Wednesday May 11, 2016
Key Developments :
- S&P 500 Finally Acquires it’s 2043.99 Downside Target
- Market oversold, looking to bounce off the targets.
What can I say? The sellers regained control today after at 3 day (what appears to be) dead cat bounce. One we very much expected after Friday’s target acquisition. However we took profits yesterday and were waiting patiently for our next move. This morning I was thinking long because I thought that we may complete the inverse H&S target of 2089. Sellers had other plans. In fact I even caught a long trade this AM thought it was headed for a big up day, but it crapped pretty hard, and had to take it off for a small gain.
In my mid-day report I was then highlighting the two converging trendlines.
When I felt good that that area was going to stay broken, I sold short and my stop is back above the two of them where they converge, and I am holding the short overnight.
So what are the risks on the table? Well I am clearly playing the larger H&S pattern, which I have been planning for even as early as Friday as I was talking about being long. Please do re-visit the weekend journal where I said the gift would be for the algos to take out the 5/2/16 highs before the next move lower.
I put this in the report last night, and am putting it in here again today. If you have any doubt I know how this game is played, you need only look at the price action I drew up on Saturday and compare it where we are now.
I anticipate, plan and execute and I share my plan here daily.
Looking ahead here though, it looks like the bearish thesis is playing out. However, if the fed calls an emergency meeting tomorrow and announces QE4 because they know what is coming, we want to be aware of the “potential” Inverse H&S in our right shoulder. Back above today’s highs would trigger the bullish pattern and we would clearly have to change our plan. It is not what I expect, but that does not mean it can not happen. It would be stupid of me to not sit here an analyze the risks in both direction and plan to take advantage of them either way. That is what we do as traders, not make bullish or bearish ridiculous statements with no thesis.
The thesis here is and has been that we would see a dead cat bounce, which we traded beautifully and then roll back over, which we are doing now. So far so good, but it doesn’t mean we should not plan for other things.
Always plan for the unexpected before the market opens so you can just pull the trigger. Get out, take a breadth and re-evaluate.
Now as much as the SPX looks like there could be a bullish reversal pattern to play, the Russel doesn’t look as good. This looks much less bullish in the bearish right shoulder than does the S&P.
This is why I watch all of the indexes and look for them to be confirming each other.
The Bottom Line:
The market is on the brink of a much larger pullback. So far the price action has been in line with expectations. If we take out today’s highs we could trigger an inverse H&S, and alothough we think the more likely scenario is sideways to down, we much watch for resolution of these two patterns. Tune out the noise, turn off Jim Cramer and watch these two patterns, there is nothing in the world you need to know. Rates don’t matter, the fed doesn’t matter nothing matters except which of the 2 spx patterns wins. The winner will give you the trade for the next big move.
Chart of the Day:
Here is a chart I have been tweeting the past few days. It will be important for this pattern to hold above the neckline, if not I become a seller of strength. From failed moves can come fast moves. Learning to understand that when patterns fail, taking the other side of your initial plan can be extremely profitable. In order to do that, you need to be able to change your mind quickly when the price action changes. I talk about changing your mind in almost every report because it is that important. It doesn’t mean you have to be a day trader. This is a 30 min patterns. We wanted to be buyers on Tuesday, we started to see some follow through on the pattern, but it is now under attack. This can happen. But patterns usually work well and they allow us to plan our trade since they occur so often. When market conditions change, or a pattern fails, cut it and move on, stick to the plan, there will always be another trade.