Sixth Time The Charm For ES?

(click image to enlarge chart)

Since the ES Stops and Targets ST trend rolled over at 1129 area on 1/21/10, the market has been in a bearish downtrend…

Stops and Targets consistently kept users on the right side of the major trends since the March 2009 lows (at 653) and the subsequent >70% advance in the markets–and issued a ST sell signal a mere 19 points from the most recent high.  Since then, trend-following bears have racked up as much as 63 points on the short side in the recent decline.

The chart above shows the current tactical layout for VST traders (in my opinion).

The first sign of confirmed life for bulls would be a push up and through the purple downtrend line.  That would break the currently most aggressive downtrend channel.

Next up would be the top of the dark red channel and then finally the red channel (where ‘VST stops here label’ is located on chart above).

I have placed 6 numbers on the chart to illustrate the places where recent counter-trend rallies have been bought by knife catchers.  In all but the most recent incidence (so far), the lows have been taken out and those knife-catcher’s stops have been taken by the bear.  This action is no different from what we saw repeatedly during the bull market where counter-trend traders continually guessed at tops and were repeatedly run over by a grinding bull market advance—it is just on the other side of the trend now.

Inevitably, one of these counter-trend rallies will eventually stick, maybe even this latest one from 1066.50 (#6 is a bounce off the multi-month dark green trident channel lower rail)—but the chart reflects the relative futility of trying to fight the trend to this point.

The multi-month trend channel was shown in this post from December 29, 2009.

Trend-following bears who have been playing this decline on the short side, now have a series of in-the-money protective targets to take partial profits on a sustained rally–starting with the purple trend line and culminating with the red trend channel.

The ST primary trend line from S&T is currently at 1108.50 and so for even the most lenient of disciplined bears–represents a locked in profit of at least 21 points at this stage of the pullback.

That lower trident channel rail may have been it for a corrective decline—or it may just have been the most recent bull trap setup.  This morning we have a decent rally going off that lower rail touch and we’ll watch to see how it does on contact with those trend lines in the chart above.

(If I were pulling the levers, I think that I would like to see another eventual plunge after leg #6 back under the bull stops at 1066 area to serve as an ideal bearish exit point amidst some panic and selling where even the most optimistic would likely give up—but the trident channel bottom rail touch may have been enough.  We’ll know soon enough.)

Often, a fast move down is terminated by a stop run under the last local pivot before a significant gap in support (in this case the 11/27/09 spike low at 1066) followed by a reversal back up through that number—or what I call a stop sweep reversal to ignite a tradable bear market rally (or the start of a trend reversal).

This is a time where bearish resolve may be tested on increasingly volatile counter-trend rallies, which may or may not morph into a bottom and reversal back into a bullish uptrend after a simple correction in an ongoing macro uptrend.  First minimal test, of course, is the purple trend line.

Today’s buying is likely a response to a touch of the dark green trident lower rail and could indeed turn out to be a corrective low, but we’ll see how the rally goes and would start taking off additional short-side profits on a breach of the trend lines shown.

Trading bias would morph from intermediate term bearish to incrementally less bearish on successive breaches of the downtrend lines with an eventual stop and reversal of all bearish positions on a crossover of the ST primary trend line.  Maybe not as sexy as nailing the exact low on a knife catch (which, if it turns out to be that trend channel bottom…has been pointed out repeatedly on recent charts) but it represents one example of a disciplined method to stay with the dominant trend until confirmation of reversal–and at this point represents locked in profits and a stress-free trade.

Of course, if those trend channels hold and the bear eventually resumes to new lows, one remains in position to continue riding the trend by moving protective stops behind price and to look for the next lower bearish objective, which could be the stop sweep/reversal scenario mentioned previously.

No trend continues forever, though–so time to pay attention here for bears–to take partial profits when appropriate and to start considering the possibility that a corrective decline in the context of a continuing macro bull market may be at or near completion.

…my .02