ES VST Trend Channel Update

(click image to enlarge chart)

(same chart at end of day Friday 1/29/10)

The chart above shows the latest ES (S&P e-Mini Futures Option) VST trend channels.

The bears remain in control to varying degrees under the top rails of the channels shown…

This morning, the purple rail (representing the most aggressive bear constraint) turned back an early rally.  That interaction also coincides with the crash gap (represented by a shaded yellow rectangle).

For bulls to get anything going here–at a minimum, the purple trendline has to be breached to the upside.

Next up would then be the presently dominant dark red channel top rail…then the red channel top rail where the VST bear trailing stops are likely resting.

Since the ST trend change, the trade is and has been short up to now.  The ST bears selling the break at 1129 area are now +43 (edit: now +60 at Friday’s close) with trailing stops at about 1105 (just above descending red trend channel) locking in at least 24 points (edit: VST trailing stops now at 1102 locking in 27 points at close).

The dark green trend line at the bottom of the chart represents the multi-month bullish trident and has not yet been touched (though it came close).  (Edit: dark green trend line was touched intraday on Friday)

There is another bull stop zone located under 1066 area that would be the next likely candidate for buying (to cover) and could potentially generate a stop sweep reversal play if reached.

Bears remain firmly in control until/unless at least one of those downtrend channel lines are broken.

VST Update

(click image to enlarge chart)

The red downtrend channel shown in the chart above has contained recent ES price action.

The shaded yellow zone in the chart above shows the October 2008 breakaway gap (1095.25 – 1090.25) that has served as a powerful price magnet in recent months. In the bigger picture, that line serves as demarcation between those who feel that the price action since the March lows has been corrective in the context of a larger bearish decline to come—and those who see March 2009 as a significant bottom and above that gap represents a breakout. (I added that longer term zone here on a VST chart to give a big picture perspective)

In the very short term, the two places to watch (in my opinion) are the top of the red downtrend channel (where VST protective bear stops are located) and the next lower level of bull stops under 1066 area, which could be the next partials target on a continued decline.

The most recent bounce occurred after stops under 1084.25 were taken (a partial cover target for VST bears).

There has apparently been plenty of bottom picking going on, likely by some of the same folks who were attempting to top-pick on the other side of the primary trend. Until those countertrend buyers give up, the bear will likely continue to push lower to take those easy stops.

VST bears are in control here so long as the red channel remains intact

Cash Indexes Big Picture

(click images to enlarge charts)

The charts above show the relationship of the current pullback to recent long-term downtrend breakouts (represented by a purple trend line in the charts above).  (These charts were originally posted on 12-26-09)

All cash indexes remain in breakout mode as of this writing.

It is not uncommon for a major trend line breakout to be revisited with a back kiss on a pullback.  The NASDAQ has rallied off a back-kiss of that trend line.

These long-term trend lines along with the ES futures breakaway gap magnet (shown in last chart image above) are key areas to watch

ES VST Channel

(click image to enlarge chart)

The red channel in the image above represents the path of current VST price action (in my opinion).

Another level of bull stops have now been taken under 1084 (shown by dashed green line in chart above), which was another partial cover target from 1127.

The next level of VST bull stops are located under 1066 area.  In between are a potential bullish trend channel bottom (purple line on image above) and the bottom of the multi-month bullish trident (dark green trendline).

Trailing stops on the core VST short position may be located just above the top rail of the bearish downtrend channel (red trendline).

ES trends remain down in ST and IT under Stops and Targets’ primary trend lines at 1120.75, and 1100.25, respectively.

VST action always occurs within the larger and more powerful context of the longer trends—and as my post yesterday pointed out, the big picture now (in my opinion) is of a return to and test of the consolidation area centered on the crash gap from 10/2008

ES Crash Gap

(click image to enlarge chart)

I have discussed the extreme importance of the breakaway gap from October 2008 in previous posts.

The chart above shows the location of that gap (parallel blue lines) and how it has continuously attracted price since the fill (and subsequent sell off) in October of 2009.

That gap was the initial price target from the March 2009 lows.  Since then, it has repeatedly attracted ES price in a sideways consolidation pattern followed by a breakout and then a back test of that gap area in recent days.

The two prominent features of the chart above are the aforementioned gap and the long-term bullish trident channel (shown in dark green).  It remains to be seen which of those two technical guides will assume control here in the short term.

A breakdown below the gap will signal a failure of the recent breakout and could draw aggressive selling.  If that were to happen, then it seems reasonable to expect an eventual test of the lower rail of the trident channel.

On the other hand, if the present pullback is merely corrective in nature, then a resumption of the macro uptrend would suggest an eventual target at the top rail of the trident channel.

Either way, the broad market has been building an incredible amount of stored energy in the present consolidation zone around the crash gap—and when this consolidation begins to trend again—it could be spectacular in either direction, with eventual targets at either the top or the bottom rail.

The S&T primary trend lines will keep astute and disciplined traders on the right side of the eventual breakout.

…my .02