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ping pong

ping pong

by ScottMarch 4, 2011

Right now neither side seems able to deal a knockout blow. 2 days ago the bears were ready to get some long anticipated payback. An after hours globex squeeze morphed into something more serious, and then the bearish mojo was spent. The bulls really should have been able to slaughter the bears today. But they didnt.

Lets keep things simple. The conclusion is EVENLY MATCHED. This thing could go either way, but IMO the highest probability option is that a top is either in or close. Further strength just failing to beat the old highs (or pipping them and falling) would not surprise me at all at this point, so I would *not* be in a hurry to get short right here. Let PRICE CONFIRM YOUR VIEW.

This chart is my starting point for looking at the whole situation. Its quite obvious that we are retesting the lower trendline after potentially breaking the bearish rising wedge. That retest could FAIL OR WORK, its still inconclusive. Its choppy because its f***king around at that trendline, deciding if the wedge is broken or not. The odds favour the wedge being broken, but as usual, if something obvious doesnt happen, expect a BIGGER move in the opposite direction.

The thing I’m really watching is this weekly pattern. This makes it very simple. Long if it goes up, and if it goes down we have a high probability of the fix being in for further downside.

It really is as simple as this setup. Though it has to be said that IMO there is a reasonable probability of an upside breakout which fails. I wouldnt call the long weekly setup a significant edge at this point.

As for today, lets look at EXHIBIT A – A tick chart of the $tick, the cleanest unfiltered data there is. 90% of the time under the zero mark for the first hour, means that BUYING PRESSURE IS NON-EXISTENT. A potential bearish trend day. At this point you should have GOTTEN OUT OF LONGS, and gotten short.

Now it sure looked like a bearish whitewash. But as we know its only a *potential* trend day, and that price will *attempt* to stage a rounded reversal, which may or may not be successful. In this case it was successful, and the clue was the tick divergence at the lows at the 3rd attempt to drive price down. “If a market tries to do something 3 times unsuccessfully, it will probably do the opposite” – Al Brooks

As an aside, in a trend day or potential trend day we should be looking for bearish setups between the 20 and 50 EMA’s as being pure gravy. In this case the first time got to between the EMAs it posted a sweet 5 min inside candle with only 2 handles of risk.

Lets look at the 5 min chart for clues.

What I conclude from that was that the late day ramp was due solely to technical factors and we didnt get fresh buying from the sidelines into the close, in other words, a squeeze, nothing more. And there was the bearish tick divergence at the end of the rally.

Where does that leave us? IMO it leaves bears again with the advantage, though its slight. Basically whenever bears have been short squeezed there is no follow through from the bulls. If you are looking to go short here is the setup. Its a BEAUTY! If any kind of sustained market weakness the russ-hole is going to get taken to the cleaners.

I’ll do another post later with metals, bonds and currency setups, which *abound* right now. The thing to watch for the current week is DX, and I’m eagerly anticipating new poster Volar’s first attempt.

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  • Joe_Jones

    Thanks for the enlightenment Scott.

  • lunch_and_dinner


    For the spx rising wedge, if you use a linear price scale then spx is still in the wedge. Your thoughts on which (log or linear price scale) is prefered are appreciated.

    ps: I would typically use a linear scale for a one year chart.

  • ronebadger

    Keep it up Scott, this is great stuff!

  • convictscott

    My apologies, thanks for pointing this out :). I didnt even notice the scale was on “log” as I dont often use trendlines in my analysis. When you take log off its even clearer, it has to break the trendline to confirm downside.

    My thoughts on linear vs log is that I have a real problem with trendlines of *all* sorts, and this is exactly why. The element of subjectivity fucks things up.

    In general the more points a trendline has the more reliable it is.

  • convictscott

    Joe, all this week from your comments you consistently look at *everything* through a bearish lens. Even though odds favor you being right this time, this type of thinking will fuck you by stopping you from taking optimal exits from your shorts. With the way you currently think you will give back *way* too much profit at the end of a successful trade.

    I'm not being critical, trying to be helpful 🙂 You really need to do some work on an objective viewpoint, your bias really is stopping you from being a pro trader 🙂

  • Clint

    As far as getting a good downside going here,if there is one thing that is troubling…it is that these big down days we've had in the last 2 weeks are having higher DJIA and S&P closes. Today we got a close back over 1320. Last week it was 1307….and then I think we had a 1317 close on Tues.-Anyway…unless,or until we start getting closes below 1300…it would appear this thing is building a base here…so to speak. Like it or not…it is what it is…until it isn't.

  • convictscott

    Its totally inconclusive until we break one way or the other. Worrying for both cases is the inability to capitalise on decent moves which should have set off a bigger move

  • convictscott

    The big thing I want to point out for this week is that the momentum changed several times a week, and it was totally unpredictable. Yesterday new highs were on the cards, today, the bears have the edge.

    This is exactly why IMO the sort of opinion that starts with “we go up until 13XXX and then fall to 12XXX” based on whatever cycle, lunar period, square of price, fib extention or whatever… its all complete bullshit.

    Read that again. complete. bullshit.

    Long term wave counts. Both bullish and bearish… complete.bullshit.

    Basically, at this point, the market cant be predicted more than a day or two, and the odds of strength hand weakness change with each new bit of information we get.

  • Clint

    Oh it's a “chop” house right here for sure. I may have to wait a few days or a week to get back in, depending on how the 1320(ish) area acts on Mon & Tues look. We'll never know. Looking forward to it. Thanx ! 🙂

  • Joe_Jones

    Don't get me wrong Scott. I jump on the bullish wagon when price action tells me to do so. Your assessments greatly helps me for my entry/exit points. I am however bearish over the short / medium term because, as I said before, QE3 will not be justified if the market is at the highest and everything is rosy. But will all know that there is no doubt that QE3 will come about eventually, otherwise JPM, BOA, and friends will collapse. So, Bernank will have to create the conditions so that QE3 is accepted. Whether it starts next week or next month, it does not really matter. All I know is that it is going to happen. Regarding the timing of my entries/exits, I know that I can improve them but it is not that critical to me because I am not leveraged in my trades, so my margin of error is greater. I am not a pro trader, just a guy that looks to banking some coins using his savings. I am happy as long as I am on the right side of the trend. I think the strongest bearish argument that I have for further downside next week is the current price action of the USD. If the market keeps going up next week and into new highs, the dollar will likely fall of the plate. Given current oil and PM prices and records dollars shorts positions, it is highly unlikely that further market propping will be entertained. Because that would mean that sheep would have won. Also, doing so would be for the FED like committing suicide and reducing significantly hopes for further QE acceptance by the public and politicians. FED would turn itself into public enemy no.1 if they shoot dead the dollar right away and I am sure that they do not want that attention.

  • Gold_Gerb

    CS, thanks for your reply.
    a follow up question.
    isn't these last 3 days, just inside candle to the March 1 range?
    if so, would it be considered just mental masturbation, until we break higher, or lower on the SPY
    March 1 candle?


  • convictscott

    Yes, but IMO a break of todays inside candle to the downside will probably set off a chain reaction where it propels it to the real decision zone, and the herd gets on board.

  • convictscott

    ¨°º¤ø„¸ N E W „ø¤º°¨
    ¸„ø¤º°¨ P O S T “°º¤ø„¸

  • tradem4alpha

    on long timeframes, obviously log charts are the best ones, because they show greater importance for the bottom of the chart then the top (for linear charts it is exactly opposite). And it very clear why log charts are the better ones: because all gains and losses in the stock market are exponential, not arithmetic. Here is a chart in linear scale:… Same charts in log scale:… This is why bear markets are very damaging in the middle and toward the end and this is why they usually start gently. Usual people have no problem with a 5-10% loss in the stock. But when this loss becomes 20, 30% then the start panicking and selling (creating an impulsive cascade). When you look at the linear chart above, it appears that someone who bought in september 2006 and sold in february 2007 made more than someone who bought in march 2009 and sold in september 2009. But this is clearly not the case. The first move is actually a 40% move, where the second move is 100%. So you see now the importance of using log charts (at least on long timeframes).

  • John Palatine

    I wouldn't be surprised if this is a top in the making. The last time we had such a range was during November last year. Eventually bulls were strong enough to turn it into a continuation pattern, but this time around, being less optimistic is perhaps more rewarding. Keep your stops tight.