I found myself torn when crafting this update. It has taken me many many years to realize that I have a naturally bearish personality. I don’t take heavy risks on trades, I make much more money short, and I am naturally defensive and protective of both financial and other assets.
Realizing this about myself has helped me to be able to step back and look at the broader picture. When everyone is shouting “the world is ending” sometimes it’s best to step back and look at the opposing views. Sometimes though, something bad really is on the horizon and it’s best to avoid it.
The Bullish Case
Yesterday I took another look at my Heaven and Hell chart and still could not resolve the last two months of market data with the long history of crashes and corrections. As I said during my initial look, that may be because the recent parabolic data has acted to skew both market prices and any signals that might be analyzed. At this point, as hard as it is to believe, the market barely looks corrective. Momentum, while bearish, isn’t any worse than previous corrections. The simplest read is.. this lack of any serious warning signs points to more upside.
I look at it like this, everyone can’t be right. Market crashes are long-tail events. If the majority of bearish traders on something like StockTwits are holding large amounts of puts and sentiment is bearish, the market isn’t going to make them all millionaires.
The bullish case points to perhaps 1-2 more decline days but ultimately a breakneck multi-day rally back up to SPX 2800+. This would both purge the bears and trap the bulls. In classic market topping action, the price would surge and then fail to find new entrants causing a panic and a final route (for this cycle). Ultimately dropping to perhaps SPX 2200 but I’d need to do analysis at that time.
The Bearish Case
Both cases are essentially bearish in that they ultimately resolve downward but I see the bearish case as taking a more direct route. In this case, we see the Fed’s recent Quantitative Tightening as a triggering event. With liquidity drying up (note it returned mostly this week), and the Fed selling 10-50 billion worth of assets into the market, the ‘bounce’ that everyone is expecting becomes the event that never happens. The market instead fails directly from it’s current level. In some ways, the present price action somewhat supports this. From peak to trough, the months prices have created a triangle which points to a sudden market pivot on the near horizon (drew it on the chart).
That pivot might only drop the market to recent lows (2540) before recovering but that would be another decision point. It could also turn more directly bearish, in which case it would point to a crash much more than a correction.
With all of the EW technicians pointing to this as either a Wave 3 ‘correction’ (absurd) or a Wave 4 decline – the real truth could be that it’s simply the end of a long bull run and there won’t be another grand rally to save everyone who was trained to ‘buy the dip’. In my heart I want this to be true, mostly because I’m a bear and nothing annoys me more than lazy “traders”. Ultimately though, it doesn’t matter what I think, I go where the data takes me.
So what do we do?
As you can see, it’s impossible to time and predict the market perfectly. Just as with momentum trading, we’re not trying to guess the future. As a trader, we come up with a hypothesis and we wait for the market to prove us right or wrong by taking one of the paths. There’s still the small risk of a fake-out but we’re trading with stops and safe positioning so a fake-out poses minimal risk.
If the market breaks out towards 2750 as I mentioned last post, that would be the first “checkbox” for the case for “rally to highs (likely 2800-ish)”. As we see this, happening, we get long and take on a little more risk and then trim it as we approach the target. The approach is similar towards the downside. If the market is not proving itself to be bullish, we favor short positions and only go long on low risk trades or smaller position sizes.
For now, I will continue trading near-term momentum data as it becomes available.
Stockbot Momentum Trader Updates
Note: These are NOT designed to be held long-term unless a fresh 1D (daily) signal is given.
Days like today (on the S&P 500) are why you diversify. The indices are grinding sideways, chopping violently in either direction. Trend traders get killed in markets like these unless they’re trading a very small intervals (1m/5m). I probably won’t be posting any SPX updates since the moves will happen too quickly. I’m trading energy today while I monitor SPX/DJIA. I do have a speculative small short position again the DOW which is a little easier to read and slightly trending downwards.
Incidentally, this sort of price action is indicative of an indecisive market, something you might see at the end of a consolidation zone (triangle) where the market is trying to decide if the prevailing direction will be up or down. It could last for a few sessions. With the weekend coming up, i think we’ll see equal pressure from bulls and bears alike wanting to clear out positions and new bulls and bears entering equally expecting a Recovery Rally or a Black Monday. This is not a position I’d hold over the weekend unless you enjoy playing the lottery or want to gamble with some put/calls.
We’ll see how midday and end-of-day shape up. I expect their to be many fake-outs until a one-side reaches exhaustion.
SPX/ES: 15m SELL signaled at 0830 but I don’t give pre-market strong-weight. I’m waiting to see what the first hour of trading concludes as. 1H finally ended at 0500 from 2/22 0800. A new 1H BUY signal was triggered at 0700 – volume is not confirming this so it’s a cautious buy at this time. When 1H and 15m conflict like this it’s sometimes better to let the market pick a direction before jumping in.
Update: ES 1H is breaking down which will confirm the 15m read that the rally might be over — if the price closes below 2716 in.. 35mins.
Update: 1110: Needs sustained trade over 2723.50 in order to break out over the chop bullishly. Otherwise it’s just noise. The same is true for 2713. That gives us a massive 10pt range. At this point, the best risk/reward trades would be from either edge of the range (betting on a reversal or betting on an extension).
Stockbock Momentum Trader gave a 15m momentum signal and purchased a High Risk position at 1045 (long). Because of their risk, I don’t recommend these typically.
Update 1128: With this micro bull rally stalled at the same place, I’d favor a return to the lows but momentum is still slightly bullish.
Update 1141: There’s significant resistance at the 2726 level (flag/triangle upper channel). I don’t epect it to break through but it if does we could see a move towards 2728-2730. Obviously, consolidating above 2726 would be bullish. Otherwise, it’s all a prelude to a trip to 2713 and below.
My best guess is that we’ll consolidate into the close leaving the market direction in question (a perfect triangle with higher lows and lower highs).
Update 12:09: Took a tight short from 2729. Nothing indicating this is a good idea but call it (bad?) instinct. Tight stop.
Update 1313: Looks like my instincts were correct. Price dropped out of the rising triangle and broke both 5m and 10m trends, with the 15m momentum looking set to break soon. A trip towards 2713 could be in the cards if/when that happens. If not, the upper breakout from yesterday (2740 is still in play). It’s difficult to tell at this time so I’m playing it moment by moment. The hourly price _really_ looks coiled and ready to break if price drops below 2722 again. We’ll see.
Curiously, Stockbot is still long from its 2720 High risk entry earlier so I’m in effect hedging by taking the other side from 2729 short. I suspect that Stockbot will signal a close of the Long shortly once 15m momentum fades. Points wise, that isn’t the best trade for the algorithm but high volatility days like today don’t generate the best momentum trades (not enough sustained momentum.
If the price bounces from 2722 then Stockbot will have proved me wrong and I’ll end up with a small profit on the short side as well.
Update 1433: Looks like Stockbot was right and the price reversed to hold the 15m Momentum (for the moment).
Price action is consolidating upward but stalling at the day’s high. That really leaves things at an important pivot. Being able to close above the flag would leave things marginally favoring the bulls (north of 2726).
Final Update 1445: 15m Momentum Signal has continued to be the most reliable signal generated for volatile indices trading. When paired with a trend exit (instead of a momentum exit), it’s been a work-horse. I’m taking off for the day Stockbot Momentum Trader is still Long from this morning’s update. My short was stopped out for a small profit. I’m guessing the price will aim to fill yesterday’s gap. In any case, Stockbot’s 15m profit as of now is right at 10pts per contract. With stops being raised for every high momentum move up.
FYI: as stated yesterday 2740 would be the pivot zone to watch. That doesn’t mean the price will make it that high, but if it does, that’s a zone to watch for a potential reversal. There’s enough time left in the session for an end-of-day decline from that level. That being said, there’s enough momentum that we may see end-of-day panic buying from late-comers, haha. Either way, watch your risk as price approaches that level.
Currency trades broke down around midnight last night but were great for the day session (using yesterday’s update)
Yesterday’s trades rallied well and broke down on open this morning. I’ll post new entries as they appear. Live Cattle was the sole exception which consolidated into a triangle preparing for a larger move.
Lean Hogs (HE) remain in rally mode poised to close the gap to 73 but given the larger breakdown in commodities, it would be smart to take some profits or tighten stops.
Natural Gas (NG): 1H BUY signaled at 0900. This one signaled as a ‘high risk buy’ so use appropriate position sizing. I believe it’s because of the relatively low volume and the fact that it’s a counter-trend entry.
Update 1300: The NG long play worked out well. Continuing to ride it as it breaks out from monthly lows. Moved stops up to protect gains at trend-line.
Update 1330: NG looks to be forming an extension wave at the 5m level. If it holds we’ll see prices spike again. These extensions have a tendency to end suddenly, so I’ll be moving stops up a bit based on price action.
Light Crude Oil (CL/QM): 15m BUY at 0630. 1H about to signal a BUY if momentum carries over resistance at 62.900.
I think this will be today’s best trade. From an entry just below the trend line, (stockbot’s entry was at 0915 but even if you entered after this post (0945) it was below the trend line). If the price action continues and holds then we may have the start of another daily Oil Bull rally.
Call me a cynic but I think it’s more likely to rally and then correct sharply. I based that mostly on the low buy volume compared to the recent selling. Price movement would have to accelerate into the close. 64.0 will be a deciding point. If the price can reach and retake 64.0 then it might inspire bullish confidence (after some consolidation).
Update 1310: Popped out near the peak at 63.500 after the consolidation broke downward. With the 1/5/10m momentum running negative, I guess my call was correct. There’s still about 5 minutes to bounce and recover the price given that 15m momentum is still positive.
Silver (SI): Weak hourly SELL and 15m SELL at 0830
My SI short continues to run sideways and is making me lose patience. I’ll stay without unless the trendline breaks.
Update 1331: Silver touched low of day and then bounced. I am still short a small amount to see if we can break the low of day and continue the down-trend.
Bitcoin hourly rally began at midnight and seems to be a continuation of the daily rally signal I posted 1-2 weeks ago.
Bitcoin (BTC): Hourly and raily continue. New 15m surge began on Asia markets open this morning. Next target would be a 10400 and eventually a return to 12000 if momentum continues. Right now, sell side pressure is showing it’s head so I can’t speak for the future. Price was rejected on it’s first trip to 12000 right at the top of the near-term crash channel from 20k. Right now Bulls need this current rally to hold or the trip to 6k will be quick. Support level is presently right at 9800 on the daily and 10200 intra-day.
Update 1333: Price failed at the support level I specified in the update. Right looks to be a consolidation forming. If it holds we may see another run up. At this point 10200 becomes strong resistance. Failure to break the now multi-month down-trend would lead to a slide.
Ethereum (ETH): Curiosity or early warning signal? ETH breaks from the rally on the daily at the 1k pivot (top of crash channel). 15m continues to break down. It’s pointing to 600. Is this an early sign of what’s to come if/when BTC fails to break 12000? ETH needs to trade above 950 to reclaim the bullish bounce.
Yesterdays Stockbot Results
BUY 2688.75 – SELL 2715.5 for 26.75 pts or $1335.5 per contract
Note: I have some automated alerts that go off during Asia market’s open which allow me to buy in early if momentum is building. If you were only to trade during daytime hours (let’s say from 0800 to 1600 like a normal job) the results would be:
BUY 2706- SELL 2715.5 for 9.5 pts or $473 per contract
This morning’s update took me longer to prepare than I anticipated. I’ll be posting 15m and 1h trade events in just a bit.