January 1, 2009
I was scanning some different periods for interesting chart patterns and wanted to share some insights on the structure of the 1987 stock market ‘crash’ in the S&P 500 Index. Let’s look at the chart of 1987 and then see the few years preceding this move with an Elliott Wave count overlaid on price.
1987 Daily Chart:
Without going into intricate detail, there are a few points I wanted to highlight.
First, notice how price continually respected the rising 20 day EMA both on the upside and downside. Moving averages, particularly in trending environments, can provide opportunities to enter on retracements against the prevailing trend with a relatively tight stop-loss parameter. Though it doesn’t always “work,” the structure can be used to supplement other entry and exit strategies.
The moving average orientation throughout most of 1987 was in the “Most Bullish Orientation” possible as price continued to ‘bounce’ off the 20 and 50 EMAs.
However, this structure changed in September. Price formed a slight negative momentum divergence going into the 1987 price high in late August. Price then retraced, breaking EMA support just as it had in April & May, which only serves as a warning rather than an official “trend change” signal.
Price formed a lower high just shy of 330 in early October was was a serious warning sign as price then re-broke beneath the confluence support of the 20 and 50 EMAs - another serious warning sign. The key area to watch was 310, which would have put in a new swing low and officially turned the trend to the downside (having now made a lower high and a lower low).
We broke 310 in mid-October AND the 20 and 50 period EMAs “crossed bearishly” which officially put the ‘nail in the coffin’ of the prevailing uptrend on the daily chart. Price then retraced to test the confluence crossover zone - I’m calling it a “Cradle Trade” though I’d love a better name for this structure - just before collapsing two days prior to the massive ’shocking’ sell-off that wiped out so many accounts at this time.
Oh, a note - once price fails at the “Cradle Resistance” or “Confluence Resistance” area after having broken beneath the 20 and 50 EMAs, the next automatic target is the rising 200 day SMA which was achieved… and then shattered two days later.
What happened next? The collapse.
Was it forecast by technical analysis? No, but the odds had officially shifted to the downside, as price had officially reversed its trend from up to down, having formed a lower high and a lower low; broke beneath the 20 and 50 day EMAs; then failed to break above confluence resistance at the “Cradle Trade” zone (Confluence Resistance where the 20 and 50 EMAs cross).
At a minimum, technical analysis warned of greater downside odds than upside odds, though again it’s easier to anticipate the possible direction of a move rather than the magnitude of the move.
As it turned out, price collapsed to the rising 200 week moving average which also happened to be a confluence Fibonacci target, because index value 220 represented the 61.8% retracement of a significnant swing low in 1984.
In the next post, I’ll examine the weekly chart structure and overlay an Elliott Wave Count to help put the 1987 ‘crash’ into a bit more perspective.
Corey Rosenbloom
Afraid to Trade.com
Receive updates from Afraid to Trade now on Twitter: http://twitter.com/afraidtotrade
Originally posted here.
Posted in RSS 
No Comments »
January 1, 2009
Courtesy BarChart.com, here are the year-to-date performances of a broad assortment of major market Indexes, including the US Equities, CRB Commodity Index, and Dollar Index.
You can view the chart yourself at BarCharts.com or use your own program to display other index and stock returns for 2008. Just be sensitive to seeing lots of red and don’t be disappointed by lots of minus signs.
Let 2008 be a reminder that bad things can happen to investors and traders, and that it’s not always safe to “Buy and Hold” or that “Diversification Always Works.”
Yes, the market will rebound from these levels - eventually - but it may take years to get back to the equity peaks of 2007. In addition, those who diversified in 2008 - hoping to mitigate risk - experienced the phenomenon that in a down-market, almost all correlations go to 1.0.
Real Estate? Down depending on location location location.
US Equities? Down 40%
Foreign Equities? Most Down over 40%
Oil? Down 60% for the year ($WTIC)
Gold? Up about 2% for the year ($GOLD)
TLT Bond Fund: Up 30% (I had to find something up)
In fact bond/note prices did well as some yields fell to record lows this year.
Take this weekend if not sooner to reflect on the lessons of 2008 and how you can identify problems, create solutions, and set goals to achieve and a plan of action to achieve them in 2009.
Corey Rosenbloom
Afraid to Trade.com
Hat-tip to Brian Shannon of AlphaTrends for also posting end-of-year numbers on key ETFs.
Originally posted here.
Posted in RSS No Comments »
January 1, 2009
2008 is finally behind us and the year ended on a positive note - a nice, solid trend day to the upside. Let’s look at the DIA intraday structure to reflect on this pleasant picture.
DIA 5-min chart Dec 31, 2008:
This is what a trend day should be - except for the close, that is.
We had a nice run from the start the resulted in a “Three Push” reversal pattern that resulted only in a retracement to the rising 50 period EMA. Until that point, any pullback was a safe buy-zone, while the 50 remained the “last line of defense” for the bulls and also served as a support buy-zone.
Price bounced sharply off the second test of the rising 50 EMA to tap new intraday highs before forming more choppy retracements back to the rising 20 EMA into additional new price highs around 3:30.
The only thing that tarnished today’s trend day move was the last 30 minutes of trading, where price formed a bearish shooting star at the upper Bollinger Band on a negative momentum divergence which preceded price reversing sharply end the day just beneath the 50 EMA. Day traders should exit at or just prior to the close each day.
A few readers have commented on the appearance of negative momentum divergences on Trend Days and my resonse is generally to throw all forms of indicators (except moving averages) off the charts on expected trend days because they will (virtually) all give false signals. Oscillators (Stochastic and RSI) will remain overbought all day and other indicators will be skewed as well, flashing sell signals as price continues to eek its way higher.
Look at the 3/10 Oscillator for an example. As price continued its journey making newer highs all day, the momentum oscillator disconfirmed all highs as the day progressed. There’s no point in trying to interpret it - sometimes it’s just best to turn off the indicators and focus your analysis strictly on one question?
“Is Price above or testing the 20 (and/or 50) period EMA?”
If we’re above it and the averages are in the most bullish orientation, then buy all pullbacks.
If we slip below it and close beneath it, take your stops and realize the trend day has ended.
Don’t try to get fancy - keep it as simple as possible. Traders can stand to make the bulk of their monthly profits on trend days.
Continue to find additional insights in today’s price data and, even though today marks the end of 2008, the trading still continues each day.
Have a great time tonight!
Corey Rosenbloom
Afraid to Trade.com
Keep up to date and receive updates from Afraid to Trade now on Twitter: http://twitter.com/afraidtotrade
Originally posted here.
Posted in RSS No Comments »
December 31, 2008
To follow up on a reader’s request to analyze the Euro Index, I present the monthly and weekly ‘fly-by analysis’ of the Euro Index to see where we’ve come and where we might be headed.
Euro Index Monthly:
The general relationship of the Euro Index to that of the US Dollar Index is inverse - in that when the US Dollar moves up, the Euro moves down which derives more from relative strength among other factors. What’s good for the Dollar is generally bad for the Euro, though that oversimplifies the relationship. The Euro Index is also is closely tied to certain commodities as well.
The Index bottomed in 2002 just ahead of the US Stock Market and began a stellar rise as the US Dollar began its equally stellar downtrend. Notice the triple-swing positive momentum divergence that preceded the actual price reversal. Notice also that we have that “super confluence” zone occur when the 20 and 50 EMAs cross and price finds support in the “cradle” of their crossing.
Price then moved into a “Three Push” pattern (which is a reversal pattern) that terminated in early 2005 on a triple-swing negative momentum divergence (the hallmark of the pattern). This also completed a full fractal Elliott Wave impulse that terminated perhaps in the First Wave.
Price then formed an “ABC” Correction into 2006, terminating at the rising 50 month EMA which provided an excellent opportunity to ‘buy a pullback’ in a strong trend. Had price failed at this level, it would have officially called into question the uptrend.
Price then re-emerged into the 5-wave fractal Third Wave which terminated right alongside crude oil and other commodities around July 2008. I’ve broken down this recent move on the weekly chart below.
Euro Index Weekly:
The first green arrow shows the bullish crossing of the 20 and 50 EMAs which resulted in a “Cradle Support Trade” (if anyone has a better name, please let me know) after the 20 EMA rose above the 50.
Price pulled back in corrective wave 2 back to the rising 50 EMA before launching a powerful Third Fractal Wavae that took us to the end of 2008 before moving into a quick “ABC” Corrective Wave 4.
Price surged up to new index highs in mid-2008 though the bulls could not hold on, as a double-top formed on a negative momentum divergence at the completion of the final (fifth) fractal wave and price then broke support via the 20 and 50 EMAs.
The “Cradle Trade” occurred again, though on the flip-side which I’ve higlighted with a red arrow. The 20 EMA crossed under the 50 EMA and price rallied (retraced) to test this zone though it was met with significant resistance, formed a doji, then collapsed during the severe market conditions of the latter half of mid-2008.
Price formed a new momentum low and rallied sharply up to test Fibonacci resistance and the falling 50 week EMA which is currently - though tenuously - holding as resistance.
In terms of the Elliott Structure on the monthly chart, possible Wave 4 has violated (entered the price territory) of Wave 1 which underscores the violence (and volatility) of the recent down-swing in the index. This should not happen in classic Elliott. However, if that count is correct, then we would be in a large-scale 5th wave potentially which would eventually challenge the $160 highs again - though that is far from certain.
Continue to watch the Euro Index and how it relates to Commodity Indexes, the US Dollar, and ultimately the US Stock Market - or FOREX traders can use Euro analysis to profit direction from relative currency valuation changes.
Keep up to date and receive updates from Afraid to Trade now on Twitter: http://twitter.com/afraidtotrade
Corey Rosenbloom
Afraid to Trade.com
Originally posted here.
Posted in RSS No Comments »
December 31, 2008
John Forman at the Essentials of Trading website posted his selected “Top Posts of 2008” list which I recommend visiting.
John also lists his “Top 5 Trading Books” for newer traders to which I concur.
I also loved his introduction which warns “Be careful what you wish for in 2009:”
It’s the end of 2008 and many traders are saying “Good riddance!” To them I say be careful what you ask for, because you just might get it. It wasn’t all that long ago that traders were complaining about the lack of volatility in the markets. Now, of course, the complaint is about too much. Funny how the pendulum swings like that, eh?
I’m guilty as I was one of the ones saying “Gosh, nothing ever happens. I’d love for volatility to pick up” back when I was trading a more swing-trading, hedged strategy based off sector rotation concepts (buying strong stocks in strong sectors & shorting weak stocks in weak sectors). With the volatility picking up in late 2007, it forced me back to trade intraday strategies which have been profitable though the swing strategies - for me at least - ceased being profitable as everything seemed to correlate (to the downside).
If anyone would like me to feature or would like to recommend another “Best of 2008″ post, feel free to let me know in the comments.
UPDATE: Although it’s not a “best of 2008,” it’s actually a “Worst of 2008,” round-up courtesy Barry Ritholtz at the Big Picture.
Corey
Originally posted here.
Posted in RSS No Comments »
December 31, 2008
Tuesday’s action provided yet another fascinating example of classic trade set-ups and low-risk, high probability opportunities in the intraday DIA chart. Let’s see this “Trend day that almost wasn’t” and also look at a bull flag, Bollinger Band Squeeze-Play, and a successfully filled morning gap (I should have titled this post, “The Day that Had it All.”)
DIA 5-min chart for December 30, 2008:
Starting at the beginning, we had an overnight gap-up that was quickly filled, complete with upper-shadow bearish candles that preceded the retracement. Price then pulled back sharply to a major ‘confluence support zone’ formed by yesterday’s close (the target for the gap-fill… where shorts would be covering) and the rising 20 period EMA. A bullish hammer candle formed which was followed by a narrow-range doji before price preceded into a fresh impulse move into new highs… albeit on a negative momentum divergence.
Oh, the retracement off the morning highs also came off a New Momentum High (NMH) which set-up the “Impulse Buy” trade I discuss frequently.
Price then formed three doji (consolidation) candles before retracing comfortably back to the rising 20 period EMA, forming parallel trendlines which set-up a possible Bull Flag trade… which met and exceeded its “Measured Move” target into fresh intraday highs (and the top of the Bollinger Band… on another negative momentum divergence). I found the morning price action so interesting that I broke character and posted an intraday analysis before the day was half over!
It was at this time that I called the price action to be most likely a Trend-Day and suggested that any retracements be bought. The “line in the sand” to determine whether or not a day will unfold as a pure trend day is the rising 50 period EMA, which - if tested - is expected to act as strong support. Failure to hold the “50″ would call the trend day theory into question, and two closes beneath the 50 would - in my book - officially invalidate the trend day, triggering stops (though some prefer to trigger stops at one bar beneath the EMA, or if price breaches the 50 at any point).
I don’t prefer those strategies - though I used to employ them - and today’s price action explains why. In the current environment, price swings tend not to ‘respect’ classic (or expected) boundaries comfortably (or as ‘nicely’ as they have in the past) which means our stops and turning points (in our analysis) must be wider to accommodate for this change in volatility.
That being said, traders who realized this and capitalized on it were able to hold on to their positions, albeit literally by a hair, and play for the full potential if the trend reaffirmed itself, which it ultimately did around 3:30. Traders who played ‘conservatively’ (as I am accustomed to do - erroneously) and utilized ‘tight stop’ strategies missed the end-of-day move completely.
Foregoing this whole “tight stop vs loose stop” debate, price formed its final trade set-up of the day, which was a breakout from consolidation play (rectangle pattern) or more specifically a breakout from a “Bollinger Band Squeeze” play which satisfied its target nicely (exit at close of day).
Take a moment to go over today’s market action and highlight your own patterns and build experience while the market is closed so that you can internalize these patterns and react better when the market is open.
Corey Rosenbloom
Afraid to Trade.com
Originally posted here.
Posted in RSS No Comments »
December 30, 2008
I just received word of my successful passing/completion of the Chartered Market Technician program’s Level III final (written essay) examination and wanted to announce that to readers and summarize the CMT.
The CMT is a designation awared by the Market Technicians Association (www.mta.org) which is a program that takes you through a wide variety of methods used in technical analysis, from the early concepts to modern technical trading systems. Full information is available by visiting the CMT portion of the MTA website or downloading the CMT Program Brochure (which will open and download as a PDF document).
The program is a three examination process which unfolds over a period of at least 18 months (6 months between each exam). Each test requires you to read four or more textbooks (and not the 100 page kind!) which walk you through the intricacies of Chart Analysis (patterns), Technical Indicators (formulas, applications, and construction), Candlestick Analysis (structure, meaning, history, interpretation), Cycles, the Elliott Wave Principle, Intermarket Analysis, Trading Strategies & Research, Statistics/Data Analysis, Psychology/Sentiment, and much more. You can find the required reading lists by visiting their website.
A second portion of receiving the CMT charter is sponsorship by three current MTA members. These members must be familiar with your work and recommend you for membership (which isn’t as intimidating as it may seem - members are quite friendly and accessible).
It is on that note that I am requesting the sponsorship of one more member to receive my CMT Designation. I would prefer for the sponsor to be familiar with my work on the blog (soon to be website) and have been aware of my daily commentaries for some time. I am requesting any MTA Member/CMT Charterholder who is willing to sponsor me to contact me (through email or through the comment section) to serve as my sponsor. I would be very appreciative of your support.
Also, if any reader is interested in learning more about the MTA or the CMT program, or to request sponsorship by me once I receive the CMT Charter, I would be happy to discuss my positive experiences with the organization and certification process.
In short, the CMT program took me from a broad “where do I start - there’s so much to learn” view through a specific pathway to develop my knolwedge and skills in a structured, professional manner. There really is so much - perhaps too much - information to take in about trading. The CMT program provides a professional pathway for retail and professional traders to take a guided approach to learning then applying the concepts discussed.
As always, thank you to everyone for your continued support. Let’s make 2009 even better in the markets!
Corey Rosenbloom
Afraid to Trade.com
Originally posted here.
Posted in RSS No Comments »
December 30, 2008
I’ve rarely seen volume flows shift so dramatically as I’ve seen in some of the crude oil related ETFs. Volume has surged to almost 50 million shares transacting per day in two particular funds: The US Oil Fund (USO) and the Double-Long Crude Oil (DXO) Fund. Let’s look at these for what this might mean.
USO - United States Oil Fund:
USO reached a 2008 low of $27.73 before bouncing off that level into the current tenuous retracement underway currently. From a quick analytical perspective:
The moving averages are in the most bearish orientation possible
Volume is surging to new highs on new lows (a possible sign of capitulation or aggressive accumulation)
A lengthy, multi-swing positive momentum divergence has been building under price since October
The 20 day EMA has provided overwhelmingly significant resistance since September
The same analysis applies to the DXO - Double-Long Crude Oil fund below:
DXO - Double-Long Crude Oil:
The only difference is that DXO has far less room to continue falling than USO, although both are roughly tied to Crude Oil prices and offer vehicles to trade if you prefer not to trade futures contracts.
It’s extraordinarily rare to see such pervasive and relentless downtrends in exchange traded funds, simply because of the diversification ETFs are expected to provide (as opposed to individual stocks).
That being said, there’s no avoiding that trading these vehicles offers both risk and reward.
It would appear that crude oil is forming a “rounded reversal” bottom, but trying to call a bottom has destroyed many accounts in this environment. I suggest standing aside until price - at least in the USO - can break above its falling 20 day EMA though conservative traders may even want to wait for further assurance when price breaks above the 50 day EMA and then the 20 and 50 EMAs cross ‘bullishly’ to provide a confluence support floor beneath price.
Until then, buying now would be an aggressive - though potentially rewarding - play.
Continue tracking crude oil and other commodities and ETFs for clues to how the broader market might be affected by these developments.
Follow Afraid to Trade on Twitter: http://twitter.com/afraidtotrade
Corey Rosenbloom
Afraid to Trade.com
Originally posted here.
Posted in RSS No Comments »
December 30, 2008
The market appears to be coming back into ‘payout’ mode, as classic patterns and set-ups are working like clockwork. It’s noon EST and we just witnessed a successful filled gap, support bounce as expected, and a complete bull flag. Let’s see these all.
DIA 5-min Chart:
Normally I wait until the end of the day to post intraday summaries but I couldn’t pass this up.
The morning began with a moderate upside gap which was quickly filled as price pulled back to confluence support via the rising 20 period EMA and yesterday’s close (purple line). The pullback was also part of the “Impulse Buy” set-up which follows a new momentum high in an observed trend. The $85.00 level also offered “round number” support so all of these ‘confluences’ made for a high-probability, low-risk trade idea.
After reaching new intraday highs, price formed numerous narrow-range (doji) candles before retracing gently back to tag the rising 20 period EMA, this time setting up the potential for a “Bull Flag,” although doing so on a negative momentum divergence. However, the bull-flag ‘worked’ and price met its target forcefully to new intraday highs.
We could have a trend day on our hands so be aware of this possibility.
Corey Rosenbloom
Afraid to Trade.com
Originally posted here.
Posted in RSS No Comments »
December 29, 2008
I could write a lengthy synopsis of the trading activity in today’s (Monday, Dec 29, 2008) market because there were so many fascinating examples of price action concepts (and patterns), but let’s focus on the key points and delve into the intraday structure in today’s DIA action.
DIA (Dow Jones) 5-min chart:
The day began just above $85 per share and then plunged almost non-stop from there, forming a large momentum swing down which created a new momentum low just after 10:00am. Price then formed a mini-positive momentum divergence into an “ABC” Bear Flag correction into key resistance via the falling 20 period EMA, as price formed three narrow-range doji candles in a row.
If you can find set-ups like this, you’ll need to trade them aggressively, perhaps on leverage. This is the classic “Impluse Sell” trade which is confirmed by price retracing to a key moving average and forming corresponding (confirming) reversal candle patterns. Not only do you have a probability edge, you also can generate a size edge, meaning your stop (which would go just beyond the falling 50 period EMA in this case) would be much smaller than your target, which is roughly a ‘measured move’ of the prior impulse.
Ultimately, price did not complete a full projection (to do so, it would have needed to travel roughly $1.00 lower. It only managed to achieve a $0.70 move), though price did provide profit to those who shorted at the $84.30 zone.
We then formed a positive momentum divergence and an ‘engulfing’ candle pattern that swallowed the previous two bars before sharply reversing to the upside and breaking the 20 period EMA (falling just shy and sustaining resistance at the 50 EMA).
Price then formed a near-perfect symmetrical triangle into support before breaking out into a forceful “Third Wave” impulse which terminated just shy of the 200 period SMA.
Price retraced back into a bull flag (not drawn) which found key support at the Convergence Zone (bullish cross) of the 20 and 50 EMAs - a trade that I’m still looking for a name to classify it. I believe these are some of the the strongest trade set-ups you can take when they occur.
Nevertheless, price burst out of the “Corrective Wave 4″ consolidation to reach resistance back at the $85 level, which is roughly where we began the day, and terminated in a “Fifth Wave” completion into the close.
Look closely at the Elliott Wave-style pattern that emerged from 1:30 to the close - to me, it reflected a perfect example of the Wave Principle playing out on a 5-minute (fractal) chart.
There was so much more to discuss regarding the intracacies of Monday’s action. Continue to study your own charts for additional insights, with the goal being the internalization of these patterns so that you can react better when they occur in real time.
Corey Rosenbloom
Afraid to Trade.com
Originally posted here.
Posted in RSS No Comments »
Looking for gold.
