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High Pole Warning
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High Pole Warning

by The MoleSeptember 5, 2011

Sometimes the market will throw us a curve ball – despite all our fancy charts and especially once we imagine that we may really know anything beyond what’s right in front of us. Deal with it – better yet – embrace it because if you want to trade for a living that’s as good as it’ll get, no matter what anyone else will try to tell you. A few weeks ago I projected SPX 1220 as a good target for a then nascent counter rally. Once we got there quite a bit evidence pointed toward a continuation, nevertheless we presented important support lines that needed to be held. The breach of these support levels may be earlier than anticipated but represents technical damage that adds to our long term bearish picture (which is the good news). On to that theme I have produced a set of chart I am certain you will enjoy.

Before we get to the good stuff I’ll throw out some short term musings for free:

The spoos traded on Labor Day and continued Friday’s sell off with a close at 1145.50. The pattern looks pretty bearish and if you are still holding out for a reversal then 1156.75 is currently your magic number (and NLBL). There is one more NLBL above at 1158.5 but we are also facing the lower 100-hour BB plus the 25-hour SMA – quite a bit of resistance. All in all we are in a pretty tough spot here and I personally would wait for first a breach of the 25-hour SMA and a successful reterest before even thinking of a long position.

On Friday I told my subs that 1172.25 needed to hold but we wound up closing below it. The price paid for this transgression was a drop to 1132.75, not so coincidentally our second NLSL support. Suffice to say that we need to hold this and it’s really the Maginot line for the longs. A drop below that probably gets us in the mid-1100s, if not lower.

Alright, enough with the easy stuff – I have some really goodies for my subs today:
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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 or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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In order for you to fully appreciate what’s going on on a medium to long term basis we need to take a little stroll down memory lane. I’m sure many of you were around back in 2008 when the tape fell apart like a cheap suit. But I’m pretty certain that very few of you have observed it through the lens of point & figure charts. There is reason to my madness, so please just humor me and follow along.

First up – if you are new to point & figure (a.k.a. PnF or P&F charts) then you may want to direct your attention to this great resource over at stockcharts.com. P&F charts are an acquired taste in that they do not plot time, just price – thus they have the ability to discard a lot of noise and retain focus on important support and resistance levels. Like regular interval based charts they can be traded via technical patterns, which admittedly are a bit of an acquired taste but can be extremely useful – let me proof it to you.

The pattern we’ll mostly focus on today is the ‘high pole reversal’ as well as its happy cousin, the ‘low pole reversal’. Here’s a good example, plotted on December 10th, 2008:

FYI – for you P&F aficionados: I’m using a traditional three box reversal chart. Anyway, here are the rules: The high pole warning is given when a chart rises above a previous high by at least 3 boxes but then reverses to give back at least 50 percent of the rise. The reversal implies that the demand that was making the prices rise has given way to supply pressure. The pattern is a warning that lower prices could be seen in the future.

Now it’s not called a warning without a reason – nothing is guaranteed but most P&F traders are less concerned with short term volatility. Their name of the game is the medium to long term time frame. With that in mind let’s look at the chart above. On December 10th there is a classic high pole reversal warning on the Dow Jones Industrial and you see a bit of follow through on the 11th and the 12th (the day of this chart).

Let’s fast forward to December 31st – as you can see the high pole warning produced quite a bit of follow through but then stabilized around DJI 8400. Now we get bullish pattern called a double top breakout, which refers to two spikes to 8600. So a bit of a snapback is on the table.

January 7th, 2009 – the double top breakout played out nicely but then hit a wall at the 9000 mark – plenty of opportunity to get out as I see a double top. We now got a double bottom breakdown – the inverse of the previous pattern.

January 29th – the double bottom break down proved to be extremely profitable and got the DJI to 8000 where it found support. The ensuing reversal to 8400 was however rudely interrupted by another high pole reversal pattern – oh my…

The 8000 mark proved to be tougher to crack than anticipated but that first high pole warning never got stopped out. And on February 10th there is a second one!

The rest is history as they say – this is the March 2009 low which shows us all the setups described before in context. Plus as an added bonus we got the inverse of the high pole now – the low pole reversal warning. And as you are surely recall the March 2009 low the rest is yet again history.

A bit more recently we got a high pole reversal warning on May 5th, 2011 – this time on the S&P 500. You all know how that played out. And that brings me to the most important chart for today:

This is Friday’s P&F chart on the SPX. And as you can see it painted a high pole warning which pretty much would have gotten confirmed today had the cash market been open. I actually filled in those boxes in blue circles – they are not officially on the chart yet but they will be unless some kind of overnight miracle unfolds in the next few hours.

Also on the chart is my own 25 SMA – which has been acting as support since the March 2009 lows (on the very left of this chart). There were two tests in recent history – on in 2009 and one in 2010 – both managed to paint a low pole reversal and maintain the upside trend.

However – we failed that 25 SMA (it’s not really day based obviously – and I best explain that some other time) back in August and have now produced an upside trend line which, has the SPX been trading today, would have been breached at the close.

On the momentum side the SPXA200R managed to crawl back to the 30% mark but if we drop from here it’s going to be lights out as it may be in danger of becoming embedded down here. If you compare the 2008 crash to today’s setup you’ll see that the initial sell off was a lot more orderly in that we bounced off the 30% mark before things got really ugly. This was the last opportunity for the longs to get out – one that many missed and deeply regretted later down the line.

This time around we dropped from 70% straight to 10% and a pop above the 30% was key in allowing a more orderly sell off in the months to come. Basically what this chart tells us is that technically we are in much worse shape than at the onset of 2008 – and don’t expect oversold conditions to be the long’s savior. What’s good for the goose is good for the gander in that overbought conditions did not prevent a buying frenzy that overshot any upside predictions by hundreds of S&P points.

Our junk to quality ratio is also not looking that hot – over the past week it had already painted a slight bearish divergence and I expect this chart to be plotting quite a bit lower on Tuesday.

Bottom Line: Yes, it’s possible that Fed & Friends are going to step in overnight to pull the cart out of the mud yet once more. But long term the picture is pretty ugly – we have a first high pole warning on the SPX and the current pattern is looking a lot more bearish than what we saw at the May high and the July snap back.

The only thing that can safe the longs at this point is an immediate snap back and push above the support lines I have presented in the past weeks. A continuation lower here tomorrow may be bought at SPX 1100 or 1000 but it won’t matter as the high pole reversal right at the 25 SMA would represent what’s commonly referred to as a ‘last kiss goodbye’.

Keep it frosty and stick with your charts, folks – emotions have no place in the game.

Cheers,

Mole


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About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
Enjoyed this post? Consider a small donation to keep those evil deeds coming!

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  • https://evilspeculator.com molecool

    And I want to see charts and setups today – after this weekend I am in zero tolerance high ban mode.

  • Anonymous

    you ran out of beer early? Sell or get out of longs when sell lines are busted and buy or get out of shorts when buy lines are busted. Isn’t that simple enough? Anyone whining is probably overleveraged. Any thoughts on USD? Maybe uncle buck is rising from the grave?

  • https://evilspeculator.com molecool

    ZeroFX is running – just FYI.

  • https://evilspeculator.com molecool

    No beer for two f…ing weeks now – Mrs. Evil is making me do some type of cleansing. The horror – the horror!!

  • Anonymous

    i thought it was one week. Get back to beer and beef soon. Dont go vegetarian too long. Trust me. Mrs evil is probably misinformed. If you absolutely must then add a lot of coconuts and coconut oil to your veggies.

  • http://practicalt.blogspot.com/ Gold_Gerb

    /ES, possible 3am event likely tonight.

    http://tinypic.com/r/142hdzp/7

  • Fearless

    I have just gotten back from the road. My strategy going forward is to short with tight stops. My medium/long term bullish scenario hasn’t been eliminated so I’ll stay nimble. The short/medium term bearish scenario is what I place at the forefront for the next couple of weeks.

  • Anonymous

    I won’t be surprised if early shorts get squeezed tomorrow after 10.00 am EST. The market was already way oversold on the hourly last Friday, so the odds of a S-T bounce are quite high, especially if we gap down hard at the open tomorrow.

    I suspect we may get a better short entry by Tuesday EOD or Wednesday. Anyway, zero will tell us when it’s the right time.

  • http://thebhbgroup.com TheBHBgroup

    great news thanks mole…those weekly pivots are working well these days on the ES.

  • https://evilspeculator.com molecool

    Boy it’s quiet here – is everyone still on vacation?

  • Anonymous

    Calm before the storm

  • Anonymous

    Calm before the storm

  • https://evilspeculator.com molecool

    Watch the AUD/JPY tonight. Here are our current target zones after breach of the daily NLSL:

  • http://practicalt.blogspot.com/ Gold_Gerb

    I am in zero tolerance high ban mode

    you think me a fool?  i’m not getting banned, uh-hu – no way.
    😉

  • http://practicalt.blogspot.com/ Gold_Gerb

    Spot Magic Number – let’s see what overnight reveals.

    http://quotes.ino.com/chart/index.html?s=forex_xauusdo&t=&a=&w=&v=i

  • Ride30b430

    @ Fearless 
    So you are bearish now, going short with tight stop and looking for an opp to go long?   Long for a bounce or long like med term bullish?  I do not know how to trade like you, this must have taken years to master.  You are truely unique with an increadible ability to holding two mutually exclusive concepts in your head while still being able to maintain focus and not chase.  Very impressed! 

    I just take a stance and trade around it, such as being bearish and covering and re-entering when comfortable.  But, my favorite thing to do in a bear market is wait for a outside event (std dev or political) like X down days in a row, % drop in a short period of time, percent from 200 DMA, “no shorting”…… you get the drift and then go REAL LONG as it starts to turn.  I’m sure Mole remembers me catching a few of those back in the good old days.  And always being prepared to capilize on a company specific event such as earnings or an suprise announcement.

    Cheers mate,

    Ride30 to 1070ish

    “I have just gotten back from the road. My strategy going forward is to short with tight stops. My medium/long term bullish scenario hasn’t been eliminated so I’ll stay nimble. The short/medium term bearish scenario is what I place at the forefront for the next couple of weeks.”

  • https://evilspeculator.com molecool

    This troll has been banned and comment has been erased as he continues to pick fights with various contributors here. 

    Moderators: Please employ zero tolerance policy and ban anyone trying to highjack the comment section. This is NOT a democracy and I don’t have any time or patience to waste on this bullshit.

  • https://evilspeculator.com molecool

    I wish the fucking mods would do their job. Time to start firing people…

  • https://evilspeculator.com molecool

    If you’re watching the spoos overnight then remember that fair value right now is around -1.10.

  • Anonymous

    Tonight’s action has broken the spoos upward trend line that was still intact through labor day. I will short any bounce/strength and see how the 1125 to 1100 support holds up.

    I am surprised by the relative strength in Aud/Jpy and Aud/Usd…if they don’t head down to their early Aug lows alone with equities, that would serve as a warning to any longer term shorts.

  • raised_by_wolves

    I’ve started hanging out with people in real-life (a big step for me, mate) and have an interest in a real-life girl (an even bigger step) so haven’t been hanging around the comment section very much these days. If you trust Gold_Gerb as much as you trust me, you could make him mod. I mean, he’s here. All. The. Time.

  • raised_by_wolves

    Thanks! Hey check out the net line support, inside week buy signal, and hammer in an uptrend for -/ES+/GC.

    http://content.screencast.com/users/raised_by_wolves/folders/Jing/media/d0cb4aa4-6947-4fc2-9b90-787220ed32ca/00003675.png

  • raised_by_wolves

    What do you think about the dark gluten-free beer at Whole Paycheck? I used it for the gluten-free-beer-glazed, spicy black beans with coconut oil I made today.

  • Anonymous

    watching also GC closely. It is just retesting its highs, which for me it’s step 3 of 4  to go short this mofo (last one being a nice red distribution candle). It can go some 20 points higher than the prior top – it doesn’t really matter.

    (don’t get me wrong – nothing really bearish here so far, it’s trending nicely and bouncing off EMA20 and trending above it, just a hypothetical opportunity, a thing that merits some more attention).

  • raised_by_wolves

    "It is just retesting its highs"
    Unless it’s not. 😉

    Good plan to wait for confirmation.

  • Anonymous

    i’d say, some 5% chance it’s merely a retest of the top. 🙂

    but if it is, then… oh boy 🙂

    my steps are: 1. break of a major trendline, 2.) some ugly red candles 3.) retest of the top (could over or undershoot, a bit, doesn’t matter) 4. ugly distribution candle.

    Gold is at No. 3 now. Slim chances to get to No 4, but a thing to watch, that’s for sure.

  • http://practicalt.blogspot.com/ Gold_Gerb

    oh no, don’t start slackin just because you’ve found a cat.
    congrats.  just keep an eye on your wallet.
    pussy can get expensive.
    😉

  • http://practicalt.blogspot.com/ Gold_Gerb

    /ES 1146.
    it’s 3am, things looking up.

    a bit of insomnia tonight.  too much sun & caffeine.

  • Anonymous

    GC short – got an entry on 5 min at 1916. (stop on BE, a top picking excersise, that costs nothing).

  • raised_by_wolves

    I do very unique and usually free activities with her. For instance, the other beautiful evening I gave her a chess lesson on the railroad tracks.

  • raised_by_wolves
  • raised_by_wolves
  • Anonymous

    gold volatility is just unbelievable up here.

  • Anonymous

    Hey RBW, good work on the woman, even if all you have is company – great stuff 🙂

  • Anonymous

    Hey RBW, good work on the woman, even if all you have is company – great stuff 🙂

  • Anonymous

    Sounds nice Cub, but I might stick to my 6 bottles of HENSCHKE ABBOTS PRAYER 1994  which I picked up recently a cab/ merlot blend. Hows the trading going? Been a little busy to write comments for a while now but I am still trading. Cant complain either, think staying a little more isolated has me trading better again :-0

  • Anonymous

    Yes been watching it, have bought options on silver stocks – long dated. looks like we could have another push higher but not wiling to play in the futs n physical like I normally do, right now. These currencies are coiling for a big move just not convinced it has started just yet. If you looking for a good long term trade buy NZDEUR on a decent dip and just add to it as it goes up 🙂

  • Anonymous

     too bad it’s only a demo account. could have cashed in on that swiss intervention.

  • http://practicalt.blogspot.com/ Gold_Gerb
  • http://practicalt.blogspot.com/ Gold_Gerb

    GLD 185

  • tradingmom

    Is the zero working?

  • tradingmom

    Nevermind…working.

  • Anonymous

    Good for you RBW.  

    And yes there is a life outside of the stock market.   🙂

    I took the weekend off myself although I did take a peek at ES a couple of times and when I did I removed a couple of real garbage comments on the the last thread.  And and I removed a comment of a poster that Amokta had already Blocked.  

    These trolls are coming in mostly during the slow times so the only thing we can do is act on them when we can.  

  • Anonymous

    That gap in regular trading yesterday while /ES traded is messing up the signal. If Mole could give us a discussion of this artifact and any implications it could have might be useful.

  • raised_by_wolves

    @chronographics:disqus @BobbyLow:disqus Thanks guys.

  • raised_by_wolves

    @chronographics:disqus @BobbyLow:disqus Thanks guys.

  • raised_by_wolves
  • raised_by_wolves
  • http://practicalt.blogspot.com/ Gold_Gerb

    DOW -303 pts
    right at my pennant line.
    I must say, this would be a time to have the zero.

    given that there is no economic news releases today, best I just sit and watch.

  • Anonymous

    Make a line from SPX Aug 10 low to Aug 22 low to…where we sit right now.  Bulls better get an offensive going or next stop should be quick drop to 1120 then 1110.
    Also interesting is we are just above the SPX low from Fri. Aug 26 low of the ‘Bernanke Blast Off Day’.

  • Anonymous

    my broker only has NZD against USD, JPY and CHF, no EUR. Weird. any suggestions with these pairs maybe?

  • Anonymous

    Looks like Vwap is holding, although zero is not positive yet. Going long for a day trade.

  • Anonymous

    (I think we need a testimonial link.)

  • Anonymous

    my condolences to all those, who were short EUR/CHF today. May their souls rest in peace.

    1000 pips of which 600 pips in 5 minutes – even if you had a stop, it would be filled a couple of hundred pips higher with this move. Jesus. 🙂

  • Anonymous

    judging from the volume and stupid moves today, it’s still labor day and only HFTs are working.

  • Anonymous

    well i would look at doing NZ/USD and then a EUR/USD if you time it right you may get a better cross anyway You may pay a little extra Bro but it could be well worth it 🙂 good luck if you go for it.

  • Anonymous

    thanks.

  • Anonymous

    Baby Divergence right now (12:42 NY Time) ???

  • Anonymous

    baby divergence for a baby move? still above zero, PA bullish, with overall feeling of “artificialness” and BOT’s work.

  • Anonymous

    baby divergence for a baby move? still above zero, PA bullish, with overall feeling of “artificialness” and BOT’s work.

  • Anonymous

    baby divergence for a baby move? still above zero, PA bullish, with overall feeling of “artificialness” and BOT’s work.

  • Anonymous

    all this chop not pushing the vix down, next down leg coming

  • Anonymous

    all this chop not pushing the vix down, next down leg coming

  • https://evilspeculator.com molecool

    She’s not misinformed – don’t jump to conclusions without knowing the details. And yes I’m eating plenty of coconut butter each day – love those medium chain triglycerides 😉

  • https://evilspeculator.com molecool

    Love your avatar 🙂

  • Anonymous

    Mole,  do we have a support line on 5min zero?

  • Fearless

    I didn’t take any trades today.  I am in meetings the whole day so no time to watch it.  Furthermore, we gapped down too far below both the 20 day SMA and the acceleration line, and too close to 1120 for my liking.  I will wait out the volatility first.

  • http://practicalt.blogspot.com/ Gold_Gerb

    DOW -150   at 11,088

    let’s see that’s half of 300! (little Sparta joke there)
    nice bounce off the bottom pennant line.

  • http://practicalt.blogspot.com/ Gold_Gerb

    DOW -150   at 11,088

    let’s see that’s half of 300! (little Sparta joke there)
    nice bounce off the bottom pennant line.

  • Anonymous

    Mr Dow and Dr Jones ?

  • http://practicalt.blogspot.com/ Gold_Gerb

    thanks for answering the 20 day – it was a lingering Q in my mind.

  • http://practicalt.blogspot.com/ Gold_Gerb

    thanks for answering the 20 day – it was a lingering Q in my mind.

  • http://practicalt.blogspot.com/ Gold_Gerb
  • https://evilspeculator.com molecool

    ????????????????????????????????????????­???????????????

    N   E   W    P   O  S   T  !   !    N   E   W    P   O  S   T  !   !   N   E   W    P   O  S   T  !   !

    ??????????????????????????????????????????­??????????????

  • Anonymous

    you could also perhaps try AUD/EUR