Tag Archives: Shift
Let’s take a quick check of our ongoing view of Market Structure, which we last updated in our April 10 “Interesting Breakout Structure” update. We can now see the resolution of the “interesting” situation that developed recently.
We’ll start with the @ES Futures (SP500 Index):
In the prior update, we viewed the market pushing into the upper trendline mid-April and we see a ‘trap’ breakout on clear negative divergences set the stage for the recent sell-off or decline back to the initial target support area just under 1,540 (today’s session low).
I also added a short-term Fibonacci Retracement zone that aligns with the 1,540 level (1,536 to be exact) – it’s the 50% Retracement or ‘half-way’ level of the rally from March to present.
In terms of game-planning purposes, if this level is to hold (buyers step back in), then the critical zone remains 1,540 for yet another inflection or swing higher.
However, a breakdown under the 50% Fibonacci Level and horizontal support line into 1,536 would suggest a potential ‘breakdown’ play toward the next key level of confluence support into 1,520 (61.8% Fibonacci Level and the highlighted region from the prior swing highs).
Also, a breakdown under the present 1,536 lows would reverse short-term structure into an official downtrend.
Believe it or not, in terms of Market Structure (categorizing the progression of swing highs and swing lows), short-term structure still remains in an uptrend (though on the edge of reversal).
The most recent down-swing merely retraced almost 100% of the prior or immediate upswing and thus did not push to a new swing low – at least not yet. That’s why 1,536 will remain the focal point in terms of swing structure (definitions).
The chart is similar in the Dow Jones Industrial Average:
I purposely omitted the Fibonacci Retracement Levels to highlight the “Open Air” or space lower in the event of a reversal in structure (which would take place under the 14,430 then 14,400).
An early warning sign of potential future reversal would occur on the break of the rising short-term trendline that connected today’s swing low at 14,560.
Using the same logic as the powerful swing-rally (one single swing) in the SP500, it would take a breakdown under the prior swing low near 14,400 to reverse the short-term structure.
A simple downside projection target would be 14,000 (a logical “Round Number” and prior resistance line through February) in the event that price broke under the 14,400 level and thus reversed short term structure.
Notice also the pervasive negative momentum divergences that have undercut the rally throughout March (the highest momentum spike was on the breakout on April 5th – from there each new peak in momentum has been lower, despite numerous new peaks higher in price).
Finally, we can compare the SP500 and Dow Jones with the NASDAQ Structure:
The NASDAQ has seen relative weakness compared to the Dow and SP500, as the NASDAQ currently plays off the support level near 3,200 from its horizontal resistance from late February/early March (the Dow and SP500 are above their respective similar levels).
In the event that buyers fail to step in and support structure (preserve the uptrend) into the 3,200 level, the next confluence projection target would be the 3,130 level which is the current intersection of a short-term trendline and a multiple-swing support level from February and March.
Keep focused on the 3,180 to 3,200 support pocket for clarification in structure (and thus short-term game-planning and targets).
In fact, the current supply/demand battle at these known inflection levels will determine short-term trading strategies and trade management.
I’ll continue to update changes in structure on the open blog but also feel free to follow along with daily commentary and detailed analysis each evening by joining our membership services for daily or weekly commentary, education, and timely analysis.
Corey Rosenbloom, CMT
Afraid to Trade.com
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Following up from my educational update on August 20th, the very same situation unfolded on August 22 with an even more powerful outcome.
Let’s take a moment to see what happened and what we can learn from this similar situation:
Please reference the prior “Example of Playing Popped Stops from a Failed Retracement” update from August 20th for the full description of this set-up, logic, and what it means for the remainder of the trading day.
The main idea here is that a similar “Bear Flag” retracement triggered as price traded back to the falling 20/50 EMA confluence in the @ES (S&P 500) futures which allowed for an aggressive entry at 1,407.50 or else a trigger-breakdown (under the rising trendline) near 1,406.50.
Like the other examples of the two successful bear flag trades in the morning session, the target was a sell-swing back to the session low, or preferably just under the session low (exiting on the break above a reversal candle high off the lower Bollinger Band).
There’s one caveat with the two examples:
While the trade lesson from August 20th contained a new TICK and Momentum low, the third flag example above developed off a dual-positive TICK/Momentum Divergence.
Divergences reduce the probabilities of a successful retracement (and indeed this retracement failed).
The lesson is not to show you that retracement trades fail, but rather to reveal the shift in bias (bull/bear) after a retracement trade fails which often signals an intraday trend reversal.
Quite simply, after a high-probability retracement trade FAILS, stop trading in the trend direction. Instead, look for bullish trades that may develop in the new direction.
Here’s a “Color-Coded” chart of the full day which reflects the “Hard Shift” in bias after the failed retracement and breakthrough above the falling 50 EMA:
We’ll look at the good trade set-up that developed after the reversal, but for now, the chart above reminds us that there is often a bias (usually based on the prevailing trend) that suggests what types of trades (bull/bear) to take.
The morning session favored the Bearish/Sell side as was evidenced by two successful “flag” retracement trades.
When the third opportunity failed at 1:00pm CST, it revealed a hard shift in bias, initially to the neutral side but then immediately to the Bullish Side due to the power/strength of the impulse.
Yes, the impulse was related to the release of the Federal Reserve Minutes, but the idea is the same:
A failed retracement which leads to a break above the falling 50 EMA often signals an official shift/reversal in trend structure which changes the bias to the Bullish Side for the remainder of the session.
Though it was impossible in this instance to play the “Popped Stops” from the sudden, news-driven breakout, it was possible to get ready to trade the first retracement or first breakout that occurs in the context of a new bullish bias.
The Green Arrow reveals the initial Flag trade which triggered from 1,408 to 1,409:
Once again, the main idea is that a bullish bias – and eventual intraday trend reversal – developed from the FAILURE of the 1:00pm CST Flag to achieve its downward target.
The green highlight reflects the sudden shift at 1:00pm while the green arrow suggests the initial or “first retracement” flag set-up that triggered at 1:40pm CST.
If you missed the quick retracement/flag trade, then a Breakout trade (not labeled) triggered on the push above 1,411/1,412 which took price to a new session high.
Personally, I prefer retracement trades to breakout trades, but both set-ups triggered in the context of the new intraday bullish bias.
Failed trades don’t have to turn into disasters; instead, hear the message signaled by price and shift/adapt to the new direction accordingly.
Corey Rosenbloom, CMT
Afraid to Trade.com
The Dow and the S&P 500 may have experienced the worst 2-week losses since November. Still, is it really time to panic? When one considers the reality that the major averages are less than -4% from multi-year highs, abandoning stock assets seems a bit premature. That said, you may want to avoid certain investments.
For example, a wide variety of Currency ETFs have worked their way into to full-scale correction mode. The CurrencyShares Euro Trust (FXE) is 12.4% below a 52-week high whereas the CurrencyShares Swedish Krona (FXS) is 11.8% off its peak. And while a lack of interest in European sovereign debt may be to blame, the uncertainties in the Chinese economy are adversely affecting Brazil and the value of the “real.” WisdomTree Dreyfus Brazilian Real (BZF) is down -12.8% from a 52-week pinnacle.
Even though the U.S. Federal Reserve has steadfastly devalued the U.S. dollar through its interest rate and easing policies, Europe’s economic contraction and ongoing austerity make it difficult for Currency ETFs to make appreciable progress. Similarly, until China clarifies its intentions to stimulate its economy, the currencies of resource-rich countries from South Africa to Brazil may be stuck in the sands.
Of course, it’s not just only the currencies of foreign countries that are struggling. I conducted a recent screen of stock funds where the short-term trendline (50-day MA) had dipped below the long-term, 200-day moving average on heavier-than-normal volume. The directional “losers” fit roughly into 3 categories: (1) resources-related stock funds, (2) European stock funds and (3) China ETFs.
Energy and materials may be having the roughest go of it. Everything from broad-based Rydex Equal Weight Energy (RYE) to SPDR Oil Gas Equipment & Services (XES) to First Trust Global Copper (CU) is 20%-plus off a high point. Selling has intensified over the last 5 days. Worse yet, the technical picture is rather bearish.
The same disturbing trend is occurring for prominent European stock ETFs, including iShares MSCI France (EWQ), iShares MSCI Austria (EWO), iShares MSCI Italy (EWI) and iShares MSCI Spain (EWP). Even China stock ETFs — iShares FTSI China 25 (FXI), PowerShares Golden Dragon (PGJ) — have seen selling volume intensify as near-term trendlines cross below long-term ones.
For weeks, I’ve maintained the same guidance. You can weather the thunderstorms of greater-than-normal selling volume and increases in volatility (i.e., wider daily trading ranges) with a healthy shift toward yield producers and consumer staple standouts.
For instance, faith in SPDR Select Sector Staples (XLP) has rarely been higher. Its uptrend remains intact and it is a mere -2.5% off of its multi-year peak.
In the same manner, there are a wide variety of less volatile income producers that could be bought on the dips, from Vanguard High Dividend Yield (VYM) to Guggenheim Multi-Asset Income ETF (CVY). The 3.5%-5.5% annualized income should help to offset the persistent fears of a cataclysmic end to the investment universe. Either way, appropriate ETF hedges and intelligent stop-limit loss orders should help one rest easier about “being in.”
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