Daytrading the ES

Getting ready for Friday...Im going to avoid taking any trades over the holidays, but Im looking at two possible scenarios that may effect your daytrading and will effect my bias:

Scenario 1:
From October to the current time, we are forming a rough, malformed inverse head and shoulders. In these types of formations, volume is key. We have record volume in the rough left shoulder and high volume in the head. We are looking at a price target of 1000 in this scenario with another pullback to the 850 area possible to form the right shoulder. We could also break over the neckline.

This scenario will either be confirmed on Friday or Monday. I'm looking for a breakage in the downward sloping trend line and a close over the 20-day moving average.

My bias will be upward to 1000 and then turn downward on the pullback, if there is a pullback, from 1000.

Scenario 2:
We are in a pattern of lower lows and lower highs with a well defined downward sloping trendline. We will bounce off of the trend line and make a lower low with the next price target being in the mid-600s.

Again, this will be confirmed or not confirmed on either Friday or Monday.

I have also included a chart of 2002 to demonstrate another very rough head and shoulders that took place. At each bottom, there was a good amount of volume. The left shoulder of the inverse head and shoulders usually has the most volume and the most selling pressure.

One of the differences between now and 2002 is that everything is happening at a very frantic pace. The market bottom in 2002-2003 occurred from mid-summer 2002 to late spring 2003. If this is Scenario 1, then this is all occurring at 2-3 times that rate of speed.

I studied the VIX for that time period in 2002. The VIX was the highest in the left shoulder and then still high (but lower) in the head and then the lowest in the right shoulder. That is what is taking place in the VIX now accept at a much more accelerated pace.







 
Here is something that I am studying a bit more which is an alternative to those who want to trade the SnP but dont want to trade the ES. That is triple leveraged ETFs.

What I did here with this chart was analyze it to see what I would have did had I traded it that day. You know that a certain pattern will exist each day, you just have to recognize that pattern, make the trade and set the stop.

One strategy is to wait the first half hour to 2 hours to recognize the pattern that is forming and then jump in on the trade.

In this case, if you had waited the first 2 hours then you would have seen that channel form. Then you get in on the trade and set a trailing stop. That trailing stop would be a little more then the height of the channel. If the trend is interupted then you can exit out of the trade. The height of this channel is about 1 point.

The rule for this trade then would be that a breakage of the upward trend line is a sell.

Some other things to notice about this chart is that around 12pm you see price dip down below the upward trend line. This is a clear signal to you that the line is no longer strong and could break at anytime. Towards the breakage, you see volume suddenly shoot up after a period of lower volume. A clear sign that the trend is about to end. 1) Bottom trend line is softening
2) sudden shoot up in volume.

At 1pm that day, when the news hit about the terrorist attack, notice how the uptrend was broken. The news event and breakage of the uptrend probably caused many a trader to get short. Notice the volume towards the end of day as the short covering and buying take hold.

When the trend breaks and ruins your original thesis, which will occur at least a few times during the day, then its time to re-group and figure out the next pattern. In this case, the downtrend formed a tight channel with half the height of the larger uptrend channel.

That channel in the middle of the day is what is called a "measured move". The rise during the day had a height of 3.6 points. Then the down trend at 1pm had a height of 1.2 points or exactly a 33% retracement. Then the etf powered up again and when it broke the downsloping trend line the result was a rise of about the same height as the initial rise.

The same technical analysis that occurs in charts over days. months, years. decades. etc. also takes place in the same way on the daily. The fun part is that each day is a new daily chart and daytraders just need to wait until the next day to find a new reality where as position traders need to wait days or weeks or months to see if their charts play out.

Notice towards the end of the day how the trend was starting to break. Probably daytraders exiting out of their positions at the end of day and negatively effecting the chart.

The great thing about this etf is that there is an inverse so you dont have to go short, just long the other etf, but dont get confused;)



 
How are we doing today traders? Im going to sit this one out until around 10:30-11am and then come back to see where we are at...
 
Im waiting for this chart to play out and then to ride the trend.

I painted two scenarios in a previous post where we were at a decision point.

On the daily, Im seeing a classic chart pattern. See how late Weds has formed what looks like an outstretched arm and now whats forming up top maybe a head and shoulders pattern...this pattern I have seen play out before over the course of years and in many other forms. One notable example is from 2005 to 2007. In 2006, towards the end you had that outreached arm type formation followed by the head and shoulders or diamond pattern in 2007.

I'm leaning towards a breakdown vs. a breakup at this point and patiently waiting so I can jump on the trend either way. Im going to have to say it will breakdown at this point, but waiting for confirmation.


 
Port,

Where's your 'line in the sand' for breakup or breakdowns today? I'm looking at 880, then 875ish on the downside with a break targeting 863. Not really strongly opinionated on the upside at the moment, but could be convinced with a move over 890.
 
Im looking at 881. I think Monday will be the determinating factor on the trend. I've sat here a while and watched it and now Im going to take off.

If it does break below 881, then I would measure the range of the consolidation at the top that I marked with the triangles and subtract that from 881. 888-881=7 881-7=874

Remember our ole ES chart from a few posts back. That 874 is right at the last retracement point.

These retracements are still valid.

ImageProxy
 
Depending on Monday, my bias will probably change to the upside. I can see the rally going right up until inauguration to the 1000 level where all pullbacks will be bought.

The higher this goes the more it shapes up like an inverse head and shoulders bottom from October to the present time. Highest volume is in the left shoulder with high volume in the head and then there will have to be the right shoulder with high volume.

I would change my bias today if there was more volume. I dont have volume to confirm the move.

The chart below will change depending upon when you look at it. Its programmed to constantly update.

ImageProxy
 
Here is the bullish scenario played out. Mid-December we are at 1000 followed by a pullback that will last until inauguration. Upon inauguration, we make the next move higher that will lift us to pre-financial panic levels or higher. Just a thought.

In the bearish scenario, the index starts trending lower next week to visit what I believe will be the final lows and mark the true bottom.

Market bottoms usually take place over 2-3 quarters. In the bullish scenario that we are in the market bottom, the timing is perfect.

Keep in mind on the chart below, I just guessed at the angle of the trend line. The resulting trend lines might be much different.



 
Here is one key indicator of long-term outlook, that I use, of the $SPX which might effect your bias.

MWW or Monster effects the long-term outlook of the $SPX. If businesses are hiring, then Monster knows long before most others. If Monster is not moving with the market, then there are issues and a general decline in the $SPX is about 3-6 months away.

Companies usually will slow hiring first when there is a problem (this wont be announced on the conference calls) then they will implement a hiring freeze (another measure that wont be announced) then they will move with the actual layoffs (these will be announced). This whole process is usually about 9-12 months during a slowdown.

Monster knows immediately if there is a slowdown in their product and this is announced on the conference calls thus effecting the share price.

Monster started falling in 2006 and then there was a recovery, but it never made it over the old high then dropped from there in 2007. In July of 2007, the market was making all-time highs, but Monster had been on the decline for 4+ months.



 
Here are our candlegroups again updated for this week. The leading group in the S&P500 right now is the XLF. I say the XLF because that pattern seems to be the deepest out of all the groups. Its as if all the other sectors are mimicking the XLF.

An ETF is only as good as its largest holding. The largest holding is usually the strongest or leading stock.

I look towards JPMorgan. This is what is called a megaphone or broadening top that has, at times, worked for and against me in the past. Has this pattern reached its target price? Will it reach the target price?

I think the target price of JPMorgan would be 10 after breaking through the floor. I suspect that JPM retraced to the trend line and now is going to go even deeper. So goes JPM, so goes the XLF and so goes the SPY. This theory supports my more bearish scenario where the S&P reaches to 630.





 
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