trade, and the adjustments to a trailing stop. Very instructive. I believe as an added edge, he also uses Elliot wave structure as a signal.

Monday, December 29, 2008

End-of-Day 12/29/08

The market found support at the low of 12/22/08.

In contrast to past days, the S&P 500 large caps and NASDAQ 100 stocks led the lagging broader market in the afternoon advance.

The 5-minute $TICK also remained in an uptrend mode in the afternoon.


Morning Observations 12/29/08

The Advance - Decline Line for all US Stocks stayed below Friday's low and trended down all morning. Fading tests of highs was the trade of the day.
The $TICK also indicated trending weakness.
Otherwise, another low volume day as most large traders are still on holiday. Probably will not pick up until next Monday.

Saturday, December 27, 2008

Comparing the Market Actiion of 12/23/08 to That of 12/26/08

On 12/23/08, the market was testing the bottom of an area of volume resistance. With the $TICK moving averages on the 5-minute chart below zero, indicating a weak market, the probability was high that the market would bounce to the down side after the test of resistance.

In contrast, the market on 12/26/08 was testing the top of an area of volume support. With the $TICK moving averages above zero, the probability was high that the market would bounce to the upside.

On 12/23/08, the Advance - Decline Line for all US Stocks obviously showed that the market was weak on every test of areas of resistance.

On 12/26/08 on tests of morning resistance areas, the market was not showing that same degree of weakness. After 1400 ET, the market was starting to show signs of strength.


Friday, December 26, 2008

End-of-Day 12/26/08

Interestingly, after 1400 ET, the large caps lagged the rest of the market for quite some time before joining in the late uptrend.


Wednesday, December 24, 2008

Using Breadth Indicators for Confirmation

In the chart above, we have the Difference between Advancing Issues and Declining Issues for the S&P 500 Index, NYSE and the NASDAQ 100. Below is the Difference between Advancing and Declining Issues for all US Stocks. As the ES futures was testing the high just after 1030 ET, only the S&P 500 Index breadth indicator was making a new high. All others were lagging thus not confirming a bullish move.

As the market declined later in the day, all indicators were in agreement to further weakness as the futures tested previous lows.


Tuesday, December 23, 2008

Merry Christmas and Season's Greetings

End-of-Day 12/23/08

We ended up with an inside day with the market just above yesterday's low. Not an encouraging finish just before Christmas. The market will be open tomorrow morning, but the trading floors will be a rather lonely place to be. Not many traders.

Morning Observations 12/23/08

It is rare for a market to trade lower for 5 days straight, but not impossible. Of course, the day is not over, but it is not looking good for a positive day.
The large cap market did try to advance after 1030 ET, but could not trade above the overnight high. It did advance past the first hour pit high, but then this level could not hold support and became resistance. In contrast, the market traded lower than the overnight low, which then found resistance at the first hour pit low.

Monday, December 22, 2008

End-of-Day 12/22/08

A slow moving, low volume market today, but loyal to the direction of a downtrend most of the day. The support and resistance levels were clearly defined, and the market moved in a step wise manner. We did close off the low.


Morning Observations 12/22/08

Very low volume market, and it is only going to get lower as we approach Christmas. Probably won't do much trading this week, but will watch from time to time.
The market was hesitant about bouncing off of Thursday low, but there were some, but not much, indication that some buying or short covering was occurring there. It did bounce, but only to just below Friday's low. At this point, the market just did not have enough buying pressure to trade above this point. The market is now below Thursday low, which is now resistance.

Sunday, December 21, 2008

Additional Friday Observations 12/19/08

Momentum precedes price. As the Futures were testing the highs, the $TICK was indicating a loss of upward momentum in the equity market. This move lately has been near 1100 ET - sometimes after and sometimes before 1100 ET.

On the 1 minute chart, I have been noticing that when the market is in a trend mode, it typically will not go past a SMA line of the (Highest High of the last 30 Bars + Lowest Low of the last 30 Bars) divided by 2. In other words, the mid-point of the last 30 minutes.

Saturday, December 20, 2008

Trading Examples to Ponder 12/20/08

A long time ago, I remember reading about a conversation between two traders at a trading firm making comments about a third trader. The two talking traders at the water cooler were struggling, while the third trader was considered the top trader at the firm.

The first trader at the water cooler mentioned how the successful trader never left his desk, and pretty much kept his nose about an inch away from the screen watching every move that the market made. The second trader said, "Maybe that is why he is the top trader!"

Here are two examples where money can be made just trading waves 2 to 3. This involves a 3-wave 50% correction of a down trend, and then a return to the down trend following the correction.

In example 1, several things indicate the termination of Wave 2:

  • The Wave has reached the 50-62% correction point
  • $TICK is starting to show strength following a test of a low.

At this point, the risk is low relative to the potential reward.

In example 2, the market making new lows is a good indication that the 50% correction is over. The market again gives us a 62% correction of Wave 1, at which the %TICK is starting to show weakness. The general rule is that down moves are quicker than up moves for various psychological reasons. Thus the decision to enter on a down move usually must be made faster than up moves. Again, the risks is low relative to the potential reward.


Friday, December 19, 2008

End-of-Day 12/19/08

The market was not able to stay above the 0930 ET open, but it did not travel too far to the downside. Today ended up being an inside day, but not a NR4 or NR7 day.


Morning Observations 12/19/08

We got a continuation of yesterday's late afternoon uptrend with help from an auto bailout plan. The market is now giving up those gains. Let's see if we can finish above the open.

Up Day?

The blue line on the $TICK daily chart is the (H+L+C)/3 pivot, and the purple line is the 20-Period SMA of the $TICK.
Since late September, the day following a 2-day downtrend of the $TICK pivot has closed higher than the 0930 ET open 8 out of 10 times.

Thursday, December 18, 2008

End-of-Day 12/18/08

It looked like the market would stay in a narrow range, until the negative GE news hit the market. That gave momentum to the sellers. This is hard to see in the heat of battle, but after the market traded below the morning's low, it made a nice A-B-C pattern.


Morning Observations 12/18/08

Following the 1000 ET reports, the market advanced and then corrected 62%. At the bottom of the 62% correction, the market tested that low twice with an advancing $TICK. The upward advance after that was slow compared to the activity that we have seen in the last several months, but more typical of how the market normally moves.

The market lately has been waiting until after 1100 ET to reverse into the European closings. At 1106 ET we finally got a good bearish $TICK divergence. After the European close, we then got a lunchtime bullish $TICK divergence.
So far, we have an inside day and another narrow range morning. The $TICK moving averages on the 5-Minute chart remains above zero showing a tendency toward buying rather than selling. We were due for a two day correction, and the correction thus far is mild.

Wednesday, December 17, 2008

End-of-Day 12/17/08

At 1420 ET, the $TICK took a nose dive on the test of the high, but the market remained above the 0930 ET open on the correction.


Morning Observations 12/17/08

There was not much to move the market up or down this morning. The 1-minute chart did not identify any meaningful divergences. The 5-minute chart showed some divergences, and the trend of the $TICK has been slightly down, until a recent up surge in lunchtime trading.
The market is finding support at the top of yesterday's Value Area. I was hoping that the market would test yesterday's high early on for a possible short trade, but the market just could not make it that far this morning. It then found support at a higher price than I thought it would. Thus, we have a relatively narrow range again today.

Pre-Market Observation 12/17/08

The market corrected during the overnight session, but it is still treating the Pre-FOMC announcement high as support, and it is also staying above that mysterious 884 level.

Tuesday, December 16, 2008

End-of-Day 12/16/08

The market finally find a reason to trade past the short-term resistance.
I have had the wrong title on the Data Legend for quite some time. The data for the black line above is actually "Today's Close - Yesterday's Close" rather than the other way around. Sorry for the confusion.

Morning Observation 12/16/08

The market is finding resistance at the lows created between 12/09/08 and 12/11/08. So far, the market has not found any reason to trade beyond this point.

The overall trend of the $TICK is positive, but the momentum most of the morning has been negative while waiting for the FOMC announcement.

We got a bullish $TICK divergence after 1000 ET, but the market faded while testing the highs of the day. We got another bullish divergence just before 1100 ET while testing the 0930 ET open. So the market remains in this narrow range probably until 1415 ET.


Monday, December 15, 2008

End-of-Day 12/15/08

Today's Value Area stayed inside Friday's Value Area as traders remain neutral until tomorrow's FOMC announcement. The market remained in a narrow range, but was slightly bearish as indicated by the $TICK's moving averages remaining below the zero line most of the day.