Early Bird Special

The real early bird special was yesterday and I hope you took full advantage of it as we seem to be trading on the right side of the tape thus far. But if you came here for a freebie I shall not disappoint but humbly ask you to first make it to the bottom of this post as we are at a crucial stage in this counter rally. Alright, I was rather skeptical about the odds of a bounce here myself, but then opinions matter little when it comes to timing one. And you already know our prime directive: When in doubt let the charts do the talking.

Now if you managed to roll out of bed at a civilized time (West Coast and Hawaiian traders excluded) then you should have been able to snag an entry near 2006 plus minus. If you snoozed then – well, you only have yourself to blame, but let me console you with the fact that wishing to be in a trade is preferable to wishing to be out of one.

Our long term panel is starting to look rather interesting. For one the weekly is now pushing against a whole stack of resistance. In combination with the 100-day SMA (right panel in the first chart) that represent an awesome hurdle that will require significant buying momentum to be overcome. In other words – if this rally fails and tumbles lower then here right now is most likely a good spot to be looking for short positions.

I myself plan to reserve judgment until after the open today. We need to see a bit more activity on the Zero panel and a continuation of the bullish signal we started to see over the past two sessions. It certainly has been a good start but if you look at the Zero Light signal yesterday (right panel) then you probably note that it’s much weaker (meaning below 1.0) than the one on the way down.

Early Genuine Bounce

Clearly a major event related sell off usually is accompanied by a panic signal as sellers are scrambling to find willing buyers and selling pressure causes quick moves in a short amount of time. The first bounce that follows is usually along the lines of what we’re seeing right now – a bit tepid as early dip buyers are dipping their toes into longs and slowly increase exposure on the way up. It is only once a major hurdle has been crossed that more buyers are stepping in for fear of losing out. Over the years we have seen this behavioral pattern play out many many times and I am probably not telling you much you didn’t already know.

Dead Cat Bounce

What you may not know is how to recognize trouble on the way up indicating that we’re most likely in what is commonly called a ‘dead cat bounce’ as opposed to the first leg of a genuine one. As a matter of fact, looking at price alone it is almost impossible to distinguish between the two. Which is why a lot of people are using a host of indicators and other measures to look below the market’s hood and more properly gauge probabilities. I may be subjective but personally I have not found a better tool for evaluating market momentum and participation than our own Zero indicator and many long term subscribers would most likely agree. Without giving you guys the big sales pitch, here are a few things to look out for:

• Lacking participation on the way up. The first day or two after a big sell off are excluded but at minimum you want to see some type of bullish divergence. On day three (that would be today you definitely want to see a signal > the 1.0 mark.
• It’s okay if there’s a drop back down lower as long as the recent low is not exceeded. So for instance today we are already smashing into LT resistance and that may mean that it’s time to get out or at least take partial profits. Quick profit taking is not necessarily a purporter of significant impending downside. But what you want to see is a mild bearish signal accompanying it – not dropping below the -1.0 mark.
• You want to see participation increase – look at the Mole bubble on the bottom of the Zero Lite (right panel). It already began to expand yesterday which is a good sign because the tiny bubble range throughout the session is fine for the very initial phase but will not suffice to push us above overhead resistance.
• Look out for bullish divergences on the way down – they a pretty good sign that whatever selling is currently happening is an opportunity to look for long entries. But always wait for a spike low or whatever price pattern you prefer.
• VERY IMPORTANT: Look out for bearish divergences on the way up. That’s really where the cookie crumbles. Let’s say we’re pushing a little higher today and the signal is start to go completely flat or even drop into negative territory. Over the past eight years of using the Zero I only rarely see these types not produce at least a small correction to the downside.
• Explosive momentum in the first two days followed by a whole lot of nothing on day three and four are often sign of a dead cat bounce. Not to be trusted, at least not until very significant medium or long term resistance has been conquered and retested. So given that we do have the potential for a genuine rally as of now.

For more tips and real life video examples on how we are trading the E-Mini along with the Zero indicator look no further than the tutorial page. If you have any pertinent questions ask away – I’m happy to help. And since I called this post the early bird special I’m offering anyone who shoots me an email before noon Eastern today one free week of the Zero so you can give it a spin yourself.