Zoning Laws

After an exhausting topping pattern equities finally resolved to the downside last week. And as always it is magnitude and vehemence of the follow up bounce that determines what happens next. But it’s not as easy as waiting a session or two and then declaring a winner. Sometimes those bad boys are trying to fake us out. So when caught inside a sideways guessing week without the proximity of any significant technical context I often resort to zoning in order to structure my approach.

Clearly the volume hole near 1935 is the gateway for the bulls and it also demarks bearish from bullish potential. Anything beyond 1940 is still part of the obligatory bounce we have been expecting – remember the 25-day SMA sits right there to block the way (shown below). If the bulls advance above it then we are in the high bounce area, which does not completely kill the bearish case but puts it into serious peril. And obviously anything above 1965 shifts the odds back to the bulls.

On the downside we have the guessing zone in which we’re currently stuck. Being short here is actually not a bad spot to be in IF you grabbed your shorts near 1940 (i.e. yesterday). Otherwise there is nothing of interest down here until we drop below 1910 – if the bears manage to drop the tape this low we could easily see acceleration lower. However IF we do it’s still possible that the bulls stage a late f-u rally higher.

What to do? 1) you are already short since 1940ish – don’t do anything and put your stop to break even. 2) You can get short right now but only with 1/2R – then build your position as it drops lower each 1/2R increment – your stop would be above yesterday’s highs. 3) Going long near the lows is possible if we approach 1910 – if you are short already then I would simply hold them and monitor the situation. 4) Be long above 1940 with a stop below – this is not expected to be a long term campaign unless the bulls start ripping this higher.

I know – complicated but as Scott mentioned – this is going to be a shitty week on the equities front.

Here’s a wee bit more context – the SMA/NL ┬áchart shows us a support trifecta sitting below. There’s a NLBL at 1923.5 – the 100-day SMA at 1911 and finally a NLSl below 1900. A breach below that one puts us solidly into bear territory.

Now on the long side I would not play the spoos – I would go with the NQ instead. Technically we are painting an RTV-L today and if we get that bounce (yellow and green in the zoning laws above) then this would be my instrument of choice.

On the short side however… well, more about that below the fold and a few more goodies for my intrepid subs:

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Honorable mention:

Gold – courtesy of Darth Mole. If you saw this one last night you may have played that break out higher. And that wasn’t the only one today: EUR/GBP, crude, soybeans, bonds – significant jump in volatility. If you haven’t signed up for Darth Mole yet – it’s FREE all through August. Have fun!


Friday Morning Briefing

Welcome to our morning briefing. Here we are reviewing short term setups ahead of the NYSE opening bell. If you are a scalper or swing trader then these setups may be of interest to you. As usual keep in mind that these are short term setups although they could be used as early entries for more longer term positions.

For some reason we’ve hit the motherlode on the setup front this morning – everything is coiled up and ready to rip. But careful – it’s quadruple witching Friday and that means you need to set your stops particularly generous today – add at least 25% to your common distance. But before we get to the goodies let’s talk about price action on the equities side. We’ve popped quite a bit higher and then pushed sideways all day with minimal participation (see the Zero indicator flat lining) in a common ramp & camp fashion. What does that mean and where do we go from here?

Well right away that is the wrong question.┬áThere is no ‘right’ or ‘wrong’ when it comes to inherently flawed mindsets related to trading. You simply trade according to what *at the current time* is the most probable outcome – and sometimes that includes both directions (I can literally see heads explode here right now).

Let me give you an example. I have a chart on which price has reached an important inflection point based on your ‘lens’ (it’s all mental models anyway). How about a 100-day SMA plus we throw in a 25-week SMA nearby for good measure. PLUS the daily Bollingers have compressed and I suspect a big move is coming. Now based on prior history price usually has either bounced back or breached and then pushed higher very rapidly. Both trades could be profitable so I would get positioned short first with a stop above that inflection point. I expect to be stopped out of course (you always do) and once that happens I flip positions to be long with a stop below what now is tentative support. May I get whipsawed once or twice? Sure – can happen but in this particular case it doesn’t matter to me as I expect increased volatility to make up for some of the early losses if they appear.

Does this example always work? Of course not – but it’s an adaptive approach that over the long term has a positive edge. Now note that I spent a maximum of 5 minutes looking at my charts as the TA should only occupy 20% of my trading day. The other 80% are 20% campaign management and finally the most important and largest aspect of trading: self management, which is 60% of trading.

Too many of you guys confuse swapping directional opinions with trading – to me it’s merely mental masturbation. If that offends your fragile egos then GOOD – you are way too comfortable with your entrenched approaches. Trading is all about persona development and if you get settled/comfortable in a path that answers easy answers then the market will hand out instant punishment. Which btw, is why I love the trading racket – unlike in politics, the law, or religion it is not up to interpretation or opinion. Your acceptance of reality has no bearing on its validity – if you’re positioned incorrectly you will lose. In essence your job as a trader is to manage loss as best as possible.

Now let’s talk about the chart above – let’s just look at the price action. After touching and successfully retesting the 100-hour SMA the SPX is now back at the upper 100-hour Bollinger which has nicely contained price action over the past weeks and months. We may get scenario A or we may get scenario B – each direction is completely plausible as price has not yet told us that it’s ready to turn. Going short here right now is tempting as we ‘have not breached the new highs’, right? Well, yes and wrong – the assumption is that breaching the new highs has any meaning whatsoever – I mean we could breach it and then fall back like a rock! Maybe – so let’s look at how price usually moves:

This is our daily volume profile chart on the E-Mini futures – all based on trading volume concentrations. When we touched that 100-hour on the SPX we were near a volume hole and as you can see the big move up (and the prior move down) was exploiting an ‘easy move range with plenty of participation. Where are we now? Near a veritable volume chasm and that means we should be prepared for a pull back – but we can’t just go short without evidence. If there isn’t any on the daily (i.e. as in right now) then we look at the hourly panels instead for patterns. So let’s do that!

And there we have two Net-Lines opening the door to both directions. We are also seeing a bit of BB compression and if you curious as to what that means then look no further than to what happened on the 18th around 15:00 EDT. So we could get a big move here shortly – if you manage to get positioned early on the hourly then you can build your position up as the tape continued to push your way. And that means you may get an early entry into what turns out to be a daily or even weekly campaign.

And that is how professional traders approach it – it’s imperative that you remain nimble and continue to assess what the tape is telling you. How does that compare with simply drawing a line and saying – I’ll go short here, no matter what because the tape ‘is supposed to fall from here?’

On to the setups – crude looking at a lot of resistance here and I’m short with a stop above the 100-hour SMA.

AUD/NZD – coiled up like a clock and I’m long with a stop below 1.077.

More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!

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Here’s a new service I dug up the other day – dukascopy has a lot of negligible content but if you’re an Forex trader (and most of us are) then the daily spread monitor is very good medicine. So if you see spreads you can drive your car through it may just be your broker ripping you off.

Be careful if you’re trading the CAD crosses around 8:30am EDT – event risk. See you guys later today.


Ides Of May Wipeout

I expected more downside yesterday near the close of the session but frankly this is a bit more than I had in mind. As usual the MSM is doing their very worst in trying to pin today’s equities wipeout to anything resembling a bearish soundbite (and having a very tough time doing so) – after all in their little bubble universe it’s the news that drives the tape, isn’t it?

Well, where were all those ‘bears’ yesterday or Tuesday when the SPX touched 1900 for the very first time? Riiiight. I guarantee you that the vast majority of bears completely missed the boat on this sell off – of course if you visit their usual watering holes today everyone is busy high-fiving as if they’re been short since the S&P was tickling the very top.

Sorry, I couldn’t resist but that’s how I roll. And I concede that it was a subtle hint – not enough to bulk up on shorts yesterday. But good enough to keep out of long positions, so I consider myself lucky. This is yet another point for the GBP/JPY to ES futures correlation – it has kept us out of trouble on several occasions now.

With a bit over an hour to go we finally managed to kiss VWAP on the Zero Lite. That’s a meager bounce after such a freefall and the bulls have to do a lot better than that. Perhaps this is the beginning of the end.

Clearly the bots are running the game again today. Very nice smooth sell curve and only spasmodic buying. Of course this has implications – meaning we could be seeing a quick reversal here soon. I hate to say it but once again a very lousy spot to take long entries.

You may remember the message I offered to the bulls the other day – 1880 needs to hold or the bears are going to rape you. Well, that message doesn’t seem to have been received as we’ve been scraping 1860 today (gasp). A very concerted effort to push the tape above 1870 is now required to pull the cart back out of the mud. This probably has to happen today as a close below the 25-day would be very bearish – no prior close below has not drawn us back to or below the 100-day SMA. And it may get worse from there.

And now that we’ve dropped 30 handles it’s probably fair if I share the latest snapshot of the daily Zero which has been painting a pretty distinct divergence for weeks now. Of course one never knows when these things resolve. But it is something to keep in mind IF we see a dead cat bounce here. I think the bulls are starting to be in big trouble here and Tuesday could have presented an exhaustion spike before a medium term trend change. Let’s not jump to conclusions – but keep collecting evidence.

Updates on our recent victims – as hoped wheat has been running like a champ and we are now putting our stop at the 2R mark. This is the second consecutive campaign in the past two weeks and it’s been very profitable. As I said before and I say it again – equities are mostly a distraction from the good setups that are out there every single day.

Gold has been less cooperative and failed at the ‘make or break point’ I highlighted yesterday. We now find ourselves back below the IP trigger at 1299 and someone you all know wishes he would have closed this one out at 1R yesterday (hum hum). However you may recall that I modified the stop quite a bit down to 1280 and with reason. This triangle formation will be instrumental in determining the direction for the next quarter. It is possible that this resolves to the downside but at this point it’s a bit early to switch sides.

CAD/CHF didn’t manage to bank 1R in three sessions and we are out of here with a measly 0.5R profit. Meh – better than a kick in the shin but given that we were at 2R this morning it’s a bit of a pain. But there goes again the old lesson regarding paper profits ;-)

Copper is looking pretty good today – as it did yesterday. Now we’ve got an IP candle (another one) and although I’m already long I may add a contract on a breach above the 100-day SMA. Will be definitely closing out and be short on a breach below today’s lows. Note the weekly context as well which as us right at the 25-week SMA. Good stuff and this is a solid setup.

Not much else I would want to touch today – let’s give it a boring sideways session tomorrow to let things settle down a bit first. See you guys on the other side.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


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