Tuesday May 10, 2016
Key Developments :
- Oversold bounce continues as S&P 500 Triggers Inverse H&S and acquires conservative target.
- Still appears to be right shoulder construction for a larger bearish pattern, but remain flexible.
- Both upper gaps are now filled.
- Market is no longer deeply oversold
In last nights report one of the main things we were watching was the inverse H&S formation on the S&P 500 futures. We talked about not having much of an edge. The reason I felt that way is because in what turned out to be a completed right shoulder, there was a little H&S construction.
That could have easily triggered overnight and given us a buying opp into 2040. It did not and instead broke out this morning, and gave us a very nice entry around 8:30AM pre-mkt (I tweeted this out). While the noise makers were out there worrying about a pullback in the DAX, I was buying the dip into the neckline retest. The measured move on this futures chart is 2089, so let’s look for the completion tomorrow. At the end of the day, I went out flat. I started to short but took it off for a small loss, as I realized that this pattern was very much still in play. So I am flat looking to get short.
Now over on the SPX which only has the intraday price action which is most important, we can also see the inverse H&S targets. Depending on which way you want to look at it, one target has been acquired, but there is a more aggressive target up at 2088.84, so there is a bit more meat on the bone for this one potentially. I took my profits at 2081 and am now neutral. I pretty much always trade the conservative targets, as that is what works best for me.
Now if you read the weekend Journal, you were very much prepared for this move over the last two days. Below is one of the charts from that posting. I basically said, ” gun to my head, they will run it back up over the Monday swing high to trigger all the greedy shorts who are not trading their targets as they should. “
So far, this is exactly what has occurred as we closed at 2084+
My plan here is to wait for the 2088.84 target to get acquired and then get short. I am looking to get short into this strength until I have price action evidence to think otherwise. You guys should know me by now. I look for places to place my bets with very low risk and high reward. At this very moment, this appears to be a right shoulder construction of a H&S for a bigger move lower. If we start to see evidence to the contrary, I will change my mind. (I diagram this below on the chart of the day).
From a risk reward perspective here, we are thinking about shorting up at 2090 against against 2100, with a downside target of 1967, that is the trade I want to be looking for right here. We are talking 100 pts of downside to lose 10 if our trade plays out to our target.
That is the name of the game, use the patterns to find risk/reward plays, be patient and let the trade develop.
The Bottom Line:
I have traded with a bullish bias, since last Friday when the downside targets were acquired. We have nailed a couple of good low risk longs including most of today’s move. We are now flipping back to neutral as we look for a place to strike a bearish trade against the 4/20/2016 highs. If those are taken out, then bearish thesis is back on hold as the bearish H&S construction will be killed off. If you follow me, you know we totally expected this bounce, and so far it is exactly how we drew it up in the weekend journal. The plan was to look for shorts after the algos took out the prior swing high. I see no reason to change that plan yet. I am quite confident, that if our bearish thesis is wrong we will see evidence of that far be before the highs are taken out, so stay tuned.
CHART OF THE DAY
One of the things I always harp on, is listening to the market and “Remain Flexible”
This is something I tell myself everyday. I tune out all news and noise, I don’t watch CNBC, I don’t care what Carl Ichan is doing. All I need is a chart and that is all you need as well.
Right now, we are neutral to bearish. What that means is we think there could be a bit more upside in the market, but are looking to get short. So what does remain flexible mean?
Let’s look at a chart of the Russell 2000. What I expect to happen, if this is a H&S construction is we go up and hit re-test that trendline and fail. However, in the event that we can get back in, and retest it as support rather than resistance, we are probably wrong.
If you put the trade on at resistance and that occurs, you will lose almost nothing, and can quickly change your mind and go long for further upside.
With the amount of chart reading and practice I have done over the years, I have learned what to look for when your pattern thesis is failing. It allows me to get in and get out with no scars. So yes, I am looking to get short, but I will be quick to change my mind if I think I am wrong.
The market doesn’t care what you and I think. Approach every trade with the idea, you will be wrong. No where you are wrong and just get out, your account will thank you.