Resolving The 12/29/09 Signal Bar Range

(click chart to enlarge image)

The red downtrend channel (now broken) was good for two potential VST trades:

1) Short from the top rail of the trend channel at 1128 to the touch of the bottom rail at 1113

2) Long from 1113 to 1122 channel touch (and still open with profit stop currently at 1120)

ES price is currently hovering in the approximate center of 12/29/09 bar range between 1120.50 and 1128.50. Those two numbers define what could lead to either a VST bullish (above 1128.50) or bearish breakout (below 1120.50).

If the ES breaks above the 12/29/09 high, the recent Top Spotter setup will be invalidated.

If ES closes below 1120.50 (without first exceeding 1128.50), then the Top Spotter will be confirmed and we would look to draw in a new bearish trident channel at that time.

ES trading today may hinge around resolving the 12/29/09 bar range (represented by yellow rectangle in the image above) today to close out 2009.

The dashed blue line indicates the new macro trading range lower boundary at 1114.50.

The horizontal red line at 1108.25 represents Stops and Targets’ current short-term stop/reversal line.

Top Spotter Setup

(click chart to enlarge image)

Yesterday at the close, Stops and Targets generated a Top Spotter setup signal for the S&P 500 and Dow (but not the NASDAQ).

Top Spotter signals are explained thoroughly in the user guide at the following url:

User Guide: Spotter Signals

The chart for this post contains an updated close up view of the channel top mentioned yesterday.  The top tick of the ES yesterday was an exact hit on the top rail and is represented by a red arrow and annotation (in magenta) where the top spotter signal was generated and the selling began.

Top Spotter setup signals require a confirmation to validate and that line is shown in magenta at 1120.50.  The ES would need to close under that line to validate the setup signal.  Of course, if price reverses and yesterday’s high is exceeded at any future date, then the current setup will be invalidated.

Price is presently traveling in a bearish downtrend channel represented by the red trident in the attached chart.  There was a bounce off the lower rail of that channel in the overnight lows (shown by a green arrow).

The bounce roughly coincided with the important range breakout number at 1114.50 mentioned in recent posts (dashed blue line) as expected.

The bears potentially have something going here—but will eventually need a decent down day to close below the 1120.50 confirmation line and confirm the spotter.

I have placed some text to show where VST bears might consider placing trailing protective stops just above the top rail of the downtrend channel.  If this is the start of a tradable move down, then that bearish channel structure should hold on a snapback rally.  If the top rail is taken out, then VST bears should be very careful of a bear trap.  As I type at 8 AM, the current stop placement (for a VST short trade) is at 1124.

The current stop/reversal line from Stops and Targets for the short-term is shown as a horizontal red line on the chart.  Generally speaking, powerful uptrends tend to ride the short-term support on pullbacks—so that line will eventually become important if the bears gain traction.

This pullback may or may not develop into something more bearish—but the trends always roll over from shortest to longest when the time comes for a significant reversal.  So far, we have a VST bearish trade that started at the touch of the channel top along with an unconfirmed top spotter signal (but on only 2 of 3 major indexes).

Keep an eye on the red trident channel for more clues.  If the bearish case begins to gain momentum, then we will see a close under the magenta line to validate the spotter setup before we see an invalidation (by making new highs).

A breakdown below that red channel would likely generate additional selling pressure and the next target of significance would be the short-term stop/reversal line (where profits would be taken on existing long trade partials).

Markets trade in both directions and this is the first real threat to the bullish uptrend since mid-October.

For patient bulls, a reversal here is merely a time to snug up stops on remaining partials and to prepare to book hard-earned profits—for bears, it could finally be the start of a profitable pullback for those on the short side.  For those who see the market as a two-sided opportunity, this is the time to start mentally preparing to change trading bias from bullish to bearish.  That fat lady hasn’t sung yet—but she’s warming up back stage.

The chart above lays out a detailed VST road map to watch.

…my .02

VST Intratrend Channels for ES Revisited

In a blog post dated 12/22/09 (VST Intratrend Channels for ES) I showed the trend channel that ES has been trading in since mid October.

This morning, the top rail of that VST trend channel has been hit (see red arrow), and so now, we watch for a possible selling reaction from that line—or a trend channel breakout.

The recent pivot high line at 1114.50 is shown as a dashed blue line and the bottom of the current ST trading range from Stops and Targets (1104.50) is shown as a red line.

The depth of selling from this top rail touch can tell us much about the trending picture going forward.  The VST and ST bulls are likely comfortable with any pullback that stays above the two lines on the chart (1114.50 and 1104.50).  A break below that range support could trigger additional selling, as the ES would fall back into the old trading range.

On the other hand, an eventual upside breakout of the trend channel top rail could lead to big things for bulls, as nearest significant upside resistance remains far above the present price levels and all cash indexes have broken out of long term downtrend channels (see previous Cash Index Trendline Breakouts post).

For now, the key numbers to watch are the present ES highs (1128.50 as of 8 AM) and the recent pivot high breakout at 1114.50.

The Significance of ES 1114.50 For VST Traders

It seems as though virtually everyone is bearish on the markets these days.  The ‘news and noise’ certainly reinforces that visceral emotion—but the news and noise is almost never right about anything.  All one has to do is to look at key market turn dates throughout history and then match up the headline news stories of the day to see just how unreliable that sort of anecdotal reasoning is and always has been.

After a more than 70% run up off the March lows, many, if not most, remain in a state of apparent disbelief about the current rally and the popular consensus seems to be that a significant pullback is well overdue.

I want to address that in this post and offer a potential entry/exit strategy for the bearish Type A’s amongst us to consider.

First, let’s take a look at how NOT to establish a bearish position in a rising market…

Establishing short positions by scaling into a rising and fully trending bull market is a very risky strategy.  That tactic has been disastrous for bears who have continually tried it since the market turned up from the March lows—and shorting against the trend after a new range breakout has likely ruined more than just a few trading accounts.

Shorting a breakout ABOVE the breakout level is one of the worst rookie trading errors that can be made (and holds equally true for going long below bearish breakdowns).  The old adage that ‘the trend is your fried’ has stood the test of time for a reason.  Trends can extend much further and much longer than anyone anticipates.  Fighting the trend can put a trader on the wrong side of momentum with no clear exit strategy other than the personal ‘uncle’ factor, where the pain of losing eventually causes capitulation.

So, let’s look at a very aggressive bearish strategy that still respects the VST trend and provides a hard stop to exit if wrong—with likely very limited losses.

Bullish breakouts occur when a pivot high of significance has been exceeded and held.  Since most countertrend speculators tend to be short to very-short-term traders, I’ll concentrate on that timeframe for the following example…

The most recent VST pivot high of significance for ES was 1114.50 on 12/4/09.  The market spent 12 trading days below that number until the current breakout on a close on 12/23/09.

That number of 1114.50 is significant because it defines the bottom of a new trading range.  So long as price is above that line, the new trading range remains valid.  The very first sign that something is potentially amiss in the bullish world will be a failure of that range support.

So, consider focusing on that 1114.50 number as a sort of ‘line in the sand’ where you determine that no short trades will be established until/unless a break of that line occurs—then that line would then serve as a backstop for protective stop placement.  Think of 1114.50 as a no-nonsense dividing line where a VST short trade is simply wrong if held above.

Stop running often occurs at the end of a trending move, and most people tend to place their stops above a significant pivot (bears) or below (bulls).  If this current move is an ending move, then after the stops have been run, there should be a fast move down under the old pivot high, and though there may be an eventual retest of the level, once a bearish move gets started—it likely won’t be touched again if a downdraft ensues and could therefore serve as an excellent countertrend entry point.

I am not a countertrend trader, so though I would not initiate a short trade against the trend, I would certainly take note of a move back below the range breakout line and start preparing to peel off profits from existing long trades.  I would also expect to see new Top Spotter signals across the indexes when a tradable top is in place.

For now, the market is trending in all timeframes and a fledging breakout is underway.

Stops and Targets was designed as an institutional money management tool, and so it tends to emphasize closing bar basis and to reflect a more patient approach to investing than many day traders are used to.  However, the intratrend support and resistance numbers are very useful trading targets for ST and VST traders and the gain to risk numbers are extremely helpful in determining the relative merit of initiating a trade–both trending and countertrend.

This market has been very frustrating for many day traders since the recent tight range coupled with no near term upside resistance has given the illusion of no opportunity (especially when the individual’s preexisting bias has been to the short side).  That really hasn’t been the case, though, as range trading strategies (such as the VST trend channels illustrated earlier) have been very effective during the consolidation.

We are very near the top rail of one of those key VST channels today (approximately ES 1127-1128 area).  It is worth watching that number to see if there is a selling reaction which leads to something more bearish as higher trends would begin to roll over, if so.  If, on the other hand, that VST trend channel is broken decisively to the upside—then bears who have been shorting the consolidation zone and held above the breakout could be in trouble.

So, the bottom line for VST traders is to watch ES 1114.50 (the equivalent line for short-term traders from Stops and Targets is 1104.50).  That is the line that represents the trend breakout level and that bears would need to take out and hold to get something going on a pullback.  Above that line is a bullish breakout and no one has any idea just how high or how long a new move can go.

…my .02