Trading Range Revisited

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(click image to enlarge chart)

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It looks like the game might have been to run the stops on both sides of the recent trading range between ES 1179.75 and 1210.50 (shown by yellow highlighted area on chart above) ahead of yesterday’s FOMC.

ES 1179 did turn out to be the VST bounce point after the stops were run just below that old trading range, and that was indeed a good spot to gamble on a rally back up into the range with initial protective stop at the lows.  There was a vicious little push down just before the FOMC announcement that tested that 1179 line and likely shook more than a few out who had the trade right, but those with a stop at the low were okay.

ES 1179 was the downside corollary of what 1210.50 was previously near the top and was used as a day trader pivot (bullish above/bearish below) by VST traders to exploit a stop run and reversal.  Pros likely sold into covering bears at the top and then covered into selling bulls and chasing bears at the bottom of that range.

If enough bears chased the initial break, then we could be seeing a snapback rally back up to take those trailing stops.

If the trend is going to eventually break bearish again after a probe into the range, then pros will again be selling to covering bears and we shouldn’t see too much of a push higher as demand is met with excessive supply.  If, on the other hand, this was just a typical pullback to ST primary trend support area in a continuing macro uptrend with a small overshoot, then demand will exceed supply as covering bears are joined by dip buyers looking for new highs.

S&T does a great job of nailing the spots where volatility is likely to occur—but it still takes some skill to position around those primary trend lines.  The trick (in my opinion) is to find the next lower timeframe support and resistance and to try to parlay that into a momentum move across a line.  Simply entering a trade at a primary trend line and then setting a tight stop is often a recipe for a quick loss as the pros battle it out and sweep the easy stops of those who trade with those tight stops in the midst of increased volatility.  It takes a bit of work and some strategy to wrest dollars away from true professionals—and the lazy don’t get rewarded in this game.

A perfect VST play (in my opinion) on the recent move was covering short partials at 1179, and then stopping the balance at 1189.  The pre-FOMC dip back through 1179 was the tell that the big boys were accumulating and that was the ideal VST buy spot ahead of primary trend line crossover to allow sufficient stop cushion to ride the wiggles across the line.

I read the current rally as a potential snapback where pros are likely cleaning up the bear stops of those who chased after the initial break.  The next likely upside target could be a back-kiss of the broken ST support trendline (dotted green on chart above) and then on to 1207.50 area if that trendline back-kiss fails to turn it back.

Sometimes bears get frustrated trying to enter short trades at the primary trend lines—and that makes perfect sense when you look at this from a macro trending perspective.  The market has been predominantly bullish for over a year, and those primary trend lines are designed to keep a guy out of trouble by generating stops to keep an ill-advised trade from being reversed and drug into counter-trend purgatory.  A good trader has got to learn to love small losses that could have turned into big losses without that protection.

Those 500+ spotter signals I mentioned recently remain a prime concern for continued viability of the macro uptrend—and after this push up, there could be a sharp reversal back down as a result…but for now, all trends remain up > 1189.

The initial pullback target for spotters is usually around the first primary trend support area and we got that within 24 hours of the top spotter signal.  Can’t let them drag you to the wrong side of the trend though—so 1189 serves as the dividing line for bias here—but using VST tactics for positioning.

I am watching for a potential back-kiss of the blue trendline first and then that dotted green trendline next—and if that comes, will be looking to see if there is a violent rejection at that line.  If not, then they likely will continue to push this back up to shake out as many bears as they can and that pullback to primary trend support could have been just another opportunity to buy the dip in a continuing rally.

The descending red trendline above is the bearish hard stop for those who positioned for a higher timeframe reversal near the top.

Bull stops are likely now just under the local pivot low (1176.75).

ES is back inside the old trading range for now, which could potentially expand to a new range between 1216.75 and 1176.75 without a breakout.  Price has to cross one of those lines in order to trend.

The pros effectively took out  large numbers of bulls and bears alike with the recent range stop sweep.  To me, that horde of spotters is a potential clue of what may come next—but as has been emphasized before–they are just counter-trend warning signals.  The true delineator of a macro trend reversal is a break and hold below the primary trend lines.  We have had the first probe and bounce off that line on ES—so now the trick is to cautiously ride the macro trend off that bounce to see where it goes, but with a wary eye for what those spotters might ultimately portend.

…my .02