My Blog

It’s been several weeks since our last update.  This will be a short update.  However, we wanted to bring an interesting setup to your attention.  At today’s low the S&P cash has formed a (Bullish) Gartley pattern.  As we have mentioned on previous posts, 78.6% represents an interesting Fibonacci from a risk/reward perspective.  Under the current scenario, we have support at 78.6% and the all-important 200 day exponential moving average.  If this Gartley is valid, the market should rally.  Additionally, several key indicators within Market Mentor Edge have hit their over-bought ranges.  Traders that are short may consider tightening their stop losses.  If you are trader that would like to play this to the long side – we would recommend that you remain vigilant as the market is far from healthy.

Happy trading

In our last Blog we mentioned that there was a higher probability that the May 2011 high would be breached (mini S&P).  We were watching 1342 as the final significant resistance level at 78.6%.  We did note that there would likely be some bumps in the road along the way.

(from July 4^th Blog)

“It’s worth noting that Diamond’s key indicators (including the McClellan) have become over-bought.  This may foreshadow a small correction/sideways movement before the market makes a thrust to the upside.”

On the 5^th and 6^th the market remained in a fairly tight trading range (giving us the forecasted sideways movement) before making a relatively significant move to the upside on the 7^th.  Interestingly, on the 7^th, Bressert’s 5 Double Stochastic issued a sell signal.  Not to mention, there were several indicators within Market Mentor Edge that remained in their respective over-bought range.

On Friday we saw some weakness in the market that was triggered by the anemic employment numbers as the market gapped down.  Although the S&P didn’t completely fill the gap, it did manage to close on a relatively strong note (significantly off of the session’s lows).

So what’s next?

We are still sticking to our forecast that the May high will be re-tested.  Of course, when/if this happens we will share some important resistance levels.  One such significant level is 1380 in the S&P cash.

As you can see from the weekly chart, 1380 represents the 78.6% retracement from the 2007 high to the 2009 low.  As such, we will be watching this level very closely.

For now, our attention will be focused on the May 2011 high.  However, if the S&P mini futures continue to sell-off, look for initial support at 1330 to 1325 and then 1315.  These are clearly very uncertain times.  Traders must remain very flexible in their approach and forecast.

Happy Trading.

In our last blog we mentioned that there was a great deal of resistance at the 1285-1296 level. Typically, we like to look for areas of confluence. This resistance level not only coincided with the April swing low, but it was at a key Fibonacci level as well as the 89 exponential MA. On June 21st and the 22nd the S&P mini entered the resistance range (probing as high as 1293.75 before being turned back). The market then sold-off making an intra-day weekly low of 1257. However, since the 27th the S&P has made a fairly powerful move to the upside. You often hear technicians refer to the “fractal” nature of the markets. That’s just a fancy way of saying that the markets display similar patterns and behaviors across multiple times. Interestingly, when we look at a 30-minute chart we see some fairly telling patterns when the S&P made its most recent swing low.

Notice how the S&P mini gapped down on the 23^rd.  However, it respected the 78.6% retracement of the prior swing low to swing high (16^th to the 22^nd).  This is a very powerful Fibonacci level.  Specifically it’s the Square root of the .618 level.  From a pragmatic perspective, it often represents the final line-in-the-sand.  A meaningful breach would have increased the probability that the June 16^th low would have been taken out.  Importantly, if the June 16^th low was taken out – the March swing-low would then be at risk.  Once the gap was filled to the upside, the Bears made another run to the downside.

Note:  the gap was filled at exactly 61.8% of the 22^nd high to the 23^rd low.

Now, we’ll drop down to a 5-minute chart to provide a clearer perspective of the price action that followed.

The pattern that I’m showing is known as a Gartley.  Interestingly, the final move down is a 78.6% retracement of the previous swing low at X.  And X is the 78.6% retracement that was illustrated on the 30-minute chart.  Fractals….

As a note to traders – these 78.6% retracement levels represent excellent entries from a risk-to-reward perspective.  We’ll provide more on this subject in a future blog post.

What’s next?

In a previous post we discussed the McClellan Oscillator becoming oversold.  This indicator has been fairly predictive in its ability to signal meaningful swing lows.

Notice that the McClellan was also showing positive or bullish divergence when the S&P made its final thrust down.  The S&P has blown past most of the meaningful resistance levels from the previous wave (May swing high to June swing low).  The all-important 78.6% retracement may represent the final stand for the Bears.

That level is at 1342.  Traders should watch very carefully how the market reacts when it enters this zone.  Significant strength will increase the probability that we re-test the May highs and beyond.  It’s worth noting that Diamond’s key indicators (including the McClellan) have become over-bought.  This may foreshadow a small correction/sideways movement before the market makes a thrust to the upside.  Let’s see what happens when the market tests 78.6%.  From a pure technical standpoint (removing all emotional biases) – we believe there’s a high probability that the May high will be tested.  Though we will refrain from becoming enamored with the Bull or the Bear.

Keep your discipline high and remain flexible!

Happy Trading and Happy 4^th!

On our last blog we mentioned that there was still downward pressure in the market.  Specifically we expected that the S&P mini would test the 1267-1270 range.  This range was a 78.6% retracement of the previous wave.  We see time and time again that the 78.6% Fibonacci tends to be the last holdout.  A meaningful break of this level usually means that the previous swing high or low will be tested.  In the case of the S&P – we are talking about the March swing low.

On June 8^th and 9^th our support level was tested.  It seemed to provide a temporary pause of the downward pressure.  However, the S&P continued to move lower making an intra-day low of 1252.25 on the 16^th.  On Friday, we closed at 1266 (once again flirting with the aforementioned support level).  As a side note, I love the fact that the popular financial media declared last week a huge success.  To us it still feels like a sick/confused market.  Opinions aside, let’s review the technical indicators and try to determine where we go from here.

Many technicians like to use a 200 day moving average as a general proxy for trend.  Simply put if the markets are trading above their 200 day moving average we are in an up-trend and if markets are trading below we are in a down-trend.  Of course, this is a seriously lagging indicator (especially at market transitions – from bull to bear and vice versa).  With that said, sometimes it does provide an interesting component when trying to broadly assess the overall health of a move.

It’s worth noting that both the DOW Industrial avg. and the S&P Cash remain above their 200 day exponential moving average.  As you can see from the chart below, the S&P flirted with the 200 day average at its intraday low on the 16^th.

Will this be the necessary support to help stop the bleeding and usher-in the next bull move?

We now turn to our Market Mentor Edge tool for additional data and support.  One indicator that instantly grabs my attention is the McClellan Oscillator.  Though not perfect, the McClellan has been a useful tool to use to help identify swing lows.  On November (2010) the McClellan reached an oversold level on the 16^th and the 17^th.  Both of these days coincided with closing lows in the S&P.  Then again on March 15^th and 16^th (2011) the McClellan reached oversold levels.  Once again this correlated to an S&P low on the 16^th.  Most recently, the McClellan reached an oversold level on June 8^th, June 10^th and June 13^th and the S&P didn’t disappoint.  This seemed to be a catalyst for last week’s rally.

So how do we make sense of everything?  On one hand, you can make a case that the market held support at the 200 day MA.  Not to mention that the McClellan signaled a potential rally.  However, we believe that all rallies need to be treated with a degree of healthy skepticism.  The NASDAQ is negatively diverging from the other markets as it took out its March lows.  In addition, Walter Bressert’s Double Stochastic is in the over-bought territory while Bressert’s B-line is still in a down mode.  Essentially both indicators are on opposite sides of their respective ranges.  This is like a gun that is locked – loaded and ready to fire.  If the Double stochastic rolls-over it will signal another thrust down that should easily test the March lows in both the DOW and S&P.

For now, we will gauge how long this rally lasts and where it takes us.  Here are the immediate resistance levels to watch in the S&P mini.

1267-1270 (as previous support becomes future resistance)

1285-1296 (April swing low + 38.2% retracement of May high to June Low + 89 exponential MA)

Traders should remain on high alert and not fall in love with either side of the market!

Happy Fathers’ Day for the Dads that are reading this and happy trading!

On May 31 we noted that 1346 had the potential to be a formidable test for the S&P.  Unfortunately for the Bulls – the S&P failed the test.  The S&P Cash made an intra-day high on June 1 of 1347.75 and the S&P Cash made a high of 1345.20.

Let’s take a look at why this level presented a challenge.

Specifically, we were watching the 61.8% Fibonacci retracement from the May high to the May Swing Low.  This level sent the bulls running for cover as we closed pretty close to the lows of the day.  As we mentioned, a selloff would result in a retest of 1300 and subsequent support at 1290 and then 1267.  Last Friday the S&P mini made it as low as 1294.50.  Importantly the close did not look like a bottom – even a temporary bottom at that.  We would expect this market to test 1290 early this week and perhaps make a probe towards the 1267-1270 range.  However, we’ll take it one step at a time.

Interestingly, there’s a fair amount of confluence at the 1267-1270 level.

However, there are some red flags for the bears.  For one, both the 10 day and 5 Day Trin have become extremely oversold.  Not to mention, Walter Bressert’s key indicators (B-Line, Double Stoch and 5 Double Stoch) are all oversold.  Finally, the NASDAQ e-mini is positively diverging from both the DOW and S&P as It didn’t take out the May swing low (May 25^th).

What’s next?

There seems to be more downside until this current sell-off is complete.  We expect that the aforementioned 1267-1270 range will be tested.  If so, we will re-assess at that level.

Happy Trading.

On May 6^th we noted that if the market (S&P mini) takes out the support at 1321 to 1325, it will likely try to test the 1300 level.  Well it took several days, but on May 25^th the S&P mini made an intra-day low of 1302.25.  Interestingly, the DOW mini (YM) and the NASDAQ mini (NQ) all made lows at significant Fibonacci support.

Specifically, the DOW retraced to 78.6% of the low set on April 18^th.  As we have mentioned in previous blogs – 78.6% is a very important and useful level.  A break of this level usually leads to a test of the previous low or high.  In this case it would be a low of 12036.  Importantly, the DOW made a nice bounce off of the support.  Many traders like to use this Fibonacci level as entry points because they can tightly define their risk at the previous swing low or high.

The NASDAQ retraced to 61.8% of March’s swing low of 2185.75 (also a significant support level).

Similar to the DOW, the S&P cash retraced to 78.6% of the April 18^th swing low.

Ok – so we established the fact that the major US markets found support at significant levels.  The million dollar question remains – what now?  For one, every rally attempt since the high on May 2^nd has only lasted 3 days.  As such, it will be interesting to see how tomorrow plays out.  When we look at Richard Diamond’s Market Mentor Edge, we don’t see anything very interesting on Diamond’s short-term indicators.  If anything, these indicators are oversold enough to provide room for a further rally.  However, Walter Bressert’s oscillators are very telling.  The B-Line and both Double Stochastic indicators are in the oversold range.  In fact, all 3 have issued long set-ups in the S&P (starting with the B-Line on May 24^th).  If we are still in a Bull market – the B-line has been very accurate at picking significant bottoms (see screen shot from Market Mentor Edge).

Notice how we have crossed the green line into over-sold territory.

Given the key support levels coupled with Bressert’s indicators locked and loaded in the over-sold range, our short-term outlook has shifted to slightly bullish.  There’s still likely some upside to this rally.  However, we will remain extremely vigilant.  Specifically, the 1337 level and the 1346 level will remain formidable tests for the S&P.  If this current rally can’t muster the requisite steam, look for the S&P to re-test 1300 and meet initial support at 1290 and then 1267.

Happy trading.

Last Friday saw a sell-off where the markets closed relatively close to the lows of the week.  The NASDAQ showed particular weakness.  In fact, the NASD e-mini closed 1 point above the intra-day low of the week.  Importantly, the markets all remained inside the previous week’s intra-day high and low range.  There was a definite battle between the bulls and the bears.  Neither side was able to take complete control (perhaps best illustrated by the formation of a triangle in the S&P e-mini future).

We are still closely watching the 1321 to 1325 range.  Within the S&P, this represents a key Fibonacci support.  Not to mention there’s a great deal of congestion as previous resistance tends to function as future support (see Feb and Apr swing high).

Interestingly, the Russell, DOW, NASDAQ and S&P all made intra-day highs on May 11^th at key retracement levels (see red arrows).

Russell

DOW

S&P

NASDAQ

As you can see, 3 out of the 4 markets retraced to the70.7% level and the NASDAQ retraced to the 78.6% level.  The 78.6 level tends to be very telling.  It’s computed by taking the square root of 61.8.  This level is often the last hold-out.  Meaning a meaningful break of 78.6 usually indicates that the market is going to retrace all the way back to the previous swing high or low (in this case a swing high).

As a side note, entering trades at these key retracements represent excellent opportunities from a risk/reward standpoint.

Importantly, all of the markets held their resistance level.  This helped set the stage for the decline into the close of the week.  As such, we continue to remain cautiously bearish.  However, we will not fall in love with the bear.  This is far from a Grizzly.  Traders need to closely monitor all upswings.  A significant move back to last week’s highs and a subsequent break above the triangle (see first chart) will increase the probability that the bull is back and never really left for that matter. It’s important to note that this market is still in an uptrend until the April swing low is breached.

Final Recap

1. Market formed Triangle – traders should monitor the direction of the break of the triangle.

2. Markets closed towards the low of the week.

3. All markets held key resistance levels (70.7 and 78.6) of May high to May low.

4. We remain cautiously bearish.

Over the last week the market made a top and spent most of the week moving to the downside.  Current events aside, we like to focus on the technical patterns to determine if there were any interesting setups that foreshadowed this correction.

Sure enough there were several technical hints that the market was making a top.  Looking at the continuous contract on the E-mini S&P, you will notice that the market completed a Butterfly pattern.  This pattern has its origins in the work of Larry Pesavento and Bryce Gilmore.  Importantly, note how the market lost steam at the 1.272 retracement level at D.

Now let’s look at the DOW.  Notice how the E-mini DOW future (YM) also bumped against formidable resistance at 1.618 (see red arrow).  Traders love to look for confluence where similar patterns are unfolding in multiple markets.

Finally, let’s look at the NASDAQ E-mini future (NQ).  Like the S&P, the NAS completed a picture perfect Butterfly.  Notice how the NAS retraces to 1.272 of the X wave.  Also worth noting is the fact that this retracement is 1.618 of the high at B.  This further fortifies the significance of the resistance that the markets experienced.

Richard Diamond’s Market Mentor Edge Analysis tool also revealed some key insights.  Notice how Bressert’s Double Stoch, 5 Double Stoch and B-line all issued short setups (see red circles).  This was after spending several days in the overbought range.

Also, from Market Mentor Edge – notice the negative divergence in the 10 Day Moving Total Advance Decline Line.  The S&P Index is making new highs but the Advance Decline Line is making a lower high.  Clearly the foundation of the house was getting weaker.

There are several other technical examples that we can cite that support last week’s correction.  The real challenge/value is what happens next?

From a support level there’s a great deal of congestion that will provide a formidable challenge for the market to break through.   The early April swing high aligns with the .618 retracement of the April swing low to the May 2^nd high.  This level is 1321 to 1325.  Thursday’s attempt to take-out this level resulted in the bounce that we saw on Friday.  As such, we will watch this level very carefully.  If we take out this support, the S&P will likely test 1300.  Currently, there’s a great deal of indecision in the market.  The next few days will be very telling.  Traders that are on the short-side of the market should remain vigilant and not fall in love with the bear (given the support that’s ahead).  For now we will remain bearish to neutral until the market tells us otherwise.

Happy trading.

On our last analysis we correctly forecasted that that the market would likely make another test of the 1220 level that was established last April.  This created an excellent opportunity for those that chose to play the long side (as the S&P has rallied 40 point since this call in late October).  Hopefully our forecast helped encouraged some of those that were short to either cover their trades or tighten their stops.  As irrational as a rally may have seemed to some (given all of the economic challenges in the economy), it’s important to remain as objective as possible from a technical standpoint and always keep your defenses on high alert.

The current scenario is a bit cloudier than it was on October 25th.  Specifically, the WB Trend Momentum has moved from Bullish to Unknown.  In addition, The Bressert Stochastic Indicators are all Over-Bought.  As such, Long Traders should look to tighten their stops to protect their profits.  Remember the name of the game is defense and we are at the 61.8% retracement of the 2007 high to the 2009 low (See weekly Chart)!  This is a very significant level.

Let’s review the list:

Sometimes the name of the game is knowing when to play and when not to.  This may be one of those times to wait and see.