Daytrading the ES

Last post for the weekend.

This chart is from one of the sites that I monitor. It is not my own.

This chart paints both the bullish and bearish scenarios in a slightly different light then what I have defined.

1. Bullish scenario- The chart shows a megaphone or broadening bottom. I have defined the pattern as an inverse head and shoulders. The broadening pattern is a rare pattern that typically either marks tops or bottoms.

2. Bearish scenario- I make the case of lower lows and lower highs. He makes the case saying we might be in a downward channel where we are just now hitting up against the ceiling.

Both points are valid in fact.

Below this chart, I have placed area charts for this same period in 1929 versus the present time. In both charts, both indexes fell by 40%. During 1929, the Empire State Building was under construction to be the tallest building in the world. During the current time, the Freedom Tower is being constructed and should be one of the tallest buildings in the world. Both time periods are very similiar with slight twists and turns.

In the 1929 scenario, the index went on to reach 6 points by 1933. The reason why I posted these two charts is to demonstrate that no one really knows when the bottom will be made. There were several points from 1929 to 1933 where many people tried to predict a bottom and were wrong just like in 2002-2003. As long as the indexes make lower highs and lower lows then they are simply not a buy.

I dont have volume data available for 1929 so couldnt construct a candlechart.








 
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It looks like the bearish scenario is becoming more likely. I went short this morning with my target at 840. Set a trailing stop.

Take notice that this is yet another lower high in a series of lower highs in this channel. Price came close, but it did make yet another lower high in this series which is very bearish.


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Charts are amazing animals. The same chart can be drawn in different ways to show two completely different scenarios. Here is the more bearish scenario chart.

Once price heads south from here, it will challenge the old lows and that will happen in approximately 10 days if the rate of sink is similiar to the previous rate. I would bet that once the price escapes the old lows then the selloff will intensify as more stop prices are hit and margin calls are performed.

The two yellow lines roughly define a range. Take the height of that range and subtract it from the bottom yellow line and you have a target in the mid-600s.

As price turns towards the bottom, the inverse head and shoulders scenario becomes invalid. The next step is the test of the old lows. Then if those lows do not hold, then the mid-600s we fall...

I also placed the bullish scenario chart that I drew a few days ago. A trader needs to see both scenarios and have a Plan B in case the scenario chosen does not work out. I address that through patience and trailing stops. Once a stop is hit, I dont jump back in readily, but wait and study what is happening and why my thesis was wrong.




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Here is something else to consider. 10 stocks comprise 20% of the S&P. You will recognize these stocks as leading stocks for their industries meaning that a move up or down in any of these will effect entire industry groups. These 10 stocks control the S&P more or less.

Do any of these stocks appear to be in an uptrend?


 
I wanted to answer my last question. Half of these stocks appear to be in a triangle with well defined lower trend line. For these stocks, a breakage of that line will be very bearish.

For the rest of them, there is no downward trendline and the only support will be the previous low they made.

Remember the bearish scenario that I painted and gave a deadline of December 10th? Here is the vix which supports that theory. A triangle in an uptrend is a bullish formation.


 
One last thing that needs mention. As the dollar rises, I suspect that credit standards are tightening. Less fake dollars out there. Unfortunately, many of the S&P500 companies are multi-nationals which wont benefit from a higher dollar.

Credit facilities harder to access, less profit being made, higher dollar, lower S&P. This dollar chart is indeed a bullish chart.


 
My target has been reached, I'm tightening up my stops. We have a volatility event in 50 minutes which is Bernanke. In the recent past, when Bernanke has spoken (usually the first few words out of his mouth), the market tanked. This event may tank us further past the 840 line in the sand....
 
Its been an amazing day. I havent seen this type of action since 2002-2003 when all of the stocks were floating around like one huge option making huge percentage moves each day...
 
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