From Friday morning's Comment Section:
"This area would seem like a nice place for a pullback, near the January-February highs of SPX 875-877 in the SPX, eh? The SPX also looks to be forming a Bearish Rising Wedge. We'll see if we get it."
The proverbial "everyone" seems to be looking at the current Bearish Rising Wedge, which always makes me a bit nervous. LOL. Sometimes, though, "everyone" is right, at least for a time, as we'll see in the next chart.
In the current time-frame, this still has the look of a Bearish Wolfe Wave. As I'm sure you've noticed, technicians often draw patterns and trendlines differently, which is their privilege. My view is "use what works." I would have used the high and low of the area that I've circled in blue, but it doesn't work. The trendlines go slicing through the candles that follow and I won't do that because, in my view, that renders any significance of the trendlines useless. If a bar opened or closed on a trendline, violated it slightly, then reversed, I would use it. Otherwise, I can't use "willy nilly" violations of trendlines. That's just my opinion, of course.
Notice the Bearish Rising Wedge (in black) that broke down on January 9. The breakdown put targets of 741.02 (the low of the Rising Wedge) and 688.71 (measured move off the breakdown) IN PLAY. On the way down, we had an intervening Symmetrical Triangle that put a target of 750.64 IN PLAY. All of the targets got MADE, and a bit more. The SPX bottomed at The Evil 666. LOL.
So, "everyone" who played any of that to the downside got it right. But, where "being bearish" went wrong was at the low. "No one" wanted banks. The majority didn't want to play a bear market rally. AAII Sentiment at the March 6 low was at a generational (20-25 years) extreme. Oops!
Market lesson: Bearish sentiment in a bear market is a confirming indicator. Where it becomes a contrary indictor is at extremes, like March 6.
We're now 200 SPX points off the March 6 low, noodling around in this Bearish Rising Wedge. While sentiment is only anectodal evidence and difficult to gauge, does it look like "everyone" is bullish, and that we're going to have a sharp reversal? That's a matter of opinion, of course, but it doesn't at all look like that to me. Early last week, from the floor of The Exchange, Bob Pissonti (sp?) of CNBC said, "Everyone is looking for a pullback. Bears have been getting squeezed with little chance to cover at lower prices. Bulls want lower prices to get in."
I put very little store in anecdotal comments like that, but I ask myself if it sounds like a fair description of what's going on. I thought that it sounded pretty accurate, and we not only didn't give up much last week, we rallied again toward the top of the wedge. So, we'll see how this Bearish Rising Wedge plays out, but I'm keeping in mind that, unlike the January Bearish Rising Wedge, we'll be selling off to breakout support in many stocks and indices in an environment in which both Bulls and Bears alike would be very happy with a good selloff. As I said, that makes me suspicous. Selloff? Sure. HUGE selloff? I'm suspicious, but I'll try to follow the program as best I can ;)
When drawing patterns, I start at a high or a low and label that #1, as I did with the low in this SDS chart (Ultrashort SPX). In this case, the next high is #2. Next low is #3. Next high is #4. We connect the data points with trendlines, and see what happens.
After #4 was in, the SDS broke to a new low. We now can see that the thin trendline where I wrote "No" probably wasn't going to be useful information, even though price at that data point was higher than the high that we labeled #2. Confirmation of that fact was at the down arrow, where the SDS got refused at trendline #2-#4. Ms. Market told us right there, "Yes, that trendline IS resistance." That's called a trendline validation.
Trendline #1-#3 hasn't been validated. Let's see what happens if we start labeling this chart at a high, rather than a low.
We'll put White #1 where we had White #2 in the last chart. Look what happens. Trendline #2-#4 got validated at Friday's lows! Ms. Market told us, "Yes, that IS support." Hmm-m...
Validated trendlines tend to be significant, and "significant" includes Fakeout Breakouts, and Fakeout Breakdowns, so we need to keep that in mind. Sometimes Ms. Market gives us a headfake, breaking out in the "wrong" direction, then reverses in the other direction, so we'll see what she's got in mind.
From Friday's "mini" Double Top in the intraday chart that we discussed at the weekend, we know that we've got SPX 864.56 IN PLAY. In the daily chart, the bottom of the Bearish Rising Wedge, as I have it drawn, comes in at SPX 851.135.
5 comments:
Good Morning,
The last section of your post anticipated my earlier questions about where to begin trendlines. Where I am uncertain is when to start #1 point at high or low. Should I try both and "use what works"? I worry about forcing a pattern or line when it isn't really there. In the first chart SPX, would the large white candle just before the blue circle also be a possible start point? Since these start points all come close to the same slope, does it make a significant difference in how the chart plays out?
Good Morning, Mark,
Those are all good questions, and your comment about not wanting to force a pattern "when it isn't really there" is particularly good.
Once we've established Data Points #1-#4 and connect the two highs and the two lows, we've got two trendlines that might or might not form a discernible pattern.
If it DOES form a discernible pattern, we want to look at the quality of the pattern. How strong does it look, in terms of width? "The bigger the base (or top), the better the breakout (or breakdown).
We can connect ANY two highs or ANY two lows and call that a trendline, but we don't know if it's a significant trendline until it gets validated by Ms. Market with a "third hit," or until a pattern target gets MADE.
So, again, look at the quality of the pattern, where it occurs in the chart (i.e. does it look like a continuation pattern), look at a few indicators, etc.
Friday morning, for example, I played the Bullish Falling Wedge in the 1-Minute chart in the SSO since there were THREE bullish patterns in the SSO on Thursday. I got stopped out for a $500 loss when that pattern morphed into a larger Bull Flag in the 10-Minute chart, which I "could have" re-entered, but I respected my stop and got out. Sometimes, we get those "false starts," and there isn't ever going to be any way that we can be absolutely sure that our pattern analysis is correct. We're going to have some losers, but we don't have to take big losses. Stop it out if your thesis proves to be incorrect.
Something else we can do, is try to stack the odds in our favor by collecting "a body of evidence," like we examined in GG at the weekend. We had at least TEN bearish factors along the way, coming off the high to Friday's low. Playing the Sell Pivot short to Friday's "possible" Double Bottom would have been a very solid play.
Even though I missed it, that's one of the reasons that from time to time, I have favorites, about which you once asked me. The more that we focus on a limited number of stocks and funds, the more familiar we are with what's going on, and the more prepared we are to make a play when it's indicated.
That said, it isn't a bad idea to "cherry pick" trades if you're feeling unsure. Look at what "body of evidence" you've got and if you'd like more evidence, stay out and be patient.
I really should do that more often, and it would be a great way to trade, but I'm too fond of "playing." LOL.
How are you doing with recognizing patterns? Do you know how to do a screen capture of a chart and then take it to paint to draw your trendlines, like I do on the Scottrade intraday chart? Let me know. That's a good way to practice.
Mark,
Sorry, I got so long-winded, I forgot to answer your other questions.
Yes, you could label the high of the big white candle as #1, but then you would need to label the next low as #2. The next high would be #3. The next low, #4. That doesn't work. Trendline #2-#4sliced through the real body of the April 15 candle. I don't like that so, personally, I wouldn't use it.
That gets into "use what works," though. Other technicals might use it and be able to come up with something, as far as a target, if it gets broken. I can't.
I don't use screen capture. I have a live chart at Interactive brokers that I've been drawing on to practice. I am still trying to determine which time frames most suit my trading personality. The other project for me is to get an indicator checklist to get through "preflight". I'm evolving and I can't thank you enough for taking the time to assist me.
As you may have guessed, I ask questions that sometimes mirror my own trading history. size of commitment,number of simultaneous
ongoing trades, and most of all discipline. Your consistency is as much an example for me as anything.
Mark,
That's great that you're "evolving." Frankly, I think that's a constant process for all of us, which probably has much to do with the market being so addictive. It would be boring if ever we could master it. LOL.
Keep up the good work!
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