Bearish Aspirations

I can’t believe I’m actually saying this but there may actually be a chance for a short term correction in equities. But let’s not get ahead of ourselves, shall we? The current bullish trend isn’t even close to being threatened yet. And although we are seeing bearish divergences on the A/D and other momo indicators equities have proven many times over the past few years that they can stubbornly continue upward for weeks or even months on end. That said, let’s review what we are up against here:

Yes, there is nothing wrong with your display or your eyesight, and no I haven’t gone completely bonkers yet. This is a short setup but it comes with a few disclaimers. First up we need to see what happens in the first hour or so. If weakness continues and we continue pushing sideways in a lackluster manner then I may be inclined to take out a TEENY WEENY short position here. If it banks coin I may actually add short positions as we continue lower. But not so fast – don’t touch that sell button just yet.

For one we are dealing with a pretty limited price window here. I have highlighted the range on our volume profile which shows us heavy selling and it’s responsible for the lower highs and lower lows we have been seeing. But once ES 2440 is breached then there’s a good chance we simply squeeze higher. Thus my entry range is below 2431 and the odds decline significantly once we push above that. And once again 2440 is where it all falls apart. A good stop range is anywhere above 2437 but 2441 may be better (but allows you less contracts). Doesn’t really matter though as we’re using a small position size, right?

Another caveat is the NQ. In short it’s looking bullish and I am not willing to grab any shorts on neither the ES nor the NQ unless I’m seeing a juicy spike high here after the open. So let’s call that condition #2: Weakness in the NQ.

And here of course is condition #3: We need to see a negative signal on the Zero Lite (right panel). Unless participation is suggesting weakness going long the ES is a fool’s errand. So let me summarize it for you:

1. Price remains below 2431
2. Weakness in the NQ – a spike high would be nice.
3. The Zero Lite is flat, goes into negative territory, or even better paints a bearish divergence.

So the odds for us to be long today are exactly [tak.. tak… tak…. tak…] 1.8%. Yaaaayyyy!!!! 😉

Alright, we need to talk about gold and it’s correlation with the USD/JPY. I used to plot that relationship quite obsessively and a recent post by Chris Carolan over at the Spiralcalendar served as a much needed reminder. In short, if you are trading gold (inversely shown in blue) then you need to be tailing the USD/JPY because it is the latter that drives the former.

And here’s the hourly panel which looks extremely tantalizing to me in that expansions in the delta (i.e. the gaps between the two) appear to result in gold following the USD/JPY. I for one can imagine a whole list of trading opportunities there or perhaps you can simply pair trade it.

HINT, I mentioned the Kalman filter the other day and if you’re mathematically inclined then you should check out the Forex section on pair trading in Ernie Chan’s book ‘Algorithmic Trading’. Enough said.

Now speaking of the USD/JPY – it’s time to once again move our trailing stop a little higher. As you can see I’m now tightening into acceleration higher, which is exactly what you want to be doing, especially after +3R in profits. It’s quite possible that we’ll see this one push into 115 before it decides to correct a little.

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