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Yesterday’s sell-off is what I have been warning about since ES crossed under long-term primary trend support at 1079.50.  There simply was no good reason to be long under that line, and so the path of least resistance was down–and the February low target that I mentioned yesterday was where it went.

The ES low on February 5, 2010 was 1031.75, and that is a very important number.  That price print has served as a structural low for the long-term timeframe and was the last technical underpinning of the bullish up-thrust from the March 2009 bottom.

Yesterday’s low of 1030.25 just slightly undercut that low.  That poke under the line triggered an increased number of unusual volume alerts in the Stops and Targets Signal Matrix under the single day stats tab.  The number of alerts was definitely elevated, but not yet eye-popping, as I assume it might be if we get a daily bar close under yesterday’s low to confirm the break.

The low yesterday also invalidated the interim bottom spotter signal on ES and reinstated the prevailing top-spotter from 4/26 at 1212.50.

My assertion all along is that this has been an intermediate term decline that has been pushing into long-term support to see if it can crack.  Those February lows would have been the obvious target for pros from the recent swing high and now they are into the resting bull stop goodie bag where immense pressure is being brought against large scale holders to cough up positions—which is exactly what a professional bear is looking for as a place to begin covering.  This game is often about bringing pressure on those on the other side of the trade for the large players who have the ability to move the markets—and this move from 1212.50 to 1031.75 has been masterful, leaving most retail traders confounded and either out of the move entirely or buying dips in a decline.

Now we are at an inflection point.  With the February lows broken, it is now obvious to everyone (after nearly 200 ES points off the top!) that something bearish is afoot.  That ‘blinding glimpse of the obvious’ often causes those most susceptible to ‘group-think disease’ to chase a mature move just as the pros often begin to capitalize on their positions.

If one holds the theory that the initial target of the short move off the tops was the place of maximum potential pressure on the other side of the trade, then we are here at the 1031.75 area.  I have often spoken about what I call stop sweep reversal play setups, and this is one of them right here.  I have placed a new VST bull/bear line at the February low, and that should serve as a good delineator between VST bullish bias above that line or bearish below for the most nimble traders.

I am not a proponent of counter-trend trading generally, but this setup could have some potential (perhaps after the requisite shakeouts).  Remember that the long-term bull stops for the big boys are located just under the area we are in presently.  If the pros behind the downtrend move are inclined to gin up more volume to provide a buy-to-cover opportunity for themselves—then a push below yesterday’s lows is what is in order and the tactic is a bit like holding someone’s head underwater until they let a ball go.  Once the pros have what they want, then they will move along to the next opportunity.

I have no idea what comes next, but this area provides some interesting possibilities and the bull/bear line at 1031.75 should keep VST traders on the right side of whatever move eventually transpires away from this key inflection point.

ES has moved to the last support trendline, which happens to be IT trendline support—so we could see either a complete breakdown under that line, or we could see a countertrend rally eventually erupt if this ultimately turns out to be a major cover zone.

The most comfortable position to be in here is short from the areas shown by arrows on the intraday chart above.  Each of those positions represents a sell signal from Stops and Targets for the three timeframes—and each is currently sitting in huge profits with protective trailing stops to lock in gains.  If the trap door opens and the market plunges here, those positions are set to capitalize on the break and are ‘stress-free’—which is quite different than what most day traders and bulls who missed the turn are feeling right here.

That last paragraph holds the secret that many of you seek…the trend is your friend.

…my .02

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PS
There have been quite a few new subscribers to the Big Picture blog recently, and I am starting to get emails again from people looking for specific trading advice, and so I want to address that here…

I am not a registered investment adviser (and don’t have any desire to ever be one) and so I cannot (nor do I want to) give individual trading advice.  This is a private blog where I find it therapeutic to jot down my musings in a diary form and it is helpful for me to do so with a large audience looking on, as it keeps me centered and focused in my analysis knowing that a very broad spectrum of readers are scrutinizing my writings.  I am not compensated for writing this blog and have no desire to ever incur the stress or the liability that comes from managing other people’s money.

We unfortunately live in an increasingly ‘entitlement-mentality’ society, and there are a great deal of people out there who feel entitled to have someone else do the work for them.  So long as they get their ‘free fish’ they are placated—but the minute the ‘free fish’ is taken away, the angry mobs roam the streets and smash the shop windows and riot.  I am quite ‘old school’ in my sensibilities and I am happy to try to help people learn to fish for themselves, but I do not intend for anything that I write to be used as anybody’s sole personal investment guidance (give a man a fish and he can eat for a day–teach a man to fish and he can live for a lifetime).  No two traders have the same circumstances and so no blanket advice or strategy can ever be suitable for all.  I highly recommend seeking a qualified investment adviser to assist in strategy and risk profile assessment.

This blog contains an increasingly large body of work that stands or fails entirely on its own merit.  If one wishes to fully understand my writings, then please take the time to start at the first post and then work through to the present day to formulate one’s own opinion and to absorb some of the unique jargon that I use.

I don’t particularly like to write this sort of ‘disclaimer’ thing, but it is necessary from time to time to bring newcomers up to speed on what this blog is…and is not.

One last note…there are far too many readers of this blog for me to ever have time to respond to every request, but I do read everything that is sent to me—and always greatly appreciate the feedback.  Thanks!

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ES 1079.50 worked well as a bull/bear line, and as I mentioned yesterday—there was/is just no good reason, tactically, to be long under that line.

In the overnight session (US) the ES has now touched the long-term trend channel bottom that has been the dominant trending structure since March of 2009.

I have added a daily chart above that shows the three trend channels and the significance of that LT (long-term) bottom rail is obvious.  (The light green line on the hourly bar chart is the same as the LT trend channel bottom on the daily bar chart).  If that trend channel fails, then the lower rail of the IT channel could come into play as a target.

The IT trend has been in control since the recent swing high on 4/26/10 but we again have a challenge at a form of LT support (trend channel method).  This is/has been a battle between two opposing timeframes for control of the macro trend structure.

If the LT trend channel fails to generate a bounce, then the possible major target for this move down (in my opinion) could be the resting stops under the February low at ES 1031.75.  I have explained the significance of that February low as a structural pivot in previous posts and if that goes, then bulls could have some real problems.

If I were the guy pulling the levers, I might be tempted to eventually break those February lows to generate sufficient volume to cover shorts from 1212.50 top and that could be a great place for a stop sweep/reversal play if it were to transpire, but first things first…

Although bears are clearly pressing here, countertrend bulls technically still have life above the support trendlines shown on the VST chart…LT channel bottom at 1055, then ST trendline support at 1044 and finally the IT trendline support presently at 1033.

I have drawn in a light gray downtrend line that could serve as an early warning indicator of a bounce developing.  Just above that line could be a good place to lock in some short trade profit from the push below 1079, if a bounce comes.

IT bears are in control but are knocking on LT trend channel support right here.

All trends are down below 1079.50 and I am keeping an eye on the gray trendline for the first sign of a potential VST (very short term) reversal.

…my .02

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ES 1079.50 should continue to work well as an intraday bull/bear line (VST trade bias is bearish below and bullish above).

Pattern traders will be watching the bar shadow from last Friday for VST clues.  The Friday high was 1079.50 and the low was 1062.75.  I have drawn in a shaded blue rectangle to show that bar shadow.  Bulls would like to see a higher low/higher high on the daily bar (and so far they have that). Bears want to see a break below the 1062.75 low to trigger the close-in bull stops.

As I explained Friday, there is absolutely no good reason to be long under 1079.50 (in my opinion) as all trends are down under that line and the market is vulnerable to a fast move lower—especially if the bar shadow low is taken out.

If, however, we see a push back up and through the long-term primary trend line (and get a daily bar close above that line), then things change and the higher timeframe (long-term) would resume dominance over the shorter timeframes (intermediate and short-term).

The market could be vulnerable here under 1079.50 and if bears were to catch an acceleration away from that line—then the next targets lower are the close-in bull stops under 1062 and then the support trendlines between 1033 and 1055.

If the current move is reversed back above 1079.50, then 1086 area may act as a defining line of VST resistance.   That line could either cap an upside probe into the bear stops above Friday’s bar shadow—or, if crossed and held, could become a VST momentum reversal buy line which would confirm the flip of the long-term primary trend line and possibly target the yellow rectangle area between 1100 and 1103.50.

ES 1079.50 holds the key as not only the VST bull/bear line…but as the dividing line between a potential start of a confirmed long-term bear market or the eventual termination of the intermediate bear move (pullback to long-term support) and a resumption of the long-term macro uptrend.  It is very important (in my opinion) to ultimately come away from this line on the right side of any trending move and flexibility is key when it comes to trading bias and mental preparation–as this can easily switch back and forth several times before the breakaway ultimately comes.  Under the long-term primary trend line is a place to be fully-bearish tactically, but if price moves back above, then that bearish bias has to be let go.

…my .02

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When I look at the multitrend configuration in Stops and Targets, the trend that is on top in a macro bearish market is the controlling trend—and the trend that is on the bottom in a macro bullish market is the controlling trend.

As I type, the intermediate trend is on top and bearish–and price is below the long-term primary trend, which is also now bearish under 1079.50

So long as price stays below that long-term primary trend line, this is a fully bearish market and there is absolutely no good reason to be long under those circumstances (in my opinion).

If price rallies from beneath to cross back above the long-term primary trend line, then the macro configuration would change back to bullish, with the long-term primary trend reasserting control.  As I mentioned yesterday, the long-term trend has more relative strength than the intermediate and so it will have reasserted dominance IF price rallies and remains above that line.

One of the most common tactical trading mistakes is to allow a losing trade to be drug across a primary trend line into ‘hold and hope’ territory—or to initiate low-odds countertrend trades against the prevailing macro trend.

We saw the permabears repeatedly shorting a persistent uptrend from March of 2009 all the way to the recent swing top on 4/26/10, and many were severely damaged or ruined by ignoring the primary trends and making the same fundamental mistake over and over again…

There is absolutely no tactical difference on the other side of the trend in a bear market by constantly buying in a down-trending market against the prevailing trend!

It should come as little surprise that almost no permabears were properly positioned when the dam finally broke at the recent swing top.  They were exhausted, most had capitulated, and some had become bullish.

Stops and Targets, on the other hand, remained patiently bullish until the swing high was detected on the very day when a top spotter signal was generated, followed in short order by confirmation and a flipping of trends.

Sadly, most retail traders are condemned to do the same dumb things over and over until they eventually run out of money, only to have their place taken by the next crop of ‘suckers’ whose moves are so easily predictable by the pros using sophisticated psychological models and mathematical probabilities.

If I could impart just one thing to anyone reading my posts it would be to always respect the primary trend structure and to ONLY take trades that agree with the direction of the prevailing macro trend.  It is extremely difficult for an individual trader to stay on top of the always evolving macro trending structures—but we now have a great strategy tool in Stops and Targets that does all those calculations for us, and if properly followed, it can help to keep us on the right side of the market in our individual equity trades and out of the majority of major trouble.

The ‘right’ trade here under 1079 is IT short from 1116 with trailing profit stops set (and nicely profitable) while awaiting the outcome of this test of long-term support.  Those traders are currently on the right side of the trend pressure and riding the momentum with little to no risk on a properly initiated trade.

If it crosses back above the LT primary trend line, then IT bears can cash in and look to switch to the other side after a well-played hand.  However, if it doesn’t rally here, as many seem to expect, then the folks presently holding countertrend longs at a loss are running a real risk of being swept away on a trend breakout.  Those IT bears will be waiting for the capitulation moment to take the other side of panicked countertrend traders willing to exit at any price just to be free of the mounting pressure.

There is absolutely no difference between those who continually shorted the bull market when all trends were up and those who now buy in a bear market when all trends are down.  Similar outcomes may be expected over time.  Those ignorant of history are doomed to repeat it.

When a long-term trending bear market is underway, it is highly unlikely that any subsequent daily bar will close above the long-term primary trend line for the duration of that bear move.  A close above that line would be a bearish failure—but so long as price remains below, this is a new long-term bear market and all trends remain down below 1079.50.

As I mentioned yesterday…1079 is the new bull/bear line for all timeframes.  IT bears are pushing here to see if the LT support can crack and if it does, the downside can come quickly with the support trendlines below as the likely next targets and then possibly followed by a test of the bottom of the spotter trend channel.  A rally back above 1079 changes things as explained above—just as the reversal below 1116 changed things after the gap into a fully bullish market that failed.

…my .02

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ES is challenging long-term primary trend support at 1079.75.

I had a very good technical question yesterday asking about relative trend strengths in Stops and Targets, and to sum up my answer…the longer the timeframe—the more powerful the trend.  Formulaically: IT > ST and LT > IT.  There are far more portfolios geared to long-term investing than to shorter terms, and so those are the big fish in the market and when they start to buy and sell, big things can happen.

What we have been seeing lately (in my opinion) has been a battle between a fledgling IT decline and an established LT uptrend, and I have alluded to that that many times in recent posts.

As I type this morning, price is sitting on long-term primary trend support at 1079.75.  The ‘right’ trade since June 21 has been short from intermediate primary trend resistance (see red arrow on chart near 1116).  Long-term support is the partials cover target and additional trailing profit stops are set just above short-term primary trend resistance.  The idea is to press the IT short trade into LT support to see if it cracks.  If not, then partials are taken and the process of reversing the position occurs, if higher timeframe support holds.

The bears have a shot to break this wide open right here by taking out long-term primary trend support.  There is no significant support below until the 1047 area.  Just below there, the final support trendlines are clustered relatively tightly between 1032 and 1042 and the big prize for bears would be to break the LT structural support levels below the February 2010 lows.

The short-term trend channel I mentioned in my last post was broken yesterday–and that was a clue that the IT bear is in control here.  There is no reason to be long below 1079 (in my opinion) and should that long-term support fail, then the downside could come quickly.

On the other hand, if ES can climb back above 1079 after a poke below, then the IT bears would be put on the defensive again as the possibility of a bounce from LT support would again be in play.  The IT bears are in good shape here, though, with partial profits locked in and trailing stops in profit.

I mentioned previously that once a long-term bear market begins—the daily bar would most likely not again close above the long-term primary trend line while the LT bear is in progress.  That is the measure of a true trending long-term bear market.

This is an important area here at 1079 and though nothing says the trend has to break away immediately from the line—once it does, then the new LT trending move could be starting.

The obvious VST bull/bear line is now at 1079.75.  Long trades are favored above, and short trades favored below.

…my .02