DAILY MARKET RECAP
Monday May 16, 2016
Key Developments :
- High probability gap and squeeze higher comes true.
- Big picture still has not changed one bit.
Let me begin by welcoming many new subscribers. The weekend report was my most successful yet, so thank you to all that follow, share and re-tweet the work I do. I put a lot of thought, insight and effort into what I hope is useful information to most of you.
This is an end of day and end of week journaling habit I have formed, and I have enjoyed sharing it with many of you. Hopefully, it can help shorten the learning curve of those new to trading, and offer a 2nd set of eyes for those out there that are more experienced like myself.
With that said, let’s get started.
If you read the Weekend Journal, you know that I am looking to be a seller of strength. And the reason for that is the major topping patterns we see across the majority of the indexes. Until that changes, by developing and triggering bullish patterns to take out the 4/20/2016 highs, I am looking to trade on the short side by selling into strength.
The price action is still telling me the ball is in the bears court. I watch the 30 minute charts closely for reasons to change my mind, but to this point, I have little reason to do so, despite being tactical within the range and avoiding very nasty squeezes like today.
I followed up the Weekend Journal with a post and video with some insight on that plan as we closed last week down near range support. I tried to go out short in case we got a gap down but had a plan to become more neutral, which I discussed in detain within the post and video. I followed that plan today.
Here is the post in case you are interested.
The main take aways were:
1) Friday’s close was still a higher low.
2) There were very high odds for a gap up based on closes in this same situation from a historical context. 71%
3) That I thought many people would be playing the smaller H&S top on Friday, and that with a gap up, if that area could become support instead of turn into resistance, we could really get a big squeeze higher.
I don’t like hard stops there because of the algos, but if I see something like we see below at the neckline, where we stop them out, then drop and the neckline becomes support, I want to be at the very least neutral.
In hind site, I should have gotten long, but I had the bear in my head, so I wanted to just be neutral. And that is what I did, I took my shorts from last Thrusday’s pop off and moved on. I have found when you are playing for a trend change, it is best sometimes to not be trying to trade it both ways. This is a feel thing that comes with experience. There is no holy grail and one of the things that works for me is to be tactical in the range and try to pick spots to trade in the direction I believe the price action is leaning. I believe at the moment that is down, until I see price action to change my mind.
This chart shows how that smaller H&S failed and started the squeeze as the neckline became support again.
From a big picture perspective nothing has changed. Just look at the Russell here. Lower highs and Lower lows in the right shoulder. That at the very least has to change for me to become turn bullish. It very well may, but it has not yet, so I am leaning against it.
Same is true in the SPX. With that downward trendline still firmly in place, the first goal for the bulls is going to be to take that out and then the shoulder high. Do that with some conviction and we can talk. Not saying it can’t happen, the market is not a certain place, but bearish to neutral here is how I am leaning until it does.
Another thing I am watching very closely here outside of the major indexes themselves are the transports. If the transports can trigger this little inverse H&S, regain the neckline and then neckline become support rather than resistance, that could be a HUGE win for the bull case.
What bears want to see is this to roll right back over pretty quickly.
Additionally, the NASDAQ. I will be keeping a close eye on the 4820 area, a move above that would trigger a bullish reversal pattern, much like the one we saw last week in the SPX which never came to fruition.
The Bottom Line:
It’s options expiration week, we still have fed minutes ahead and the bulls pulled off an excellent squeeze today. They will need to continue to build on that by forming some bullish patterns to take us higher. At the moment, I don’t see much to work with and the big picture more dominant patterns remain in place despite a very powerful move off of the much expected gap up and squeeze back above Thursday’s low. Continue to keep your eyes out for patterns that would threaten the bearish thesis, as well as for a break below the very well defined necklines in all the major indexes. There is nothing else you need to concern yourself with now, not even the up and coming fed minutes. Either this range will break or a bullish pattern will form and fire to take us higher. See you guys and gals out there tomorrow.
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