(This is a continuation of a series on typical workflow, or how to best read and apply the analysis from Stops and Targets.  I also posted an ‘ES Update’ entry earlier this morning)

I thought it might be interesting to take a closer look at Stops and Targets’ ES analysis page, to show how one can derive quite a lot of very useful information…

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As I explained in a previous ‘workflow’ post, the first place I look is at the selected tab and in the example above I see that the multitrend tab has been automatically preselected by Stops and Targets. That tells me there has been a major event detected today, and so Stops and Targets is directing my attention to the multitrend overview tab for details.

Okay, so let’s have a look a little closer at the multitrend tab…

1) The multitrend rating is currently shown as ‘Bull 9’.

2) To see a detailed explanation of what that rating means, I read the first paragraph. Okay, that makes sense… after a strong rally from a deep pullback, ES is now back above all three primary trend lines. For now, at least, the bulls are back in command.

3) Next, I read the spotter paragraph and note that a bottom spotter was detected at 1252.75 on June 16th, and then confirmed at 1269 on June 20th and has advanced 3.6% off that low.

Confirmed spotters in Stops and Targets can often be very helpful to identify a change in momentum. As it turned out, this one nailed a change in character during an intermediate pullback–and non-S&T bears who are out there operating without that important piece of information missed the important clue and many of those guys continued to persist with the old paradigm and may have taken sizable losses as the range trade bottomed out.

4) Speaking of trading range, taking a look at the ‘trendicator’ text right under the multitrend graphic, I note that it says ‘trading range between 1260 and 1338.50’. Looking at my earlier post today, it becomes clear just how accurate that range bottom was, as ES double-bottomed at that line before starting this latest run higher.

The trendicator is an important part of the analysis page, and can tip off strategy subtleties between a ranging environment, where stops are run– and a trending environment, where we expect to see a series of stair-step movements in the direction of the dominant trend. Some of you may recall that the trendicator was indicating a bearish trend under 1295, as can be seen in this screenshot from June 16th when the bottom spotter was detected:

http://stopsandtargets.com/members/futures/blog/wp-content/uploads/2011/06/ES-Spotter-6-16-2011.png

Once that trendicator switched to a range between 1260 and 1338, something important had changed, and as we can see now–that something was the setting of the bottom spotter.

(Mea Culpa: I am as guilty as the next guy of occasionally trying to ‘help’ an analysis system along, and I started second-guessing the 1338.50 top of that trading range as being perhaps ‘too high’, and so I started anticipating what I thought might narrow the range to fit my thesis, and that was the daily close line of interest at 1288 mentioned yesterday.   No biggie in the grand scheme of things, but just another illustration of how a human analyst, with biases and outside influences, just isn’t a match for a computer when it comes to tactical strategy generation.)

5) The next place I look is to see what timeframe is ‘in play, and Stops and Targets points me to the intermediate tab, which is also marked by a green up arrow on the tab to show the dominant trend and direction at a glance. So, I click on the intermediate tab and start reading carefully…

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6) The first paragraph tells me everything I need to know about the trend within the trend, including what to do with any previous positions and warnings about volatility.

7) Next I read the ‘Intermediate Trade Setup’ paragraph and note that ES is presently in the ‘ideal buy zone’, which is spelled out in detail as being between 1297 and 1311.25. Within that zone, the gain to risk ratio is 3:1, or better, and Stops and Targets tells me exactly where a trailing stop should be placed to stay within that extremely important risk management envelope. In the example above, the minimum initial stop placement is at 1278.50, for a max initial risk of 19 points, or about 1.46%. The targeted upside gain is at 1354.25, which is a potential gain of 56.75 points, or about 4.37%. The potential gain divided by risk = 3:1

Now, that target is a long way away, and we do have a range top that is lower than the target, but those things tend to work themselves over time. There is an intermediate trade here, but it is not without risk, and in this case that initial risk is 19 points, or 1.46%, which is reasonable for an intermediate position, but many traders won’t be willing to place a stop that wide, and that is why many of them get constantly stopped-out on entries.  Each trade setup carries a potential gain and a potential risk, along with a requisite ‘ante’ to play the hand.  That is probably one of the hardest things for some traders to learn–but risk management is the key to successful trading, and is what the pros live by– and what their prey, the amateurs, consequently die by.

Note: The futures don’t have a position-sizing tool (because of leverage) but for those with Stops and Targets’ equities analysis option, anytime there is a potential trade within the ideal entry zone, a position-sizing tool becomes available, which can be explored in depth at the following link:

http://www.stopsandtargets.com/members/help.html#37

There is no such thing as a ‘risk-free’ trade, and so the idea is to identify the possibilities, define the potential gain, and then calculate the maximum risk.  Only the individual trader can determine what his/her risk appetite parameters are, and position-sizing becomes extremely important to make sure that the inevitable losses never are allowed to grow beyond a predetermined percentage of portfolio size.

Strangely enough, the bane of many self-guided traders is actually not allowing a trade enough leeway to become established.  Impatience, coupled with fear and greed, are the demons we all fight.  In the example above, a trader had to ask himself if he was willing to initially risk 19 points to potentially make 56, and if he was willing to give the trade weeks to months (intermediate time frame) to potentially play out.

…my .02

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With a daily bar close > 1288 and the range broken > 1293.75, that was a very aggressive close yesterday, taking out the bear stops and guaranteeing a higher structural pivot than what was previously setting up at 1293.75. The last chance for bears to get out of the way was the dotted purple trendline resistance I pointed out two days ago.

As I type, ES is back in bullish territory across all major timeframes and I have redrawn my hourly chart to show where the major markers occurred after the bottom spotter signal was generated…

The bottom spotter on June 16th at 1252.25 was where the change in character started. A series of higher lows/higher highs culminated in taking the bear stops that had congregated above the key 1284.75 bull/bear line. Once that objective was achieved, profit-taking drove ES back down to the bottom of Stops and Targets’ trading range at 1260 for the first leg of a double bottom that was completed after a trip back up to 1284.75 and then back down to the second touch of 1260, where the latest squeeze began.

As mentioned yesterday, the run by LT, ST, and VST bulls was back towards intermediate bears, who had been driving the market right up until the bottom spotter detected a momentum change. The IT bears have now been run back through their stops, and so this is where things could start to get interesting.

I have drawn in a new VST trend channel, and if this breakout can hold, the next major target above descending ST primary trendline resistance, presently at about 1326.  First VST support is at 1291.75 on a pullback, and that line can work for day traders to define intraday bias.

…my .02

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PS

NQ has been leading, so it is a good idea to keep an eye on Stops and Targets’ ST confirmed resistance there at 2298.

http://www.stopsandtargets.com/members/futures/nq.html

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Have the pros succeeded in frustrating you yet?

This is now the fourteenth hourly bar cross of 1284.75 in the last 17 trading days!

I figured that old range bottom was going to be important strategically, and we have seen quite the month-long consolidation centered around it.

It hasn’t been terribly interesting recently from a trending perspective, but that may be about to change soon. An old trading friend used to say about these long consolidation scenarios… ‘first they bore you nearly to death–and then when everyone finally tunes out and walks away–then, whammo!’

Bear stops are concentrating above 1293.75, and bull stops are resting under the 1252.25 spotter low and there is a confluence of ST and LT trendline support on July 4th near that spotter low.

VST bulls are in good shape here above yesterday’s daily bar high at 1280, and the dotted purple stop/reverse line for the most aggressive bears, along with the old ST trend channel top rail, was broken earlier in the session.  ES 1288 could be a line of interest on the close to possibly help set up a closing bar range top (with a close below that line).

As I have been writing recently, the script has been to squeeze the bulls under 1284.75 with incremental new lows until the bottom spotter triggered at 1252.25. Since then, the game has been to hose the bears who may have been lulled into a false sense of security, perhaps thinking the market was finally ‘making sense’ against the news and noise. (The ‘news and noise’ is almost always wrong, by the way)

Tactically, the LT, VST, and ST bulls are now working their way back towards the IT bears, armed with a bottom spotter underneath. First order of business is to build a structural pivot, and that is what this expected small range here between 1252.25 and 1293.75 could be all about.

There could be fireworks coming around the July 4th holiday… but first things first, and the bears are in the pros’ sights, at present.

Stops and Targets is showing the trades we should be on. As always, it could care less about ‘news and noise’, and instead only applies consistent logic to find the best solution to the current puzzle.

…my .02

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ES is now in a small VST trading range between 1252.25 and 1293.75, as expected. I am watching to see if 1293.75 will form a structural pivot over the next few days– and also if the critical LT support trendline (presently at 1249) can hold, if tested. Bear stops are at the high and bull stops are at the low of that VST range.

I have added a dashed-purple (tentative) ST resistance trendline that can serve as a trailing stop line for bears, and an eventual momentum reversal line for bulls, as we await the resolution of the current ST versus LT battle to either set a pullback bottom–or to break into a fully-bearish market under LT support.

…my .02

My overall assessment of the broad market has been an intermediate-term pullback to long-term support, and that agrees with Stops and Targets’ ‘Bear 3’ rating (which is described on analysis page ‘multitrend’ tabs).

I have posted a number of weekly charts showing long-term trendline support and resistance and they should be self-explanatory.  The weekly charts set up a broad overall understanding of the main trend that drives the markets.

(FYI: The vertical lines represent the start of the current US political administration and the subsequent enactment of the ARRA act, and the reader may drawn his/her own conclusions.)

The NASDAQ has been leading, as it often does, and there was a touch and hard bounce from the LT trendline support on the same day that a bottom spotter was generated.  We’ll have to see how today closes, but as I type, there are higher highs/higher lows on ES and YM, and an outside reversal bar on NQ.

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Zooming in one magnitude on ES to daily bars, now we can see the three major support and resistance levels. The picture becomes a bit more clear now, showing new short-term support just above the LT trendline and a short-term trading range forming between descending ST resistance and ascending ST support. Again, that agrees with Stops and Targets, which is now showing a trading range for ES on the analysis page.

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Zooming in to an hourly chart, we can see the new short-term low at 1252.25, detected by a Stops and Targets spotter signal, and the current local high at 1293.75 (formed when the bear stops were taken), which may form an eventual structural high if we get sideways action for a few more days– but if that line is exceeded, the cycle clock will be reset as we look for an eventual ST high to form, which will become very important later on.

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So, in a nutshell… The top spotter on May 2nd nailed the pullback that morphed into an intermediate decline.  That pullback has tested NQ long-term trendline support (ES and YM came close) before bouncing at a bottom spotter signal, which has attained it’s initial objective.  Those LT trend lines are very important, as they define the border between a long-term bull and LT bear market.  There is a battle going on here between bulls and bears in the ST which will ultimately decide the fate of the LT.

Have a great weekend everyone–and don’t forget that today is the annual re-balancing for the Russell 3000 index, with a list of additions and deletions becoming final after the close.  Much of the recent chicanery is likely centered around pre-positioning ahead of this major market event.

…my .02