Deef’s Online Brainstorm

Today had a vicious surprise afternoon rally without a large significant news event, though after the fact supposedly rumors about LEH finances was the catalyst.  The Oct 11, 2007 market top and surprise afternoon sell off was also a surprise after an uneventful morning session, supposedly triggered by BIDU news or sell off.

Here’s volume profile of today’s NQ session, notice narrow range sideways in the morning (with a 10am news knee jerk spike up).

Here’s Oct 11, 2007 volume profile chart of the ER2, sideways morning action, with early afternoon weak break out, followed by afternoon sell off.

Both sessions have some similarities, but whether or not this recent sell off is a start of a large down trend in the market like the Oct 11, 2007 sell off marked the top and start of the early 2008 credit bubble sell off.  Too early to tell, so far market looks like the market could be forming a sideways choppy trading range.  Though if support levels start getting taken out with increasing volume, that could point towards another leg down to break new lows for 2008.

In the past, I have tried to develop a strategy which would allow profitable results daily in all variety of markets, including strong trending, slow trending, sideways consolidations, choppy consolidations, narrowing range consolidations, etc.  But I still end up prone to blow ups from chasing and leverage and trying to fade a strong trend. 

Those blow ups which though relatively rare, end up being huge losses due to the leverage, poor risk management and fading a strong trend.  The huge losses from those blow ups can end up huge, usually taking out months of gains in those less trending sessions.

So maybe it’s better to develop a strategy to best take advantage of very strong trends.  They do not happen often, but when they do, it can provide huge potential profits.  Also with a bit more research, there should be characteristics which are common among most all strong trends. 

Today’s session I was lucky to catch part of the trend with some leverage (leverage was probably due to a bit reckless, chasing trading) and rode the final contract to the next to the last bottom.  My trailed stop get hit from way to strong of a bounce, which seems to be common on the NQ recently.

Here’s 3 minute chart of the afternoon break down in the NQ, I got stopped out around 2:00pm, looked like a potential bottom on slightly lower peak volume, but one more sell off was to come before the final bottom which broke the down trend line & also was right at 1 hour of straight down trend.   

Another exit strategy might be to watch the A/D line, the 2:00pm bounce on the A/D line was insignificant, but from 2:30 to 2:45pm the A/D line went sideways, and then around 2:45pm prices broke higher than 2:30pm high, and with 3:00pm surge broke higher. 

Below are some 2 minute charts of the 4 major e-mini futures:

Here’s the NQ which had a 8.75 point bounce around 2:00pm, approx $175.00 per contract for that bounce, and about 30% of the total sell of range of approximately 30 points.

YM had a 35 point bounce around 2:00pm for about $175, and about 30% of the sell off range of about 120 points.

ES had 4.25 point bounce of $212.50 or 26.5% of the 14 point sell off range.

ER2 had a 2 point max bounce of $200, or about 20% of the 10 point sell off range, and still seems to be best contract for trailing stops.

Now 100 point moves in the YM within an hour or 30 point moves in the NQ in an hour aren’t very common.  So a strategy that uses leverage yet also has some risk control might not be the easiest to develop, nor to implement.  When trading starts happening so fast, after the brain is used to slow choppy trading action.  It is hard to keep a straight head or to even believe the strong trend is going to continue.  Also these trending sessions are generally rare and usually very unexpected, so hard to get concentrated exposure and experience to get proficient.  Though maybe it’s time to get a chart provider who provides tick replays, which would offer a method of concentrated exposure to develop, test and refine some sort of strategy.

It has been a very unusual trading week, which generally has ended flat for the week.  Started with slow narrow range consolidation, but that changed by end of the week with some vicious vertical move rallies and sell offs. 

Wide range volatile consolidation sideways type action is typical of bottoms forming, very unusual for this type action with all of the indices near recent highs and attempting to break over head resistance.  But if it is a bear market, possibly typical bottoming action in bull markets will become topping action in bear markets?

The NQ’s ended slightly up for the week and did make significant break higher above prior week’s highs. 

ES also closed slightly up for the week, but only marginally broke higher highs than last week.

Now compare how much better trending the Dollar/Yen currency pair trades for the same period.  Down trend from Friday 4/18 to Wednesday 4/23, then uptrend from there to today’s close.  Maybe time to add some currency trading into the mix, instead of trying to trade stock indices when they’re chopping.

Today was a gap and go strong trending rally session.  These sessions look like they should be easy to trade after the fact, but rarely are they as profitable for e-mini day traders, and quite often this type price action can lead to potential blow up sessions. 

I was able to net 9.50 points on the NQ with 5 trades, with one big winner for 10 points, but did get chopped up a bit with 3 losses within the opening 45 minute narrow range (5 point) sideways wedge consolidation.  I went long at 1824.00 at 10:17am, and got out at target of 1834 at 10:23am, that target was originally lower and raised to 1834, which I thought was a possible resistance area.  Of course prices continued past my target (initially slowly), then peaked  around 1839, and then retraced slightly below my exit to 1833.25.  So I still would’ve gotten out if I trailed a stop, probably around 1834-1835 with a 4-4.5 point trailing stop.   But what’s frustrating is the trend was just starting and kept going up until peaking at 1848.75, over 14 points past my exit level.  I skipped the lunch time doldrums, and tried a long trade which happened to be right near the start of the afternoon rally break out.  I went long at 1843.25 at 2:19pm, prices went up and broke a higher high on the 150 tick chart for 2+ points, but I held for more and had to deal with a strong retrace which went back to 1841.50 (1.75 points in the negative) and had be quite nervous, so I set my target just slightly below prior highs at 1846.75, which got hit eventually at 2:53pm, making this a 32 minute trade for just 3.50 points, but of course I got out much too early, and prices continued higher to peak at 1854.25, 7.5 points higher than my exit, and after hours prices spiked 10 points higher.  

These strong trending vertical type trading sessions are plain difficult for day-traders, prices keep going slowly higher and higher, and always look like they’re offering ideal counter trend fade type trades.  Which makes you nervous if you’re in a with-trend trade, and want to get out before a vicious retrace.  And makes you eager to try to call a top and fade because of how attractive a 38.2% retrace might be.  But fading can be murder because prices keep going higher, then eventually top and then go choppy sideways slowly, then break out a little more. 

Thing is, I had been trying to be more disciplined to give trades room with loose trailing stops, to be able to catch more of the move.  However I’ve given up lots of potential gains in the past few sessions due to some of the recent low volume choppy trading action.  It’d be nice if the market would string along a series of similar price action in a row, instead of alternating, and then occasionally throwing in a surprise vicious strong trending session.

I’ve been following the lunar cycles of full moon marking market bottoms and new moons for market tops for several months.  I’m still not yet actively trading solely based on those cycles just yet.  The January 22nd panic bottom was right at a full moon, but the next 3 moon cycles were mostly sideways, then the past 2 moon cycles were pretty close. 

Here’s a daily chart since the Oct 07 top of the SPX with full moons marked as gray circles, and new moons with dark gray circles.

Next moon is a full moon on April 20th which could mark a near term bottom or at least sideways range.  However along with that there is a financial astrology cycle date on April 22, and a McClellan NYSE Vol cycle bottom on April 18.  So if the market continues in this sideways trading range on this recent low volume.  There could be quite a decent rally starting late this week/early next week to at least run into the FOMC meeting on April 30th.

I’ve recently been focusing more on trading psychology and money management strategies, and about 1.5 weeks ago have switched from trading ER2 Russell 2000 E-mini, to either NQ, YM, CL, GC, or maybe even currency pairs.

ER2 is going to be changing exchanges soon, so volume has been lighter, which can create some vicious spikes when a big order hits the market.  It’s a good thing when you’re on the right side of that trade, but more often than not it usually creates a situation to get easily chopped up, or go mentally tilt and fight against the trend.

Day trading the NQ’s is a totally different animal compared to the ER2, it doesn’t really offer very quick scalps, and can retrace/consolidate within a 4 point range back and forth before continuing the trend.  Sure you could scalp for 2 quick points here and there, but 2 points is $40, and commissions would be $4.80 R/T.  Not really worth it, unless there’s a methodology for super high percentage trades without huge stop levels.  It’s been much slower trading with the NQ, takes a lot more patience.  I’ve been able to catch some 5-8 point trades, typically taking 15-30 minutes, waiting patiently for confirmation of a move, then a lower risk entry level, sometimes trailing stops 4-5 points behind (due to NQ’s choppy range), and then waiting through a few retracements before it finally gets to my target, exhaustion type exit, or stopped out due to trend reversal.  Still tweaking/experimenting with money management strategies, currently just trading 1 contract.  It’s frustrating to get stopped out for loss or slight profit after have NQ’s go 3-4 points in my favor, and also frustrating if that was just a pull back and my target gets hit.  On the flip side, it’s also frustrating when I set my target conservatively, and then prices run another 4-10 points past my target, sometimes never even retracing back to my target level. 

I’ve also dipped my toes into trading crude oil, NYMEX CL contract, 1 tick is 1 cent and equal to $10, just like the ER2.  It moves in some ways quite similar to the ER2, so I’ve made some quick scalps for 10-20 ticks in a minute or two.  It does require being aware of news events which can really move crude violently. 

On the trading psychology side, that’s what has been my main focus since the beginning of the year.  Learning to be more aware of my emotions, instincts, reactions, feelings while trading.  Also externally working on methods to create better mental health, lower stress, focus, etc.  I’ve been through journey including acupuncture, fasting (yogurt, master cleanse, strict water), energy work of Qi-Gong, Reiki, Quantum Touch, change of diet, herbs/medicines (beta blockers, kava kava, calcium, magnesium, ginseng, cayenne pepper), aromatherapy, crystals, feldenkrais/yoga/pilates, sunlight therapy, music therapy, etc. etc. 

Still can’t say that I’ve ‘arrived’ where I’m just totally mentally sure and confident trading.  I’m still prone to letting the market get to me, and occasional bouts of tilt.  But with getting away from trading the ER2, the NQ trends a bit smoother, though also a bit slower, which generally helps avoid getting mentally chopped up.  But on the flip side, getting too aggressive on the NQ with leverage is almost guaranteed big losses. 

There’s been some improvement with mental calmness with a combination of various strategies, but still an ongoing process.

In related news, Oprah’s current book club book is Eckhart Tolle’s book “A New Earth”, which covers personal psychology, finding one’s purpose, changing mental outlook, etc.  In a recent show, a common light bulb type moment seems to be people focusing a bit more on the present instead of future or past.  Another thing commonly mentioned is realizing that there isn’t a need to constantly compete or keep up with the Jones. 

Granted, our current microwave society pretty much promotes being busy, constant distraction, fear/worry and materialism.  It’s not surprising that a book that shows just how pointless those things are, can be quite enlightening to others.

Can’t comment much more on that book, as I haven’t read any of Eckhart Tolle’s work, but from the reviews on the Oprah show, might be interesting enough to add it to my half.com list.  Will have to compare this recent book with his older one, and various prices, reviews, etc. though. 

Starting to see some signs of panic in the market, VIX spike on Tuesday, along with FED panic rate cut of 0.75.  Tuesday’s action had wild ranges but intra-day trading action was rather orderly for the VIX spike and panic overseas.  Wednesday had a retest of Tuesday’s lows, along with much more panic type trading action, whippy action, along with server slow down/freezes. 

Now was yesterday’s intra-day 600 point Dow, and 400 tick ER2 range constitute the bottom, probably too early to tell.  But likely a strong enough bottom to at least power a decent dead cat bounce.  One day of strength doesn’t constitute a change of trend.  Overall trend is down, so once this rally starts reaching prior support turned resistance, time to consider shorting.

Here’s a 60 minute chart of the ES, yesterday’s afternoon rally finally broke a prior session’s high, but not yet broken 2 prior sessions highs.  Did break potential resistance level of 1330, and so far today is coiling sideways right above that level.  1360 to 1370 area would be the next level of resistance which would start a change of trend with a significant prior high being broken.  Bullish moving average cross over, pull backs towards the 50 ema should be good long entries.

This rally is still technically counter trend on the daily charts, so long and short entries should generally have fairly short time frames, or tightening of stops to protect profits.

Down trend continues with increasing volume showing momentum continuing on the way down.  Some signs of potential capitulation and panic are starting to show, with VIX up 4 points to close 28.46, put/call ratio close at 1.35/1.49 (equity/total), spike of multiple -1200 or below TICK readings, and highest daily volume in this recent down trend and since Nov 8, 07, and before that a spike in high volume readings late July/August, etc.

All of that only points towards extremely oversold condition along with signs of panic over-reaction.  Would need some sort of bullish reversal to point out a potential bottom, or better yet some sort of double bottom with the retest on lower volume.  Climax high volume readings can signal near term bottoms, but also can be start/middle of a move, showing strength in a break down.

Here’s ES S&P E-mini chart showing an orderly and very solid down trend with lower highs and new lows, along with momentum/increasing volume on down moves, and low volume on consolidation/counter trend rallies.  Nearest level of resistance is 1370, while there are no meaningful levels of support other than prior session lows. 

 However in the bigger picture of things, today’s action was technically quite bearish.  Today’s session solidly broke and close well below February & August 2007 lows, along with a bearish cross of 50 ema/200ema.  If you follow the bull market of 1999 to mid 2000, and from 2003 to 2008, you can see how the 200 ema has held as support all the way up, corrections would find support around the 200 ema then bounce to next leg up.  In contrast in the bear market of 2001 to 2003, the 200 ema works as resistance stopping counter trend rallies before the next leg down.  So once prices finally find some support and start a counter trend rally, the 200 ema should provide resistance and currently is around 1450-1475.

I have boxed in the recent sell off range from 1525 to 1333 (approx 200 points), and have compared it to prior sell off ranges, the August 16th sell off from top to bottom also was about 200 points, and most prior corrections in 1998 to 2003 were within 200 point ranges.  1998 crash went a bit further, along with sell offs during the 2001 to 2003 bear market which included March 2001, Sept 11, 2001, and final sell off in Jun/Jul 2002.  So based on comparison of prior sell off ranges, this recent sell off is close to a bottom,  unless it extends to one of the crash type sell offs of 98, Mar 01, Sept 01, or Jun/Jul 02.  In that case, it might not find a bottom until 1250.  If there is that big of a crash move, that would make a rebound rally back up to the 200 ema rather violent and fast in a time frame of 2-4 months.  The cyan circle marks shows critical support being broken, in comparison to 2000 top, I marked off 2 areas of critical support broken, first one was broke but quickly bounced off and rallied to 200 ema, but 2nd one was broken thru then sideways for about 2 weeks around that support, followed by a 2nd leg of selling to double the range of the sell off, before bottoming and then bouncing back up to 200 ema.

Looking at the recent technical damage on the S&P charts, makes me really wonder just how bad things are currently?  I wasn’t following the market during the 2000 top, but that was a major bubble crash which led to a brutal bear market.  The recent action looks to be very similar to the 2000 top, but is actually looks even more bearish than initial sell off move that confirmed the 50/200 moving average bearish cross.  This credit/housing bubble burst looks like it could be just bad if not worse than the internet bubble bursting. 

Next week points towards several cycle periods to point towards a market turn, full moon on January 22th, which could mark some sort of a panic intermediate term bottom, along with an astronomy cycle turn date on the 25th.  But going long when it’s a solid down trend is counter trend, so best to only trade long for a day or two.  At least until counter trend rallies start equaling or surpassing the range of the down moves.  Sell offs have been max 3% down/day, while the few rallies have maxed at 2% up total daily range.

Some crazy intra-day swings today, big gap down open with instant vertical gap fill rally run during first 30 minutes, then 180 degree reversal to totally retrace that move and break new lows, followed by another 180 degree reversal to retest the morning highs, then an afternoon 2nd leg rally to break new highs, followed by an end of the day plunge at 3:30pm to retrace about 61.8%. 

Finally getting some typical panic/sell off type intra-day trading action.  Wild swings down and wild swings up intra day, punishing both bulls and bears.  So it is the start of a sign of getting close to an intermediate term bottom.  VIX is still unusually low considering how fast and how far this sell off has gone, so that is quite uncharacteristic for an intermediate term bottom, wonder what it will take to spike the VIX up?  When that happens, that will be quite an ugly trading session.

Here’s chart of the ES S&P E-mini’s, showing a solid down trend that is consistently making lower highs and lower lows.  There were a few times that prior high was tested, and just 1 time that a prior high was substantially broken (Jan 10th), but it only broke prior session highs, and unable to break prior 2 session highs. 

The intra-day rallies and relatively flat over-all close compared to prior day was a pretty impressive sign of strength considering the INTC bad news and big dollar rally.  But price action is still solidly bearish, prior session highs are still rarely broken, support continues to get broken, while resistance continues holding. 

That triangle consolidation of lower highs and higher lows on declining volume, which closed near the highs on Monday afternoon, ended up breaking down Tuesday with a big gap down open, followed by an increase in volume.  It was a gap and run type open, with selling after open, then a sideways near the lows, slightly above last Wednesday’s lows.  Then a zig zag down, up and then down break down right at the end of the day.

Aftermarket the indicies have all crashed down well below Wednesday’s lows, due to disappointing INTC earnings, so looks like it’s the start of another leg down. 

Those 3 sessions of narrowing range along with declining volume triangle consolidation was a pretty good heads up for a break down move.  Trends tend to break out of consolidations in continuation of the trend, also the counter up trend was within prior sessions ranges, rally move was on decreasing volume, and did not break above substantial resistance.

My exit on that SPY short put position ended up being right near the intra-day lows, got out after morning lows were taken out, which ended up being a double bottom.  At least that still ended up being a profitable trade, but frustrating when I could’ve close it for double at the open, or if I held into close for slightly more.

Hard to tell if things are as bullish for the next session or two, currently futures are pretty weak, Dow down 48 points.  But that seems to be common after hours activity, tends to fade the direction of a strong end of day move. 

The past 2 sessions have been inside of the 2 day reversal oversold bounce last Wednesday/Thursday, with consistently declining volume since peaking on Wednesday.  A long entry at end of close Friday was attractive because it was a lower volume session and was around 61.8% retracement and a retest of 1400 support/resistance price level on weak volume.  However Monday’s session was on even less volume, narrowing daily range and almost an inside day of Friday’s range. 

Currently resistance of Friday/Monday’s highs around 1424 on ES, and above that is 1437 which is substantial resistance of 2 different session highs, and also Friday 1/4/07 gap down open. 

I missed going short around 1424, so there might be a decent long play if there is a decent gap down open followed by a bit of early morning selling and then reversal.

Tomorrow Jan 15th is a short term cycle high, so it is possible there might be a run towards 1436, then continued sideways to options expiration Friday.  Middle of next week has nice confluence of time cycles for an intermediate term bottom, so could be a lower low formed with some sort of bullish divergence, or a higher low.