I thought it would be fun to use the information from the free eduational articles that are posted to this site to analyse the market at this point. We will use the S&P 500 tradable EFT SPY for this. There are two charts of SPY posted with this article. One shows a longer time frame and one shows a shorter period so that the candlestick bars we will talk about are clearer to see.
In a prior article, as it occured, a big deal was made out of the reversal bar on October 4th. I was pointed out that that day may be the bottom we have all been looking for, and that this October may set the low as October has has many times before. This reversal bar could have signaled a bullish run into the end of the year. It was that significant. Now an important point. We do not “predict that”, and then simply buy stocks and wait to sell at the years end. What we do is trade along with the market as it unfolds and occurs taking note of the quality of pull backs and price action.
This way we catch the past leaders reasserting themselves like Colorado stock Chipotle (CMG), near a new high today; and avoid past leaders like Colorado stock Crocs, Inc (CROX), Netflix (NFLX), and Amazon (AMZN); at least for now.
So here goes: The reversal day of October 4th sent a message to all knowledgeable observers that buyers were stepping up which did not allow the market go lower. The breakdown infact failed as evidenced by the bottoming tail at the end of that day as prices came back up into the consolidation. This shouted loud and clear that there was significant support in that area.
Now…. many traders went short as prices fell below the consolidation lows. Imagine how ugly it looked in the morning as prices were at the lows. Contrast that with how that candlestick bar looked a the end of the session when trading was completed for the day. A completely different message! All those shorts were forced to cover (or buy back) their positons which added that much more buying to the buying that was already making the market rise. This is an example of a provervial short sqeeze. A very good time to trade is when other traders are forced to do something that really don’t want to do.
A key to good trading is putting yourself in other traders shoes and thinking what they must be thinking. Many folks think they are trading just stocks when they are really trading “other traders”, and this is why the psychology is so important.
OK so at this point we have a probable direction … up! The short sqeeze and buying continues for several days while we are enjoying the ride. But then something different happens. we get a red bar on October 7th. We are now on alert. Infact if the next day prices trade below that bar we will sell for our well earned profit. (Not too hard was it) But the next day we are blessed with a gap that opens above that whole red bar and we are off the races again! The psychology is similar. All those looking to short for the expected fall back down to the bottom of that consolidation have their hopes dashed and are forced to cover again. This time there is no warning or slowness about it the market just opens up higher and there begins a feeding frenzy of buying to cover losses.
So we are now eyeing the top of the consolidation as a possible target. Another concept applicable to the move at this point is a measured move. Frequently a second move in these cases occures similar to the first move, and since we already would naturally be looking at the top of the consolidation we have another concept confirming our target. There is also little resistance now from where we are presently at the the top of the consolidation where we will expect considerable resistance if we get there.
So what happened a few days later when we got near the top? Momentum slowed and we startred to go sideways. All traders were looking a that since it was the area previously that prices reversed and went back down several times. There is a self fullfilling prophecy about that too – psychology again.
Now we find ourselves chopping along the top of this area wondering if we will go back down or escape to the clear air above and break out. We don’t know for sure and since we don’t hold predictions we have sold the lions share of our position for a nice profit.
On October 21st we get our answer and price breaks above the consolidation and we buy some more shares. We make more gains on the next day, but the third day on October 25th prices gap down at the opening and sell off below the candlestick bar on the 24th revealing buyers may be losing control to the sellers. At this point things look a little bearish. we have a short sideways consolidation below us to help support our position but it is pretty loose and not that long. It would be an easy one to fall back down through. We see the intraday chart on the 60 minute chart (not shown) that there is a flat base above us too now trapping us between these two small consolidations. Neither is that formidable (like a car going down the highway and running through a wooden fence – had the consolidations looked more like a concrete wall it would have been more formidable or had momentum been slowing at the end of a several day advance we may have been driving a motor scooter instead of a car.)
So we are now cought up to today. Having sold almost all the rest of our shares during the 25th as the market began to fall convincingly (we watched the pivots go lower and lower, and the 20 day moving average start to roll over); we now wonder what’s next?
If you recall in yesterdays article we were left with a slight bearish taste in our mouths. Sellers had taken over control. But today leaves us with a new refreshed outlook. The bottoming tail shows sellers could not keep control and buyers again took over. They negated that entire red candlestick bar from yesterday. It was engulfed or ignored as it is said. A tip: Look at all 3 red candlestick bars that occured on the way up from the begining reversal bar on October 4th. You will see something very similar. All 3 were ignored! This is bullish! Buyers just kept stepping up.
Now look at October 18,19, and 20. And compare the pattern of these 3 candlestick bars to the last 3 days of trading. Pretty similar huh! both sets of these 3 bars show a nice gentle controlled pull back. Now what should be thinking for tomorrow? The probability of going up more went up after today. This is why we do not ‘marry’ a bias or predict.
This market has been very tough to trade with the volatility that is taking place, but a knowlegeable person would have done very well in October just reacting to the concepts outlined above. Every trade had a plan – a smart entry, a target, and a reasonable stop loss to keep from losing too much. On the other hand for those that did not see the warning signs of Netflix (NFLX), Colorado stock Crocs, Inc (CROX), or did not protect themselves with stops (and honor them) on First Solar (FSLR), or Amazon (AMZN) today; are not having such a fine October. All of these stocks were leaders just short time ago. Usually leadership changes on different legs of a bull market.
It is hoped that the above commentary was interesting and showed how simple it can be (not always easy but simple), when a plan is in place and you know what to look for. Fundamentals always play a part but are very hard to trade as they can take a long time to gain traction – time enough for big losses. Please note all during this nice advance we heard about the problems in Washington with out government getting things done, the European officials getting anything done at all (I am reminded of the CNBC joke all day long about how many European officals does it take to change a light bulb ;-), the ‘occupy’ movement news, and all the rest of it. But what we had was a plan they let us in on probable gains the market could make at a time it was most likely and stops that protected us agianst somethign going wrong.
So where can it go from here. Well, we were left with a slight bullish bias. we can buy above yesterdays high. That would reveal the bulls are again in control after this slight pullback. Why not buy right now. Simply because this is a volatile market. There is plenty of time for some bad news story to come out over night, some major company reporting shocking earnings, or something else; and we simply want the market to prove itself first with a small show of strength. We will be happy to trade off a slightly smaller tradable move for a stronger odds.
Having said that we notice a huge area of clear air above should be continue up.There is not much resistance. (We are back in our car but only anticipating running into speed bumps and not fences or concrete walls. We could gain momentum and upgrade to a mack truck that would do better should any fences appear as we trade.)
The NASDAQ is not as far along as the S&P 500 is. The ETF representing the NASDAQ market, QQQ, is still mired at the top of its consolidation and has not broken out yet. It will need to for the overall market to continue to do well. So that is something we can watch. The “Q’s” as they are called (QQQ again), also have a great clear air area above the consolidation and could trade form 60 to 100. Which would mean, if it did, that 2011 was just a long consolidation in a long term bullish market. A pause that refreshes. (But lets not predict).
Even though the NASDAQ market is not as far long as the S&P 500 stocks many of its components s are looking more bullish now. It is full of tech stocks and the the ETF, SMH, has a monthly buy set up pattern. Biotech, IBB, does too. This does not mean they trigger and go up for sure (we don’t predict); but theya re tradable with targets and stops should they prove themselves and trigger.
The bond yeilds mentioned in the original October 4th article are looking like they can continue to help, as well as the dollar and other currencies. There don’t seem to be divergent charts spelling caution at the moment.
So I hope you enjoyed following along with the commentrary while looking at the two charts provided. Anyone can do this. But they need a plan!
Trade with a plan