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Wednesday, January 29, 2014

Wednesday, 1/29/14 update


Five waves down can be counted in the ES from the mid January highs:



Daily indicator is in buy territory:
So we could well see a bounce here, but it should be just a bounce - 5 waves down portends at least one more round of sustained selling.

Saturday, January 25, 2014

Saturday, 1/25/14 update

Bottoms are made and tops are built as the saying goes.  It's now obvious that the ambiguous and maddening chop since the 1st of the year was a top being built.  The expected Intermediate Term top is now in place.

There are two questions that need to be answered.  First is important on the short term, and that is where the bottom will be for the current sell-off.   Second is important on the longer term picture, and that question is the appropriate degree of the wave count.

Let's take the second question first.  There are two alternate possibilities that have been presented in recent weeks.

Alternate #1

OR

Alternate #2

From the Intermediate W2 low in Jun, 2012 there are two alternates.

Alternate #1 has Intermediate W3 topping at a high of 1705.00 on Aug 5, 2013.  That high was almost an exact hit of a fibonnacci target at 1702.50 where Inter W3 = 1.618 x Inter W1.  Intermediate W4 was a double zig-zag that had a low print of 1624.75 on Aug 28 followed by a final low at 1625.50 on Aug 30, 2013.  Intermediate W5 followed and topped with a slight Minute W5 failure at 1845.75 on Jan 15 after printing a prior Minute W3 high of 1846.50 on Dec 31.  Major W3 is thus complete and Major W4 now in progress.  Major W5 will follow the Major W4 low and lead into a very significant Primary Wave III top.

Alternate #2 has Intermediate W3 extending considerably and topping at the Dec 31 - Jan 15 highs.  Intermediate W4 now in progress.  This would require an Intermediate W4 bottom & W5 top yet to occur before a Major W3 top.

The current correction could help eliminate one of the two above alternates.  Major W2 was a double zig-zag and Intermediate W2 was a flat.  The EW rule of alternation is that waves 2 & 4 should alternate in form and/or complexity, so if the pattern since Jan 15 is a zig-zag then Alternate #1 will drop in probability and if it is a flat then Alternate #2 will diminish in probability.  However, a triangle or very complex formation will keep the situation undecided.  

As for targets for the current sell-off, it's a bit early to develop anything with a high level of confidence.  However, a volume profile chart can give us some clues to what may occur.  A volume profile is a visual representation of the number of futures contracts traded at different price levels over a specified period of time.  The theory is that price levels on the chart that have a low number of traded contracts associated with them are levels of support or resistance.  These levels are called volume holes.  The idea is that there are less potential sellers or buyers since there were less contracts traded at those levels.  In a bear market, those with long positions are going to bail as prices approach their entry level, which will provide impetus for the move.  But the less contracts held at a specific price level the less downward inertia is available.  Same principles apply in reverse in a bull market.


The blue bars on the left side of the chart are the volume profile. They represent the number of contracts traded at different price levels over the last 6 months.  There are two obvious volume holes in the chart, one at ES 1811.75 to 1816.50, the second at ES 1729.00 to 1734.25.  As can be seen, the 1st level did in fact provide some support in the small correction of Jan 13 & 14.  However when that level was penetrated on Friday the selling actually accelerated, which is to be expected.  The 2nd volume hole apparent is at 1734.25 and could well limit the current sell-off.  In addition, ES 1735.50 is a 50% retrace of the rally from Aug 28 into the recent highs.  So right now the 1735 area is a likely candidate for a target for the current sell off.
 

Wednesday, January 22, 2014

Wednesday, 1/22/14 update

Here's a possibility:
Hourly bars

Daily bars

Tuesday, January 21, 2014

Tuesday, 1/21/14 update

I use TOS for charting & trading, they sent in an update over the weekend that has blown up - had to uninstall and reinstall their software yesterday and was able to get in a little work on charts late yesterday PM, but this AM back to square one - can't even get to the log in window!!!  Very frustrating, computers are wonderful when everything's working properly, but when it isn't they are a nightmare.  When I first started trading back in the dark ages, I charted with a pencil & some graph paper, sometimes I wonder if that wasn't better - at least I didn't spend endless time on hold waiting for a tech.

Anyway, can't post any charts at the moment, but on the short term it appeared that last week's pattern was corrective in nature which indicates further rally this week.  However, the market is almost certainly in a 5th wave, and probably at several degrees, so caution is warranted.

Sunday, January 12, 2014

Sunday, 1/12/14 update

Sloppy mess in the ES/SPX this last week, and as a result the short term picture is pretty hazy.

Continuing with last week's theme that an Intermediate Term top is either nearby are already in, the short term EW counts look like this:

Alternate #1 - IT top nearby

Alternate #2 - IT top in at Dec 31 high

In Alt #1, the count shows a double zig-zag off last Monday's lows for a "B" wave of a Minute W4 flat in progress.  EW rules will allow for as much as 3 zig-zags in a multiple zig-zag move, so the possibility of another upward thrust is open.  If that occurs, and if new highs are achieved, then Alt #2 is disqualified.  Also, there is the possibility that the entire mess off last Monday's lows is some sort of leading diagonal wave 1, in which case both these alternates would be ruled out and a far different short term scenario presents itself.  But let's save that possibility for analysis if it occurs.

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The Tick trading system looked pretty darn good in the chart presented last week:

To review the trading rules: trade signals need two things to happen, a cross by the blue SMA above (buy signal) or below (sell signal) the red SMA, and a Heikin-Ashi bar in the direction of the indicated trend.  Stop losses are set at a distance of 1 ATR from the closing price of the bar where the trade was initiated.  In the period reviewed last week, which was the 20 trading days ending Jan 3, there were 6 completed trades with 4 winners and 2 losers, net gain of 69.97 points with a max drawdown of 15.44 points.

As mentioned in last week's post, a trading approach like this needs a good 12 months of tracking before a definitive judgement can be made on it's utility.  The results in the last week on this system are a good illustration of why this is necessary:


As can be seen, the system got into some pretty serious whipsaws, and the results for the 20 day period ending Jan 10 are 4 winners and 6 losers, only 15.07 net gain with a max drawdown of 18.50 points.  Not nearly as impressive as it looked a week ago, or rather, impressive in the other direction. 

So what happened, and can anything be done about it?  My read on the situation is that the activity of the last couple of weeks is reflecting a lack of strong conviction by both the bulls and the bears, so the result is indecision and a sideways market.  This is actually quite interesting, because the pattern in prices and the pattern in the Tick analysis reflect each other.  What can be done from a trading standpoint?  I think the answer can be found in the lyrics of an old song: "You've got to know when to hold 'em, know when to fold 'em" (The Gambler - Kenny Rogers).  In this situation, it's time to back away from the table. 

Applying that thought to the Tick trading system, the thing that is of use can be found in the histogram.  That chart represents the spread between the two moving averages employed.  The rule considered is that trading signals should be ignored if the histogram doesn't generate a reading above 25 or below -25 for for more than 26 bars.  Why 26? Because that's the time period used in the MA's employed.  Why 25 to -25?  Honestly, because that looked about right when examining the chart.  If eventually this rule is determined to be a keeper, then the appropriate trigger levels should also be tested and refined.  

Applying this new rule to the most recent twenty days results in a marked improvement:

As can be seen, the adjusted system now shows 4 completed trades, with 3 winners and 1 loser, 32.02 points net gain with 12.89 max drawdown. 

When developing a trading system, a danger is making up rules for every negative situation that occurs.  There is that danger here, but I believe it's not yet a concern.  In this particular case, it is true that markets often go into a sideways mode, and that will present the danger of whipsaws.  Especially with a system based on moving averages.  So it seems appropriate that the issue be addressed and a means of handling it be developed.

Sunday, January 5, 2014

Sunday, 1/5/14 update


Preferred count for the ES/SPX at the moment has the market working out a 4th wave correction of the rally off the Dec 15 lows.  The 2nd wave of the structure was a zig-zag so the EW rule of alternation requires a flat, triangle or some type of complex structure for wave 4.  A flat is shown but any of the others are possible.   Wave 5 will follow the completion of wave 4 and that should lead into an intermediate term top of some significance.

It should be noted that there is a way to count the structure off the Dec 15 low as a completed 5 wave impulse at the Dec 31 high:


This alternate has a problem with the lack of proportionality between wave 2 & 4 of the structure, so it has to be viewed as less probable than the preferred count in the 1st chart above.  But it is only slightly less probable, say 45/55.

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The tick is like the heartbeat of the equities market and can be an excellent tool for trade timing.   When time permits in the last couple of years I've been experimenting with and refining a trading tool which uses the tick as it's basis.  The latest iteration shows some real promise and is presented below.


The bottom chart is an MACD type treatment of the NYSE Composite Tick based on 30 minute bars.  The blue line is a 26 period SMA of the average (H+L/2) Tick per period, the red line is a 26 period SMA of the difference between the instantaneous (1 period) Tick and the 26 period SMA, and the histogram is the difference between the two lines.  The top chart is the SPX but in Heikin-Ashi format.

Trade signals need two things to happen: a cross by the blue SMA above (buy signal) or below (sell signal) the red SMA, and a Heikin-Ashi bar in the direction of the indicated trend.  The idea to use Heikin-Ashi bars is the latest refinement and is intended to help suppress whipsaws, although there was a whipsaw event in the last couple of days.  Also, there is the possibility of another whipsaw in the next trading day unless equities immediately move lower.  Another reason to use Heikin-Ashi is to orient the trading system to one which buys strength and sells weakness.  This is counter-intuitive to some traders, but it does avail itself of the old market adage that says "the trend is your friend".

Stop losses are the final component.  They are set at a distance of 1 ATR from the closing price of the bar where the trade was initiated.

I use TOS as my charting/trading platform and unfortunately they only retain 20 days of data for time periods of less than an hour.  So this system only has 20 days of data so far.  I feel that the minimum requirement for a high level of confidence in a trading tool is 12 months of data at the very least, and obviously more is better.  So this approach needs to be tracked for another year or so before it can be said that it has a definitive edge.  But the initial feedback is quite promising: 6 completed trades with 4 winners and 2 losers, net gain of 69.97 points with a max drawdown of 15.44 points.

One other note.  On the chart above it can be seen that the market activity of the last few days has not generated strong directionality in the Tick by the measures used.  In a way this is further confirmation of the value of the analyses employed because it's pretty accurately reflecting what is known to be the case: a holiday market with a significant number of major players not participating.  Monday should see a change in this situation as everyone comes back off of holiday.  But, as noted above, it may mean another whipsaw in the trades indicated.

I plan on reporting the results of this approach in the months to come.

Happy New Year!