Well ES did pullback following my last post but then ES broke through the old 2002 high for a third time about a month ago and as I was anticipating it has rallied much higher above both 2002 and 2007 highs. Measuring this swing from the low (1530.5) to the high (1665.75), the swing has been 135 points. Usually these type of swings last about 150-160 points so I think we have a little bit farther to go.
But the close this week does look like it could be the finishing close. Back in February of 2009 I had dinner with some friends of a friend, one of these people was a manager at a hedge fund. At that time I wasn’t trading full time, but when he found out I was very interested he gave me one piece of advice. I wish I remembered his exact words but he told me there would be a 1000 point rally in the market. I didn’t bother to ask him whether he was talking about the DOW or the S&P500. Everything was so gloomy and miserable back then I couldn’t imagine even a 20 point rally taking place in the S&P500 (or a 2 point rally in SPY for my old readers). So I didn’t give much weight to his advice. At any rate I felt I had to make my own decisions to succeed at trading and didn’t want to be clouded with the views of others.
But here we are. The 2009 low was 665.75, today’s high was 1665.75, so the S&P500 futures have gained exactly 1000 points to date since the 2009 low. I’m certain that if I go back and ask him now whether he was talking about the DOW or the S&P500, he’ll definitely claim it was the S&P!
665.75 to 1665.75. It would be a nice number to top on.
I know a little more now than I did back then and I think we’re going to begin to see some volatility next week. Again this doesn’t mean you should short with all your might, let alone short even one contract of ES. There is no sell signal at all.
But I have seen the pattern developing in ES hundreds of times in other markets and I think we can expect an inside bar or “cloud cover” type candlestick next week. In other words, I think ES will peak no more than 10 points above 1665.75 and hit a low in the 1645-1650 region. If ES rallies more than 10 points above 1665.75 then what I am thinking is not happening and I am wrong and I will have to re-evaluate at that time.
I’m clearly guessing here but I am familiar enough with the pattern to at least take a stab on the short side. So I’m going to ahead and short any weakness I see next week, with a stop at 1676 and with a target at 1650. In particular I’m going to short any 1-3 point pop and drop above the 1665.75 high. That would be the best setup in my opinion.
If ES climbs higher and goes into one of it’s sideways/rounded tops then I’ll sell calls at strikes 10-20 points higher than the price at the time because it’s too hard to identify a good stop price with those kind of tops.
The other thing to do next week is to buy bonds. In particular I’m going to be looking to buy the 5/10 year treasuries over the 30 year one.
I don’t think this is the end of the rally. Assuming we do get an inside bar next week then I still think there are 3-5 more weeks of rallying/sideways movement to go before we get a real sell signal on the indices. If by some miracle ES were to reverse next week and take out this week’s low at 1621.5 that would be a big time sell signal and would most likely carry ES down to the 1580 range.
But even if that happens, I still don’t think it would mark the end of this rally. I do think we’ll get a 10% correction at some point but we’re still too early. If everything plays out as I am expecting then I think it would take at least 3 months for a significant top to form. That would set the S&P500 up for a decline in September/October of this year- historically the worst performing months for the market.
Another guess I have for next week is that the dollar will back off highs and drop below today’s low at 83.865 generating a sell signal. I’m too tired to write more about this but it’s one other thing to look for.
When the S&P500 broke through the 2000 high at 1553 it spent 5 days testing the level and on the 6th day it dropped and the eventual correction dropped it to 1370. A rally followed which carried the S&P to 1576.
Now the S&P500 is breaking through the 2007 high at 1576. It would be reasonable to expect at least 5-7 days to pass before any drop begins.
But here’s the thing. The reason everyone become so bearish after the 2007 crash is because the 2009 low took out the 2002 low. This by definition indicated that the S&P500 is now in a downtrend. No one expected the S&P to come back and take out the 2007 high again. But now that it has, it invalidates the downtrend argument.
The 2007 high gained roughly 30 points on the 2000 high. This time around I think the S&P500 will gain much much more. It’s hard to estimate how much more we will gain above the 2007 high but basic technical analysis implies that we should expect a move about the size of the drop from the 2007 high to the 2009 low, ie 900 points.
I know this sounds completely ridiculous and I am not aiming for another 900 point rally to follow this one, but my point is that even though it is high time for a correction and technically we are in a good spot for one to occur, we should keep our mind open to the possibility that any correction that takes place is just another pullback before an even larger rally begins.
ES gapped up from the 1527.5 close on 3/4 and has made new highs tonight at 1544.25. This gap is much different than the one at 1424 and may signal exhaustion.
It is still too early to short ES but any sell setup that forms should be taken. If this gap is an exhaustion gap we should see a top develop within the next two weeks. However in recent years the market has been moving quicker (in my opinion) and the gap may close in much less time.
My feeling is that if the gap closes quickly- say within the next few days, then the resulting drop should probably be bought as a dip. However if ES develops a top over the course of a week or more and then drops to fill the gap, then the high may be in for a while.
There are some signs in other markets that may indicate that a top is near as well. Crude has dropped nearly 10% while ES has continued to climb. I believe Bonds made a significant low near the beginning of February and I believe this low will hold.
At any rate there hasn’t been any point trying to short ES up until now. Now is the time to be alert and begin taking some shots at shorting ES.
The last time I checked in on ES I was looking for ES to pullback below 1400 and for a “superior” buy setup to form. ES did pullback below 1400 on December 28th to 1382.25 but it rallied very strongly out of this price area the very next day and closed near 1424. This was the superior buy setup. Now I was hoping for something that would be a lot easier to trade, that is one reason why I was calling it a “superior” buy setup- but in fact it was extremely hard to trade. I completely missed it, kudos to you if you caught it.
Looking back, I knew we had a good buy setup when ES closed at 1360 on November 16 and I should have bought this setup more heavily. And looking back I completely blew this because I felt we would get a better opportunity. This was a huge error on my part. I always miss buying the Thanksgiving dip and this year was no exception. It’s just something I’m not good at.
Anyway following the close at 1424, ES gapped up around 20 points and hasn’t looked back. ES just made new highs above 1468 this past week and I think we all agree that the market looks incredibly strong so I’m not going to list all the strengths and instead will focus on the very little weak points that may hint at an impending pullback:
1. ES has only exceeded the old 1468 high by 3 points. This puts ES in trap reversal territory. Now that ES has broken 1468, ES should quickly clear this price area and head towards 1500. If ES stays within five points of 1468 this leaves ES prone to a trap reversal. ES could pullback 10-15 points from here but I don’t it will drop much further than that.
2. The Nasdaq is still severely lagging the S&P500. But at this point I have accepted that maybe it doesn’t matter if the Nasdaq is strong or not. The Nasdaq being much weaker indicates to me that the tech sector is not leading the latest bull market rally. Healthcare (XLV) and Consumer Discretionary (XLY) sectors are doing extremely well right now and perhaps we should be looking for weakness in these areas instead of the Nasdaq. Still, if there were no S&P500 and the major index were the Nasdaq I would be looking to get short right now.
3. The daily candlestick on Friday may also be suggestive of a small 10-15 point pullback to begin next week but ES shouldn’t drop really get close to 1440 in my opinion.
So to summarize we don’t have a sell setup or any good reason to be short right now. I know some of you might be aiming for ES to drop back to 1424 to fill the gap there, but for all purposes the gap at 1424 looks like a textbook breakaway gap to me. These kind of gaps can take half a year or longer to fill. There is a great book on chart patterns called “Encyclopedia of Chart Patterns” by Thomas Bulkowski. In this book Bulkowski goes over hundreds of chart patterns and provides a ton of statistics on their success rate. Off the top of my head, I believe Bulkowski has found that a breakaway or continuation gap takes on average 100-150 days to close. So I know it looks like a very juicy profit to aim for the 1424 gap fill but it may be a half year long endeavor to realize the profit.
So what have I been trading the past month? Well while ES hasn’t provided many good trading opportunities over the past month- I have been active in almost every other market has: Ags, Currencies, Energies, Bonds, Metals, Softs.
There was a huge breakout in corn on Friday and this may end the downtrend so the picture in the Ags market is kind of unclear right now. But up until Friday everything (corn, wheat, oats, soybeans) was a good candidate to short.
I consider the uptrend in Live Cattle futures to be the strongest uptrend in any market right now. This market pulled back last week and I’m looking for a buy.
Nat Gas has been pulling back the past month but we have a good buy setup going into next week and I’m trying to build a long position here.
Gas (RB) and Heating Oil are a lot weaker than Crude and I am short these markets. I am looking to get short Crude next week. I’ll talk about this more in another post.
The Yen has broken all support levels and resolved to the downside. I have been adding short to this market at any opportunity.
I just got long on the 30 year (ZB) and 10 year bonds (ZN) on Friday. I am looking for continuation to the upside in these markets next week.
I think most readers of this blog know where I stand on Gold. We have seen some volatility in Gold but I am holding short this market with a stop at 1695. The interesting thing is that Silver has been holding a key uptrend line for the past month so we could get yet another big rally this year but I’ll believe it when I see it. I’m holding short till I get stopped out.
I got long Sugar, Corn, and Coffee this past week. All of these markets have been in a downtrend for ages and so I’m not expecting a whole lot out of them. I feel the best about Sugar.
I finally got around to transferring over the website to a better server. I made some posts in between but I lost them during the transfer.
Last week I was expecting ES to close around 1404- this would have indicated that ES is headed lower. But ES closed well above 1404, at 1415.5. This is bullish and supports the idea that ES will not break below 1340.25 again. I then expected a range of 40-50 points for this week depending on whether ES would reverse back to the downside or not.
This week we had a sell setup on Monday, followed by a hesitation bar on Tuesday. Today we had continuation to the downside but quickly reversed out of it. On short term charts, this reversal pattern looks exactly like the reversal pattern that took place at the 1340.25 low. One could argue to buy ES today.
So my initial inclination was that we should be headed up for the remainder of the week. However then I noticed that once again the Nasdaq lagged the S&P500 pretty badly today. I mentioned a few days ago (in one of my now-deleted posts) that I felt currencies were weak. Well I was wrong about that back then, but now the currencies look good to sell for tomorrow. This is not how things were setup back in the 1340 area. Down there everything looked like a buy. So I’m still not ready to buy ES right now.
It’s possible ES rallies tomorrow and pulls all the other markets up with it but I have my reservations and I still think there is a good chance ES hits the 1380-1390 range this week. Still this is not a good place to be selling ES so I simply have to wait and see what happens. The currencies look like better sells to me and I’ll try shorting 6A, 6B, 6C, 6E tomorrow as well as Crude.
The high this week has been 1424 and the low so far has been 1396.75- a range of about 27 points. I’m not sure whether ES will tank or rally but I have expectations on what could happen in each case. I think if ES breaks below 1396.75 tomorrow or on Friday it could really plummet and hit the 1377-1380 range. On the other hand if ES takes out 1424 later this week then I think upside will be limited to about 1435.
I’m leaning towards ES breaking down again tomorrow but I don’t have enough justification to sell ES right now so I’ll have to skip this one.
Here’s the sell setup. Coincidentally it is right at the 1068 uptrend backtest and the 1459.75 downtrend test point. This is almost perfect.
ES didn’t peak as high as I was hoping today but I still managed to get short. My stop is 1408 and I think we have to potential to drop to the 1380-1388 range tomorrow. This is the best look we have had at shorting this bounce off the 1340 low yet and it could very well be the only look we get.
1. Drop to 1388 = Success, this is the expected outcome. Nothing to discuss here. 50% chance.
2. Hesitation bar = We might get a doji tomorrow. They key here is whether ES breaks the 1395 low or not. If ES does break the low and then closes with a doji- I will keep holding short. But if ES does not break the 1395 low and closes with a doji- that is kind of ominous behavior and I will take some risk off and potentially brace for a reversal. 30% chance.
3. Complete Reversal = It’s always possible that our stop gets hit. It could happen, so bet accordingly. The 1459.75 downtrend line is made up of two points: 1459.75 and 1431.75. We just tested this downtrend line for the first time. Usually the first tests overshoots the trendline a little bit. This didn’t happen this time around and this is why I consider the sell setup to be “almost perfect” and not perfect. I am going to fret about this but it’s not worth fretting about. This is a really really good look and like I said before sometimes you do miss wide open shots but you shouldn’t shy away from taking them. 20% chance.
Nasdaq Weakness Update
Previously the Nasdaq was lagging the S&P500 by about 3.8%, now it is lagging by 1.75%. So the Nasdaq has been a lot stronger than the S&P since the 1340.25 low. Therefore I’m going to short ES and not NQ.
Overall this is good news for bulls and bad news for bears. Even if the markets drop tomorrow, if the Nasdaq keeps outperforming the S&P500 it is a good sign that the low may be in at 1340.25 and when we get my much ballyhooed “superior buy setup” in a week or two it has a much better chance of being successful.
Currency Sell Setups
I’m seeing sell setups for tomorrow on almost all the major currency futures as well: 6A, 6B, 6C, 6E, 6M, 6N, 6S. I regard 6E as the weakest and 6A as the strongest. I plan on shorting the 6B, 6C, and 6E as well.
Given today’s candlestick I think a drop is very very near. ES could turn and tank tomorrow- I have seen this happen many times and there is a good chance it happens. I’ll call this the “drop scenario.” In this case ES will probably peak no more than 2 points above 1407.75 (last week’s high) and then reverse immediately and take out today’s 1395 low. I’ll give this a 30% chance of happening.
But it is also common with this structure to get an inverted hammer candlestick tomorrow. Meaning that ES could pop a little bit tomorrow and possibly hit the 50 day moving average at 1416.5, but then it should drop back in the 1405-1408 vicinity. I’ll call this the “exhausted rally scenario.” I’ll give this a 40% chance of happening. If this happens then I think ES shouldn’t trade any higher than 1420 tomorrow and should close in the 1405-1408 range.
If ES closes above 1408 tomorrow then it’s not clear whether a drop is near or not. But it’s common for ES to say rally tomorrow and close up, but then to reverse the entire move on Wednesday. I’ll call this the “pop then drop” scenario and give it a 25% chance of happening. In this case ES should preferably close no higher than 1416.5. Then on Wednesday ES should drop back to the 1405-1408 range or lower. Any close above 1416.5 on Tuesday and we have to come up with another plan.
Finally ES could simply rally tomorrow, close above 1416.5 and in this case it’s back to the drawing board we have to wait for some other signal of a pullback. I highly doubt this will happen given the candlestick we had today, but I still have to acknowledge that it can happen. So I’ll give it a 5% chance of occurring.
In summary, I think tomorrow is a good day to try to short ES and I will definitely be taking a crack at it in some form tomorrow.
Someone asked if they should go long. This is not a place to good go long. ES might not hit 1340 again but it will pullback below 1400 again in the near future. I can almost guarantee it.
We almost had another 45 point range this week on ES. ES rallied from the beginning till the end of the week and is currently near a lot of resistance.
A week ago ES dropped below the 1068 uptrend line (2011 low) and has now popped back above it but I still consider it to be backtesting this trendline. ES is also testing the 1459.75 downtrend line. The 50 day moving average is about 15 points above the current price at 1418.5.
I looked back over the years to situations where ES has “pulled back significantly after making a new high and then rallied for the first time out of the pullback.” I found that the week that follows is usually a near doji-slightly up type week with a smaller range than the preceding week. Friday’s candlestick does look like a finishing bar to the rally and ES is now in a price area where I think the bears will attack it a lot more aggressively so I think expecting a doji/slight-up week is reasonable. So I’m anticipating a 30-35 point range for next week. I think ES will probably reach 1420, while holding a low above 1390, give or take a few points at each extreme.
Previously I said that when ES breaks above 1400 I would short it with everything I had- I still plan on doing this but just because ES is now over 1400 does not mean I should short this right away. Once again we are in a situation where I want to sell but I don’t have the required sell setup to do so. I could be completely wrong about all my predictions and ES could rally another 45 points from here and be on the verge of new highs again by the end of next week. So there is no shorting until we get a sell setup.
I don’t have a good strategy for this week. We’re kind of in a wait-and-see position right now. If we look at the monthly ES candlestick, it opened at 1402, peaked at 1431.75 and hit a low of 1340.25.
If ES closes below 1402 this month (end of this week) then I think the downtrend will continue in December.
If ES closes above 1402 but below 1415 then the downtrend could continue but it’s likely that we’ll get another doji-type month in December.
If ES closes above 1415 this month then I think the low is in and the overall uptrend will continue.
The 1415 tipping point is my own estimate based on the fact that I consider it to be in the upper end of this week’s range.
My gut feel is that based on the candlestick structure that ES will close this week around the 1400-1404 price area or maybe slightly lower. So I am going to try and fade any moves that take ES far away from 1400. We are still in an overall downtrend and I will definitely attempt to short ES whenever I get even the slightest sell setup but at the same time if ES drops to say 1380 early in the week, I might try to fade this move as well. Again I think fading these moves by selling puts and calls is the best strategy. I’m comfortable being short ES at 1430 and I’m willing to bet ES doesn’t fall below 1380 this week.
Overall I’m still treating this rally off the lows as a bounce and am waiting for it to exhaust itself so I can short it. There are no signs of exhaustion yet but based on previous price patterns this is the week to look for exhaustion signs to show up.
I have mentioned the Nasdaq weakness several times over the past few months and here is a chart comparing the S&P500 (red/green) to the Nasdaq (pink). The Russell is also shown as a blue line for completeness but this is not as important. As you can see over the past 6 months the Nasdaq has severely lagged the S&P500.
Now these percentage charts can be very misleading, it all depends on where you begin the chart. For example looking back over a year:
Looking back over a year the S&P and Nasdaq look even. So it’s important to get the timeframe right. In this case I think looking back over 6 months is more relevant than looking back over a year. The 6 month chart begins at 5/21/2012- close to the June 4, 2012 low (If I could easily do it, I would begin the chart at 6/4/2012 but I have to figure out how to do this and as usual don’t have too much time to spend). This chart is more relevant because the June low is where the dip this year ended, we had buy setups and this is the place where traders got long. So this is where all the long trades originated and so it makes sense to calculate the rate of return from this point and not from the beginning of the year.
So the Nasdaq is lagging by about 3.8%, at one point it in September it was leading by almost 2%. So I’d ideally like to see the Nasdaq regain about 6% but this might be a reach. Still I want to see the Nasdaq close the gap compared to the S&P500. That would help support that the stock market in general is still in good shape and making new highs next year is a good possibility.
Now one could argue that suppose 1340.25 turns out to be the low. Then shouldn’t we look at this percentage chart based from 11/16? That’s a good point and maybe we should and maybe we’ll find in a few weeks that the Nasdaq has outperformed the S&P500 referred to 11/16 but still has not made up the 3.8% referred to 6 months ago. This is a possibility and this is where my analysis is a little lacking.
I had hoped to find some time to study past drops and S&P500/Nasdaq percent differences coming into and out of drops. This is something I’ll still do in the future anyway when I find some time as I believe it is very valuable information, but it takes time.
One other thing that kind of mucks up this comparison is that the S&P500 is a float weighted index and the Nasdaq-100 is a cap weighted index so it’s kind of like comparing an apple to an orange. With AAPL taking up around 15% of the Nasdaq weight, the big difference in the Nasdaq and S&P500 price might simply be explained as the rapid rise and fall of AAPL stock.
In summary it’s very useful to study strength and weakness in an asset class. When leaders become laggards it is one sign that a change of trend may be coming but as with most things it is one tool that we can use to help diagnose the condition of the market and not a complete trading strategy that we can bet on day in and day out. But it is still extremely important. When we get to the point where I am ready to short the indices again, I will probably be shorting the Nasdaq. And when I am ready to buy the indices again, I will probably be buying the S&P500.
One of my biggest wins this year was shorting Gold, but looking back I should have shorted Silver or Copper. They were weaker markets back then and if I had put the same money into shorting silver or copper that I had into shorting gold, I would have made more shorting them instead of Gold.
…and a low to base our stops off of: 1340.25. I’m going to go ahead and assume that the low is in for the next week or two based on the fact that ES reversed so hard off the new 1340.25 low made Friday. ES touched the 61.8% retracement as well and that may have helped fuel some of the bounce. But the main reasons reversals like this happen is simply because ES is oversold and pushing new lows gets harder and harder. It also helps that yesterday was OPEX and the market makers probably screwed over a bunch of put buyers.
Handling the buy setup
Last week I estimated a 40-45 point range, and we peaked at 1386 and dropped to 1340, so it turned out to be 46 points. This week I’m expecting a 40-50 point range. I think we could get a slightly wider range this week but we should not get anywhere near the 70 point range we had a two weeks ago. There are three things that can happen next week:
1. The Runaway Gap Up
Since ES closed Friday with a terrific buy setup and near the highs it is very likely that ES gaps up on Sunday and it is possible that ES doesn’t look back and rallies all the way back to 1400. If this happens then I would expect the range to be 40 points next week. The low will be 1360 and the high will be about 1400. Given that between 1360 and 1400 we have 40 points we have to simply day trade this: don’t wait for a picture perfect buy setup you probably won’t get one. Find any promising indication that ES is headed up and simply try to blindly buy with a tight stop of no more than 3 points, move the stop to breakeven if profitable and hopefully it keeps running. Caution: this sounds easier than it looks and takes a fair amount of skill. Alternatively you could simply buy ES and set the stop at 1340.25 and honor the full 20 point stop- just don’t bet a lot of contracts. OR you could sell puts to reduce risk even further. Once again the 50% rule applies. If you sell a 1340 strike put with ES at 1360 and ES then drops to 1340- your loss will probably be about 10 points (half of 20 points, half the loss of simply longing ES).
2. Traders Fade the Gap Up
On the other hand ES could gap up Sunday but then reverse back possibly deep into the 1340-1350 range on Monday and then reverse again back to the upside on Tuesday. I have observed this pattern many times and there is a good possibility it occurs. If this were to happen then I would estimate a range of 50 points this week: the low would be 1345 and the high would be 1395. I am partially long at this point- I sold a bunch of puts on Friday and the purpose of this move is to stress longs and weak hands will cave. They key here is that ES should not take out 1340.25. And we have to stay vigilant until 1340.25 breaks. The good part is we get yet another opportunity to get long.
3. Failed Buy Setup
Finally ES could gap up Sunday and reverse and take out the 1340.25 low on Monday. This puts us in a difficult spot. In this situation we are forced to exit our longs when ES breaks below 1340.25 because this is indicative that ES is headed much lower, possibly down to 1300. At the same time we could still get yet another monster trap reversal- ES could drop to 1339 and then reverse back towards 1400. This happens all the time and it’s probably the most frustrating thing that happens in trading- your stop gets hit and then ES rallies in the direction you were betting on. It’s even more frustrating in this case because we are going long based on a trap reversal and to get another trap reversal one after the other is extremely frustrating. In my experience it is best to be conservative and respect the 1340.25 stop and then buy again later if it trap reverses. This means your stop at 1340.25 will get hit and you will probably have to buy back in the 1345-1348 range if a trap reversal happens- and this is very difficult to buy because of the recent fear/history of being stopped out- but that’s just how it is sometimes. You have to be persistent near bottoms.
Still, putting the stop at 1340.25 is better than say allowing for some trap reversal margin and setting the stop at 1335. I think if ES breaks 1340.25 in this coming week then it is headed down further and we have to respect that. But it all depends on the timeframe. Say ES gaps up Sunday and then early Monday morning (like before 11:30AM EST) quickly drops below 1340.25- in this case I would be suspicious of a trap reversal brewing. But say ES drops Monday and closes around 1345 and then on Tuesday or overnight Monday, ES drops below 1340.25- in this case I think ES is headed down to 1300-1320. The quicker a move takes place the more likely it is to be reversed. In summary this puts us in a very difficult situation and I hope it does not happen but we should think out our plan of action ahead of time instead of trying to wing it at the last minute- if ES breaks 1340.25 and you make some last minute decisions you are bound to lose. I think outside observers often get the impression that day trading is like some talented guy winging trades left and right as if playing a video game. In reality you shouldn’t be winging anything all your moves should be planned out ahead of time.
Also if ES closes below 1340.25 that is game over for longs for now. (Not helping dispel the video game impression, am I?)
Where are we headed?
At this point ES has declined about 128 points off the 1468 high, and I doubt that ES rallies back to 1468 so every rally will be treated as a bounce and I will be looking for sell setups. If ES stays above 1340.25 this week then we will bounce back to 1400 or get very close to it. It all depends on how much more time ES spends in the 1340-1360 range. Either ES is going to move fast or slow:
Fast: If ES takes off on Monday and doesn’t look back then I think we’ll quickly reach 1400 and that will be about the extent of the rally. The “fast” move is characteristic of a pullback in a downtrend and the downtrend will most likely resume.
Slow: If ES churns around the 1340-1360 range for few days or a week then ES could bounce back as high as 1420-1430. The “slow” move is characteristic of bulls regaining control. It’s slower because what is happening is that bulls are trying to feel out how many other bulls our out there. They buy a little bit and naturally given the strength of the downtrend, a bunch of sellers show up and drop the price back down. If the sellers outweigh the buyers then the low will quickly be taken out. However if buyers keep coming into support the price then it builds confidence in the buyers. It’s similar to being in a Indiana Jones type situation where you have to cross a rickety old bridge over a big chasm. Nobody is going to simply try to walk across it without inspecting the bridge in some form. You might shake the bridge and take one or two test steps to see if it even looks like it can support your weight. If you test it and it breaks you save yourself, (although now you are stuck on one side but that’s a story for another day). Anyway, if ES spends next week churning around then the rally is going to be much much stronger and it means that 1340.25 could be the extent of this drop- the low might be in for a while.
Whether ES rallies quickly or not, V shaped bottoms rarely occur. That is, in both cases whether ES rallies to 1400 or 1430, there is going to be another drop towards 1340. I can say this with 100% certainty and this is why I have not been in a hurry to buy this drop. This second drop that is coming will produce a “superior buy setup” and buying this buy setup should be our main focus. I call this “superior” because it is superior to the buy setup we have now. Before the 1340.25 low was established, nobody honestly knew what the low would be so it’s tricky as hell to catch because you have to anticipate and recognize the low being created on the fly. Nobody can do this day in and day out. Sometimes people get lucky but nobody calls them all right so this is not a reliable strategy. The “superior” buy setup is superior because once ES rallies strongly off the 1340.25 low- we can depend on the 1340.25 low. We can point to the rally off 1340.25 as evidence to justify buying the next pullback. The bigger the rally off the low, the stronger the justification. Also in my experience the “superior” buy setup has a much better candlestick pattern then the current buy setup so we don’t have to rely on day trading to catch it. The disadvantage of the “superior” buy setup is that we probably won’t get to buy ES in the 1340-1360 range. We might have to settle for buying in the 1370-1380 range. And so we could miss out on 40 points which is significant. But think of those missed 40 points like a home inspection on a property you want to buy. Sometimes the home inspection will not find anything wrong with the property. But if the home inspection comes back and you find out the foundation is bad and termites have eaten away at the structure well you just saved yourself from a lot of trouble.
Now if ES rallies quickly that makes it look more like a bounce and it makes the “superior buy setup” more likely to fail. But that doesn’t mean you shouldn’t try to buy it. It’s like playing basketball and picking your shots wisely. If you are being completely smothered by a 7 foot defender then it is stupid to try to shoot over him. But if there is no defender within 10 feet and you are close to the hoop then you should definitely take the shot. Yes there are times you will miss this wide open shot but should you feel bad about it? No. You had a good look, you took it and it just didn’t go in this time. It doesn’t mean you shouldn’t have taken it or you shouldn’t take it again in the future.
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