September 22, 2011
Uncategorized
By Geoff Bysshe
The Fed's "twist" worked.
As a result of the Fed's announcement, the action in the QQQ was as follows...
First the market rallied (for a nanosecond) to confuse you,
then in sunk like a rock decisively,
then it rallied back to where it started before the announcement,
then it collapsed to a new low for the day,
then again it rallied back to where it started before the announcement ,
and finally (in the words of CNBC)...
IT PLUMMETED to new lows for the day to complete the worst down day the S&P has seen in a month.
That's pretty twisted.
A lot will be said about the day's reaction to the news so I'll focus on what you aren't likely to hear anywhere else.
First, today's action...
In the chart below, look at the relative performance of the Q's (the strongest of the market watch) vs. the IWM's (the weakest). Notice that each time the Q's rallied after the announcement they reached the pr- announcement level. The IWM's on the other hand put in successively lower highs. This was projecting the possibility of the steep sell-off we experienced at the end of the day.
Next, the big picture...
I'll always determine the state of the markets by considering the condition of all 4 "market watch" charts - QQQ, SPY, DIA, and IWM. This can make it a little complex at times but the benefits are well worth it.
All four market watch have been in a bearish phase, the 50-day under the 200 day MA and price under the 50-day MA, for most of the last 6 weeks. And when today's floor trader pivot (FTP) is under yesterday's FTP there is short-term bias of bearish. In a long and short term bearish condition we'll favor OR breakdowns and short OR Reversal trades. When everything lines up this nicely, trading breakouts and trading reversal is easy.
But markets do not always line up as cleanly as we'd like, and to make matters worse, waiting for too many indicators to line up usually means the trade is over - you're too late. Before we know where the opening range will be, we'll weigh the condition of each market watch chart based on:
1. Market Phase
2. Condition of faster daily moving averages - 10, 20-day simple, and the adaptive MA
3. Floor trader pivot patterns
4. 3-day pivot bias
5. Trend lines and daily swing levels
While I may not comment on all these areas every day, they are considered. Additionally, there are other secondary factors like the 60-min charts, the VIX and other overall market indicators, but If you focus on the primary 5 listed above you'll be way ahead of most traders.
Now that the Fed twist is out in the open let's figure out the primary conditions of the market watch.
Market Phase: Generally bearish: All but the Q's are in a bearish phase with strong down slope and separation of the 50-day below the 200-day MA. Note the 200-day MA's are still relatively flat.
The divergent one of the 4 is the Q's which moved in to a recovery phase since it's traded for 2 days over the 50-day. This is the leading daily market watch.
Q's, however are hitting the resistance of the 200-day MA and had not moved too far over the very negatively sloped 50-day, so it may be "recovering" but not it's not bullish.
Conclusion: 3 of the 4 are bearish and one (Q's) stretched up at the phase MA resistance level.
The 10 and 20-day MA's: These have had a bullish stack and slope in the Q's since 9/6, and now line up nicely with the trend line from the lows so they will set the low end of my intermediate term bullish bias for the Q's.
Unfortunately for the bulls the 10 and 20-day MA in the other 3 indexes have gone from trying to turn up to now stacked negatively with the price below them which is simply bearish.
Conclusion: 3 of the 4 markets have intermediate term MA's of the 10 and 20-day that are in a bearish condition.
3-Day Pivots: On my charts you'll see these as the green and red dashed lines. The easiest trades using the 3-day pivots are the ones that indicate a reversal from one side of the 3-day pivot range to beyond the other side of the range then confirm in the direction of the phase.
Today, we had that trade in the IWM's. Yesterday the IWM's closed below the 3 day pivot low for the first time after being above the 3 day pivot high for 4 days. So an OR breakdown below yesterday's low is the breakdown trade. I was more aggressive and sold the OR reversal for a swing trade entry, but that was based on all the factors I'm discussing here.
Tomorrow the other 3 market watch will have a confirmed bearish 3-day pivot bias if they get a 30-minute OR breakdown and trade below today's low.
Conclusion: In the Q's the trade below the 3-day pivot low is a stretch against the intermediate (10 and 20-day MA) bullish condition, and a bounce could trap the bears, but a confirmation on the downside along with the other 3 markets confirming a bearish bias would be very bearish! It's as easy as following the 30-min OR to determine.
Floor Trader Pivot Stack: There is more to the pivots' relative position than whether today's floor trader pivot, (High + Low + Close)/3, is higher or lower than yesterday, but I'll limit the analysis to that for the sake of the condition of the one day pivots for most daily reports. I'll take other pivot factors into consideration in determining how strongly I'll emphasize the condition.
If you've been reading this daily you've heard me say very clearly how many of the market watches are positively or negatively stacked. This is because if you believe in the 80/20 principle... you have 80% of what you need with phase, pivot stack and OR trade set-up rules!
Conclusion: Tomorrow's pivot stack will be very negative in all 4 indexes. This means the FTP, 1-day pivot high and R1 are going to be major resistance levels to look for short OR Reversals. A nuance to look for is the performance in the Q's. if it's going to continue to lead it should lead through its levels. If it can't get going on the upside that will set a negative tone for the day.
Trend Lines: While it is not always true that the trend lines are the most important, I think they are now! Look at the charts provided below. If you click on them they may enlarge. I think keeping it simple is best.
The magenta and black moving averages are the 50 and 200-day respectively. The SPY and DIA have all but retraced back (or sideways) their trend line from the low in white. This line has held the market up for almost 2 months. This is the key support line.
If the trend line is broken on a closing basis I will turn more bearish.
The black dashed line is the key resistance line on the upside. Like the trend line for the low side I'll look for several closes above it to indicate the trend may be up.
Conclusion: The trend line from the August lows is the line in the sand for the markets.
Adding it all up:
The weakest of the 3 market watch are sitting at a major inflection point which has been support numerous times. The shorter term measures are all negative so we'll look for OR breakdowns and short OR reversals. However if the intra-day action does not line up for a short then be patient.
There may be opportunities to go long, but know that you are buying against a very big inflection point in the market so adhere to your stops. Unless there is a large gap to fade against a swing low, I'd avoid being long the market watch under today's lows.
Click on image to enlarge:
