Thursday, 29 September 2011

The Moment Of Truth

Morning All,

The next 2 sessions really will define whether we are on the cusp of an intermediate rally or whether this market really is in trouble and destined to break lower. To me, it really is that simple. The market is waiting upon a vote out of Germany and no one knows what will happen. The market was certainly fearful last night but breadth readings did not hit any new bearish extremes. For me, I believe that the DAX market has bottomed based on the technical work I have been showing here. I also think there is a good chance we have seen double bottom pattern in US markets. If this scenario is to play out, the market must now hold in around here. Time to get your Fib retracements out and identify your low risk buy spots with tight stops.

I have been toying with the idea of an intermediate corrective rally as we saw in 07/08. I was somewhat early last week. However, as I keep saying, this kind of move should be choppy, whippy, and shake out both bulls and bears alike. This is what corrective rallies do. Yesterday I was studying this intermediate rally in 07/08 and this is shown in the chart below. How frustrating was that move? Ultimately, the market rallied 15% from low to high in 45 trading days right into the 200 Day moving average. It was only after this move that the market really sold off leading to the collapse in 08/09. This is how markets work. The initial move out of the high is never the best shorting opportunity.

S&P500 March 2008 Intermediate Rally
I have labelled a number of red arrows here to highlight the sharp moves lower within the overall higher intermediate trend. I think we may be looking at a similar scenario given the macro, given the concerns out there and the economic slowdown. This is obv dependant on the S&P holding its most recent lows.

S&P500 Current
I saved this chart yesterday before last nights sell off. I wish I had posted it yesterday! If we have seen a genuine double bottom, the market will hold in tonight. I envision the overall move being choppy and whippy for the unsuspecting.

In the short term, there are a number of good trading setups appearing.

Emini Dec Futures 15mins:
The Eminis built a great base pattern under 1140/1145 and we are now retesting this previous breakout level. This is a low risk long entry with stops below 1135. A great trading pattern (I just got long). If this cant hold then this is a genuine move lower back down to 1100 and lower.

Australian Dec Futures 15mins:
In Australia we are also looking at a great trading setup. The market has now pulled back to a previous breakout zone at 3980/4000. If this is a genuine base pattern (which I think it is), then last nights pullback offers a great low risk entry.

So in sum, we have seen some pullbacks to some great trading levels. If this market is going to hold in, it will do so here. The catalyst is coming tonight and thus obviously these patterns will be either quickly validated or blown away. So whats the trade? Buy it first (or wait for confirmation) and if markets do not hold, its time to flip and join this move lower. I don't know which scenario will play out but as a trader you have to be flexible. I do think there is a strong possibility of a bigger picture intermediate rally thus I am looking for buy setups.