Yesterday’s market action signaled the end of the ‘easy money’ portion of this recent bullish run-up. While there may still be more to go (or another stage), at this point, the bullish momentum was solidly crushed/reset.
Using a few of the simple tools I’ve presented on this blog, namely the RSI Trend Indicator, the Momentum Indicator and the Weiss Wave, we can draw a few conclusions here.
First, we are still in a bullish RSI cycle that may be reaching a temporary or a cyclic top. Second, our Weiss Wave read which helps judge the relative velocity of a momentum move has been reset from a growing build up of bullish momentum. Lastly, the market remains in a chop zone with price action occurring within a historically narrow range.
With this information in hand, it makes the intra-day trading strategy a little safer. We know that we should be prepared for a potential mean reversion this week. If that happens, we should be prepared to trade put, trade short, or step aside for a period of time. This being a price action chop zone (yellow area), we can reason that intra-day moves may contain fake-outs and the overall cylic trend (from May 1st or so) may continue until we get an RSI firmly falling.
Lastly, I should note that the price action crossed above the 2720 line I had indicated in the last update. This gives a slight preference to the overall price movement being bullish and perhaps a temporary retracement occurring prior to a run higher.
To put in into perspective, the chart below shows the market action based on classic support/resistance levels. As you can see, the price has broken above the normal consolidation zone and may potentially be forming a support level before jumping higher. It may also fail at this point. That is what makes this a tricky zone to trade at a longer time-frame.
Momentum moves are based on price trends. If we see the market reversing yesterday’s decline then it’s further evidence of price continuing on the existing (favored) bullish trajectory. If we instead see continued volume selling, we can be reasonably comfortable with the assessment that prices will decline over the near term.
From a systematic trading perspective, you’d typically only want to enter your trades at signal high/low. This wouldn’t be a good time to enter long/short. Sure, the market can rocket up/down today but from a probability perspective, if you’re entering trades between your signals, you’re not actually utilizing the model that you’ve calculated.
The same indicators above can be used on a 15minute time scale (and perhaps a little lower) for those that prefer day-trading.
At this time, one of Stockbots Momentum Trader algorithms trades the 15 minute time-frame 24/7 using a variation of the data above as its entry/exit data.
On another note, I continue work on the Stockbot website which has been slowed somewhat by the wedding plans. I was in talks with a brokerage last week, discussing ways in which the ‘bot’ algorithms could be automated and perhaps auto-executed on your trading platform. Of course this is very specific to each brokerage.
Until Next Time, Trade Safe.