Wednesday, 22 June 2011

Yup, that was it

Morning All,

I am feeling pretty happy today. Great day in Sydney, I surfed with Taj Burrow the day before last (well he was in the water whilst I was out), and yes- the market is up! The market does this to us. It makes us feel happy when we are making money or when our analysis right. However, in this instance I am genuinely happy not for these reasons, but because I have been thinking like a Trader and carrying out my trading plan. This is not to gloat as I hate those guys out there who tweet endlessly about their successes and coin they are banking. For me, my true joy comes from a realisation of self improvement.

You see, I genuinely believe that the best traders are the ones that think differently from the rest. This is a quote taken straight out from "Trading in the Zone" by M.Douglas and it is so true. It took me a long while to realise this. Like many traders and technicians, I would often trade the obvious pattern with the crowd at exactly the wrong time. I would see a trend once it was already well established and often jump on board, extrapolating this well into the future. It took me a while to really develop an understanding of market structure and profiles. It also took me a long while to really understand the weaknesses in technical analysis. To take this current market as an example, technically we are in a downtrend with many topping patterns in place, we know that the end of QE2 is here thus a natural prop for the market is gone, and the sovereign debt crisis has turned very real. In short, there is not much to like. And yet, if you actually step back and look at where we are, the market is just testing the low end of the range (S&P500 and XJO). The low risk/high reward trade is to buy the panic into this zone and sell it if it drops. That is thinking like a trader. You can use confirmation rules or position sizing algorithms or whatever you like to buy into these zones, but the important part is thinking about risk/reward. Am I actually going to make money being short here or am I best off waiting, or even going long?

I showed a number of interesting stock setups yesterday illustrating this point: BEN, CBA, NAB, QBE, WPL, RIO are all just testing the low end of the range and support. We are seeing follow through today.

I also put up a post the day before showing the S&P500 and XJO testing the low end of their range and waiting for the bullish reversal candle: We have now seen those bullish reversal candles.

So where are we now? I think the stage is set for a strong rally in the S&P500 right up to 1325/1330 over the coming weeks. This is in line with my 2007 parallel scenario. If this does play out, that will be the genuine time to short stocks.

S&P500 2007:
I showed this chart the other day. The initial sell off out of the 2007 high was a wedge type pattern. Price tested the previous August lows and held. It was only when the rally out of this wedge pattern failed that the genuine bear market began.

S&P500 Current:
Last night we saw the breakout from the wedge pattern. Price did not get into my ideal 1250 level but neither did it in 2007. I will give price the benefit of the doubt and say that a low is in place. Look for 1295 to break for confirmation. Looking for targets to fib retrace at 1325/1330+.

XJO Daily:
Just to update the Daily chart I have been showing. Price tested and held the previous lows. I do not think we will be going up in a straight line but we will see higher prices over the coming days/weeks imho. Lots of res on the way up so keep trading the levels.

Hang Seng Index
Stage is set for a bear trap if price regains 22,000. This is the most important rule in technical analysis. Note that A=C down off the top and there is a bullish spillover at the low end of the channel.

This market is going to really move one way of the other and it is looking like an upside breakout back up to 10,000. Straddles or upside calls.

In sum, one days price action does not make a trend. However, I do think we are on the cusp of a significant short squeeze. There are good res levels all the way up so trade around these as we move higher. If this is following the 2007 scenario, be nimble as we do head higher. There will be lots of non-confirmations and sector rotations so stick to those markets and stocks that are actually displaying strength.