Get Updates

If you like what you've read you can get updates easily here.

Look out Below!

With a hefty down day today where can we expect to take a breather? The 50MA of the S&P500 is approx. 1165 and that's where we are targeting for a breif pause.

Understanding Fibonacci

Options Expiry

Options expiry (third Friday of every month), is this coming Friday. Here are some things to keep in mind.

• About 2-3 days prior to expiration, time decay drastically decreases (for options you've bought), and works in your favor (for options you've sold).
• The week of options expiry tends to be an up week followed by a down Monday.
• If you've sold a naked put and the stock is In-the-Money (ITM), you will be required to purchase those shares come expiry.

Trend or Range Day?

How did we know that today was going to be a trending day, and for that matter, an extremely profitable day? We look at three things on the open.

1. Prior day’s close

Looking at the prior day’s close, we established (after Globex overnight trading) that today would be a gap down. Statistics show that approx. 80% of gaps fill, but the larger the gap, the less likely the gap is to fill and the more likely it is to begin a trend day.

2. Market breadth

Once the market opens the first thing we look to is the market breadth, that is, what percentages of stocks are advancing versus declining. We see that today the market opened extremely bearish (only 9% of the stocks we’re bullish).

3. Candle formation at the open

Once we have confirmation of the first two we look to the candle formation to signal our entry. We see that on a 15-min chart the first candle was a large body bearish candle. Looking at a 5-min chart we see that the market attempted to move higher to close the gap, but was immediately rejected initiating the selloff.

After looking at these three aspects, we have a confirmed short entry and, as the day progresses we continue monitoring the breadth and as long as it remains as bearish as our entry we continue to stay short resulting in a very profitable trade.

The Hanging Man Reversal

Monday’s SPY chart produced a candlestick pattern called the hanging man. This is a bearish pattern. To some, Monday’s candle may look like a hammer (a bullish signal), it is the positioning of the candle (at the top of the rally) that makes it a bearish pattern.

The hanging man alone does not initiate a sell or short signal. Tuesday’s price action, closing below the body of Monday does however confirm this bear signal (see the write-up on candlesticks).

While the past two weeks have produced light volume, we have a potential pullback to the prior resistance (now new support). If we are to make a new high this pattern would have failed, therefore our stop would be placed just above the highs for short positions.

Market Higher?

While we have been bouncing between roughly S&P 1085 and 1115, many would be looking to short this last move, however with such a powerhouse week of news this sideways movement seems quite bullish. The list of stocks making new 52-wk highs each day continues to be extensive. If we break $1116.25 on the S&P I would be anticipating a spike (at least intraday) in the markets.

This has been a very difficult intraday trading environment and the holidays it even more difficult to judge price action due to the lacking volume. We are however, looking towards a bullish 2009 close. If we break $1085 to the downside and continue falling with large body candles on the daily's we will shift our bias.

Anticipation Doesn't Pay

Does it pay to Jump the gun? In most cases, No. Though there are times it is profitable, it is not highly probable. Catching the few cents or points ahead of the breakout or breakdown is not worth the risk that it entails. When entering a trade around a specific candlestick or pattern formation, it is in your best interest to wait for the breakout above or below the pattern such as a hammer before entering the trade.

In the case of Wednesday's candle formation, if you did go long in the morning, don't worry, that's perfectly okay, just make sure to have your risk defined, that is, "a stop below the low of the tail." Before taking any trade you MUST, MUST, MUST define your entry price, stop price, and profit target. This alone will greatly increase your probability of success.

Another leg higher?

Today’s decline and rally happened on relatively big volume, signaling a continued move to the upside. The candlestick formation that was formed, called a hammer indicates that first the bears were able to push prices lower, but later in the day the bulls overpowered and brought prices back up near the open, this is a bullish sign.

We’ve also had plenty of stocks making new 52-wk highs over the past week and only a few making 52-wk lows. We know we are wrong if prices break below the tail of today's hammer hence a stop should be placed just below there on any long trades tomorrow.

Earnings, Earnings, Earnings

Keep an eye out for earnings announcements in the stocks you are trading for the next few weeks. Click here for more info on earnings announcements.

A Healthy Pullback?

On a line chart, the pullback we've seen appears to be quite healthy. We remain in the trend of higher highs and higher lows, with the Ascending Triangle pattern prevailing. Notice how every time we touch the trend line we move higher off of it.

When a market moves sideways or pulls back slightly look to volume to determine if it is a temporary breather, or a change of trend. If volume decreases after a move higher is it expected that prices will continue in the direction of the trend. If volume remains high during a period of sideways action it is an indication that sellers are becoming stronger and could signal a turn in trend.

Watch for a Bounce!

Watch for a bounce at the S&P 980 Level. Not only is this a strong support level, it is right at the uptrend line of the March and July lows. The rest of the week should continue to drift lower on lighter volume going into the 3-day holiday weekend.

How the market reacts to the Jobless Claims number Thursday and Employment Situation Friday will be quite important. For those continuing to be bearish, don't worry, we are halfway through the formation of a head and shoulder's pattern on the top line figures.

The Top is Here!

Well, for the short term anyways... The two bearish candlestick patterns on the daily chart of the S&P and across the top line board look to be a telling sign that a pullback is in store, all we need is a catalyst. Look for a quick and vicious move back down to $1000. Of course, if the market likes Thursday's GDP # and we do happen to move above $1038, we will be buying with both hands as bears' stops will be triggered initiating a rapped move to the upside.

Is the Recession Over?

With all the negative headlines like “Job options narrow as recession bites” and “Biggest Recession Blunders” one would believe we are headed for another downturn in the markets. While the summer month’s lower volume trading can distort the longer term outlook, it is often said that by the time the media get’s long, it’s time to go short and vice-versa.

The Fibo Bounce

Looking at an hourly chart of the S&P, we seem to be breaking a Fibonacci Levels, pulling back, then bouncing off to the next Fibo Level. Looking to the market internals intra-day can help confirm whether or not the pullback is buyable.

Black Friday 2?

Taking a look at the S/P and Dow, we are at, and coming into a major support level. The Dow, closing at the lowest level since 1997, has the potential to break down into "open space" meaning the next support level is not clear.
The S/P is not far behind, just off it's November 08 lows which coincide with the lows of 2002/03. If we see a break of the S/P 740 or the Dow 7450 we could be in for some serious panic selling. Be prepared for extreme volatility, and as we stated before, a potential surprise rally which could come at any time.

The largest bull moves happen in the context of a bear market.

Gaps, the EUR/USD, and DOW Correlation

With recent US and global economic new heavily influencing the market, we have seen morning gaps off the open. One indication on which way these gaps will play out is to look at the EUR/USD, as it trades 24-hrs a day.We recently saw a triangle breakdown in the EUR/USD. Measuring the high/low points of the EUR/USD triangle we get a target of 1.22. The Dow is sitting right at its support level of 7500 and any break lower may induce panic selling.

If a panic sell does come in, often times it is followed by extreme volatility and a surprise rally so be cautious and pay attention to the VIX. Of course, we also should be prepared for a bounce at these levels in case more global economic news acts as a catalyst.If we do see a retest back up to the of the triangle in the Euro, the Dow is likely to retest its old broken support around 7800 as new resistance, this would give us a great opportunity to get short if prices roll over at this level.

While we cannot predict what will happen in the markets, planning scenarios can give us great opportunities for higher probability trades. Good luck!

VIX Triangle

Taking a look at the Volatility Index (VIX) daily chart, Justin noticed we are forming a symmetrical triangle as well as coming into the 200-MA. Watch for a contraction of the VIX into the 30's to signal a move higher, but if the VIX breaks to the upside, we should see stocks go lower.

Diverging Indices = Higher?

As we take a look at the top line figures (S/P, DOW, NASDAQ) we see an interesting divergence. Let’s examine the price action and the Stochastic Indicator. All charts are daily candlesticks.

The S/P is forming symmetrical triangle with a Stochastic turning higher. Volume has decreased over the past week and the apex of the triangle is tightening.
The Dow is creating a descending triangle, in the context of a sideways market, and its Stochastic is forming a triangle with a lower high which is turning higher, forming a higher low.
The NASDAQ on the other hand has put in a higher low on the dailies and is about to break out to make a new high, forming a small up channel. The NASDAQ has been the strongest index over the past few weeks and we see a small increase in volume these past few days as it makes its way higher.
For the rest of the week and week to come, look to the NASDAQ to lead the market higher with confirming triangle breaks on the S/P and Dow. However, If we break lower, expect a quick, violent, and emotional move back to last November’s S/P 750 level.