I'll describe what I think is going on, and suggest a strategy for trading it. I've added 2 charts (weekly and daily SP500) to illustrate this set up.
I hope you'll find at least some information that may point you towards a profitable decision, whether you're long or short.
==
Significant hints for assessing the potential of further correction
- 1330 / 1350 is a very strong area of resistance
- Broken up trendline: As can be seen on the charts, we've broken a significant up trendline on March10th
- Weekly RSI has also broken up its slighlty older up trendline, which I've found is a relevant signal of either a pause, or reversal in the trend
“Is this correction over ???”
That's the question traders have been heavily discussing since markets started correcting, from the 1344.07 high of Feb18 2011 on the SP500.
So far, 1249.05 is the lowest we've been, making this down move a mere 7.6% correction. That's a really shallow move, which I'm not even sure does qualify as a correction.
Anyway, the SP500 has since retaken several technical levels: 1261 , 1280 , 1294 and 1303. And it's currently testing what I personally feel is the last possible stop if we are still in a correction : the 1312 mark.
2 technical resistances (emphasized in a bright blue color on the daily chart) add up at this level: first a significant horizontal line, then the downtrend line that we're testing for the third time since the top.
That's where we have what I believe is a high-probability opportunity for getting short.
Possible strategy for trading it
- What to short: if the move plays out as planned, any of the weakest stocks will do for a good ride.
- Point for entry: from my POV, yesterday is the right time. :p . More seriously, today is a good timing for aggressive traders wanting to play this scenario.
- First target: 1230. Potential : 6.1%. Of course we won't move in a straight line from 1312 to 1230. That's where trailing stops come in handy. The action to take once/if we get there will depend on the charts.
- Stop loss: either 1333 (1.8%) or 1344.1 (2.6%) makes good basis around which to define the stop loss.
 | Weekly SP500, March2008 - March2011 |
 | Daily SP500 with possible targets and stop losses, December2009 - March2011 |
Some words of caution
I've mentioned all this previously, but doesn't hurt putting it all in one place.
Who I am
- profession: software developer
- trading as a hobby for 2 years
- I don't claim to have any superior trading skills that would grant my analysis some kind of authority. As you are well aware, I'm still learning, and with less experience than most of regulars on this blog. I just think that sharing my work fits with the spirit of this blog.
Trading record
- I've lost BIG money trying to short the market from 2008 to 2010. I know that, over that period, I've been utterly reckless and undisciplined in my trading..
- I'm rebuilding decent capital, as well as practicing my trading skills, with the goal of getting started again somewhere in late 2011/2012
- Tasting cold steel for real hasn't put me off trading. Quite the opposite, it's a motivator for building my own trading system, which I'm continuously testing and tuning through virtual trading. You can see my current virtual portfolio here (pseudo is "lloydb"..) if you're interested.
- Last word, about this virtual portfolio:note that it's already my 7th to 10th virtual portfolio, since I've dumped the previous ones each time it went wrong too far... I've started this one in early January 2011. Therefore, despite having locked great profits since, I'm aware that only time will tell if that was just a string of lucky trade, or if I'm able to generate steady profits in the long run.
That's it for now. Have a great day all! ;) (and sorry for posting that late)
Oh and sorry if the post is too long. The "words of caution" part takes up much space. I could have made without that one, but, since this is my first post, I thought I would make it clear who I am and what my intent is in posting this analysis.
ReplyDeleteI know regulars here are already aware of all this stuff. But these details are primarily aimed at "passersby".
@ICan, 5:41PM from yesterday thread:"I think I-Man was looking at 3/25 date? Important, trend change?
ReplyDeleteI've just skimmed through old comments, and you're right. I-Man stated this:
"If that occurs, it should set up a decent bounce that takes us up to a lower high, to solidify the downtrend.
Watch Friday 3/25 for the "real" lower high... could be one heck of a reversal trade on that day. Reversal price, approx 12030, but could go as far as 12300 depending on how many folks want to fight over the last seat when the music stops."
I-Man, March 1, 2011 8:04 PM (emphasis mine)
That may prove to have been one hell of an acurate call! And I'm glad I'm sitting on the same side of the trade as Mr Rasta then:D(if he's still holding this view that is).
@WS,
ReplyDeleteThanks for the post and the honesty!
ICan
WokfStreet - Good post, thanks for sharing your thoughts
ReplyDeleteMutt
Good one, Wolfie! On another note.....I'm sure Rock would have an opinion on this one. And maybe others here. And yet it's somehow the greedy unions' fault that we have insane deficits. These companies' no longer have any sense of local community. That's the issue.
ReplyDeleteGE's strategy let's it avoid taxes altogether
http://www.nytimes.com/2011/03/25/business/economy/25tax.html?_r=1&hp
Looks at Anonymous Traders Blog and see Mannwich is STILL in town - Well that explains the Green in the market :)
ReplyDeleteMutt
Wolfie this is fantastic! Way to hit the ball out of the park with your first post!
ReplyDeleteThank you so much!
Mannwich - I do not believe (Name the industry) starts out greedy, but over the course of time, most do.
ReplyDeleteAnd often times one of the highest costs in doing business, so in an effort to maximize profits, business tends to squeeze there first.
If it were not for the unions the wheels of industry would eventually turn us all into slave labor and owing our soul to the company store.
It is the job of the union to squeeze industry back and of course the workers love it, but at some point the balance tips.
Can unions be greedy, you bet anyone/anything who gains too much control eventually becomes greedy.
Is the system that created the need for unions fair> Hell HO.
Where would we be as a nation if it was not unions?
Mutt
This;
ReplyDelete"And often times one of the highest costs in doing business, so in an effort to maximize profits, business tends to squeeze there first."
Should read This;
"And often times one of the highest costs in doing business, is employee wages and benefits. So in an effort to maximize profits, business tends to squeeze there first."
Mutt
Manny - that article on GE is really something. I'm unclear how the company is even legally American. If the vast majority of both it's employees, as well as it's profits, are made overseas, why aren't we handling this like a foreign company? Hell, bring back tariffs and make GE's 30%.
ReplyDeleteIf you really want to see large American companies hire Americans again reclassify any company who does not have a majority of it's profits and employees in this country as a foreign company and make them pay a fat tariff to get their products or services in the US.
Silly I know, but it's still early here!
Mutt - hah, your 10:33 is priceless!
ReplyDeleteok one more -
ReplyDeleteThe money quote from the article
Its extraordinary success is based on an aggressive strategy that mixes fierce lobbying for tax breaks and innovative accounting that enables it to concentrate its profits offshore. G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.
Tell me again how we're not technically a fascist country at this point?
why isn't there a movement in this country to start punishing these kinds of companies? How much could the consumer hurt a company like GE? I don't think Huffington's stunt on trying to get people to leave the big banks really ended up amounting to anything. Still, we need to at least be publicly punishing these companies.
ReplyDeleteAND (ok, I'm on a roll this morning) I don't believe for a second this bullshit line the far right gives us that the taxes would just be pushed off onto the consumer. GE made 14.2 % in profit last year, how much of that went to line the pockets of their senior management. The "savings" so many of these companies create each year with their taxes sure as hell aren't being passed on to the consumer. Let the f***ers try to raise their prices in this economic environment.
ReplyDeleteWoflie,
ReplyDeleteFabulous first post, thank you so much for the analysis and sharing.
I-Man's calls so far have been great, it will be interesting to see if this market falls apart from here.
ReplyDeleteOf course, Manny is out of town and I leave tomorrow, and Rock is gone, too, so maybe we will have what will be known in the future as the trifecta correction.
Mutt,
ReplyDeleteIf it were not for unions, this country would resemble Mexico, or countries in South America.
What the greedy anti-union idiots forget is that the unions built the middle class, whose members in turn buy their products which is why we had the rise of the middle class in America.
The middle class as we know it, has very small history, mostly post WWII and the depression.
And the unions/labor used to be able to provide the check and balance against business but no more.
The money quote from the article that Thor posted is exactly why we will not get any reform in this country and how we got to being a nation that export's it's jobs and allows big corporations a free ride.
ReplyDeleteThe revolving door between lobbyists, congress, government and business that benefits those who participate in it insures that this will continue to happen.
ReplyDeleteWe see this in finance/banking, defense industries (GE is both finance and defense), just to name two.
The former regulators become lobbyists, or corporate executives, former congressmen become lobbyists, or corporate execs, former military become lobbyists or corporate execs, and since in the end all of their compensation derives from corporations there is no incentive to stop the merry go round.
Hah - there are reports that NBC Reporters (GE Subsidiary) are dodging bombs made by GE's weapons division. Ah, the irony.
ReplyDeleteJon Stewart made fun of that last night.
ReplyDeleteNot in town but at the pool and lurking. Perfect weather here.
ReplyDeleteManny you SUCK :P
ReplyDeleteGood article
ReplyDeleteInflation spike won’t last, Lockhart says
WASHINGTON (MarketWatch) — The recent spike in inflation won’t last, said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, on Friday.
“While short-term measures of inflation have moved up rather strongly in the last few months, I hold to the view that this trajectory will not persist,” Lockhart said in a speech to a business group in Ft. Myers, Fla.
Lockhart also defended the Federal Reserve from criticism that it’s too focused on so-called “core” inflation, which strips out food and energy prices.
“Contrary to popular opinion, Federal Reserve officials do actually eat and fill up their gas tanks,” he said. Read entire Lockhart speech.
@All: thanks for the nice words. Update on the analysis: as you may have guessed, the 2 technical barriers mentioned in the analysis (1312 line + down trendline) took a haircut right at the open. Nothing critical yet, but that's still a negative.
ReplyDeleteI would feel somewhat better if the market gives back the 1312 level before closing the week.
@Denise, 11:28AM:maybe we will have what will be known in the future as the trifecta correction
ReplyDeleteWe won't miss recording the trifecta in the history books, if that happens!
(though as pointed by Mutt, Manny seems to be interfering with the free markets by popping from random places like swimming pools)
How ironic would it be if things really do start falling apart in 2012? It would be like Y2K only this time for real.
ReplyDeleteThe market not going down significantly in the face of the global events tells you something about the underlying demand.
ReplyDeleteWe are seeing strength, not weakness, but we are also seeing consolidation under the old highs so I don't see any clear direction until it breaks out either way.
Thor,
ReplyDeleteMonth after month people are calling for the market to crash and besides the Flash Crash which was not the public selling, we have not crashed.
WolfStreet - And for Mannwich's interference of the market making a correction, I hope he gets a sun burn a turns red :)
ReplyDeleteMutt
Denise - agree. I ignore the doom and gloomers for the most point. Whether they are going to be right in the very long term, they've been wrong the last two and a half years and I think that speaks volumes. It not only speaks for their inability to correctly forecast, but it illustrates an extreme rigidity of thought and a failure to adapt a position to changing inputs and data.
ReplyDeleteGreat column from PK:
ReplyDeleteThe Austerity Illusion
Portugal’s government has just fallen in a dispute over austerity proposals. Irish bond yields have topped 10 percent for the first time. And the British government has just marked its economic forecast down and its deficit forecast up.
What do these events have in common? They’re all evidence that slashing spending in the face of high unemployment is a mistake. Austerity advocates predicted that spending cuts would bring quick dividends in the form of rising confidence, and that there would be few, if any, adverse effects on growth and jobs; but they were wrong.
Thor - Yup, things change all the time and if you are unable to adapt with the changes, you kinda get left behind.
ReplyDeleteI honestly do not think things will end well, because BerSupidAnke can't print free money forever.....Or can he?
Mutt
1310 ES is the line in the sand today.
ReplyDeleteThis market reminds me more of the post Feb. top, all pullbacks are being bought.
ReplyDeleteNo fear!
The biggest negative I see is declining volume on this rally every day. You want to see increasing volume.
ReplyDeleteChart at CA.
ReplyDeleteAlso, no new tick highs to confirm price action.
ReplyDeleteDenise - Right, and hopefully people don't mistake our bullishness on the markets for bullishness on the economy, or the long term prospects for the economy.
ReplyDeleteI think we accurately see that this is not a normal market while many of the doom and gloomers have been trying to fit their square peg believe systems into round hole reality.
Elections coming to Canada - non-confidence vote in the House of Commons -Minority Cons govt. falls. Vote was over giving more tax cuts to businesses.
ReplyDeleteWhile I am a fiscal coservative - but believe in just society.
ICan
ICan, I just love when they use my tax dollars for worthy causes.
ReplyDeleteI think it would be nice if we all just stayed in that night and watched TV (US TV) instead of going to vote. Even if it's all reruns.
ReplyDeleteThor,
ReplyDeleteI believe that is the biggest mistake that people make, taking macroeconomic fundamental news and trying to correlate and predict market action from that.
So, the loonie sold off - Liberals aren't monsters. Actually. it was they who brought in balanced budgets and surpluses.
ReplyDelete@greg,
I didn't vote last time. Didn't like any party. Have to watch closely this time.
ICan
ICan,
ReplyDeleteI saw that. Hmmm.
Who isn't a fiscal conservative? It is more about what we spend our limited funds on rather than limited our spending.
The supposed fiscal conservative conservatives have shown themselves to be anything but conservative when it comes to unfunded tax cuts for them and their supporters, and defense spending, wars.
How many times have we heard that there is no money for SS, Medicare, etc, yet there is plenty of money for tax cuts for the rich and corporate welfare.
Conservatives have for too long been voted into office on their so-called fiscal prudence, i.e., George Bush's eight years gave us 5 trillion dollars added to the deficit.
dss(3:18),
ReplyDeleteA lesson I had to learn.
Too much fiat from the globe chasing yield. Nothing to do with fundamentals. Case in point, the U.S. equity markets from 2009-2010.
ICan
Denise - and I was once one of those people! We certainly had two years where that was proven wrong.
ReplyDeleteICan and Greg - good for Canada! You guys should resist the drift toward fascism that we are engaged in down here for as long as you can.
I learned technical analysis and totally rejected fundamental analysis when I was starting out. How I learned that was I was sold a stock by my broker (in the stone age) who gave a glowing recommendation of the company and industry's prospects. When the stock got crushed, I lost about 1/2 of my investment. That was when I started down this path.
ReplyDeletePlus since I am older than you I remember the really harsh economic times of the 70's.
It was a terrible time fundamentally and things looked the worst at the bottom in 1982, after eight years of terrible markets. Yet the market rallied for the next 18 years, even recovering from the 1987 crash.
No one rings a bell at the top and no one rings a bell at the bottom. Things always look best at the top and worst at the bottom. Markets go further in both directions than anyone could have predicted.
Let history and internals be your guide, rather than hysterical blog coverage and misleading media coverage.
Denise - but there are certainly some fundamentals that can affects the markets, if only in the short term. 9/11, Katrina, Lehmans. I've often wondered how (if at all) Technical Analysis works when you have something happen like a 9/11 that can drop the markets a thousand points.
ReplyDeleteIn the end, we and the world will inflate their way out of these crises, just like they always have before, or those that can, will devalue their currency. The world is not coming to an end, regardless.
ReplyDeleteThor, make no mistake, it's pretty much the same up here, perhaps a little less blatant. We'll spend a lot of money, have an election, and end up with the same government we have now. Only good thing up here, it only lasts a few months. It'll all be over by summer. We don't take these things near as serious as you do. No need to drag it out.
ReplyDelete@Thor(3:26)
ReplyDeleteSame issues plague Canada as the U.S. Insert Lib/Cons for Dems/Rep. Liberal party almost wipedout by corruption scandle in 2005, while Cons PM Mulroney was also involved in kickbacks.
ICan
@greg(3:40)
ReplyDeleteLOL!
How could we be any different from our cousins?
ICan
Now ICan, be nice to Mulroney. There is nothing wrong with a former Prime Minister meeting some guy in New York City and accepting a brown paper bag full of cash. I think you may be drawing some conclusions. I mean, maybe the guy owed him some money, and couldn't afford an attache case, or maybe he just wanted to help out a guy who was now out of work. Politics doesn't pay all that well, you know.
ReplyDeleteThor,
ReplyDeleteYes, I agree. 9/11 came out of nowhere. There isn't a system of analysis in the world that can help you there. Or natural disasters that happen often precipitate strong market declines.
Katrina didn't do any damage to the US markets.
The collapse of the markets in starting in 2007 was not a totally unknown or unpredictable event, as there were many warnings before the top, technical analysis saved me as we were out of stocks by May 2007.
What told me something was coming was that I was stopped out of almost every single stock that I had bought for investment, one by one. New trades went bad immediately. New highs had been lagging for months, peaking on 12/5/06. That was the first clue among many that the internals were deteriorating. Time for caution.
ICan, as the comedian Dave Foley said.."Canadians, just like Americans, without the guns".
ReplyDeleteBy following the principles that I have talked about before, fewer stocks making a new price high as the market advances, etc., you can get a handle on what is happening beneath the surface as the DOW or S&P go to new highs.
ReplyDeleteGreg and ICan - You're supposed to enable my ignorance. Where else am I supposed to go if the shit really hits the fan? ;-) Canada is my ultimate escape hatch!
ReplyDeleteDenise - I understand.
ReplyDeleteWhere's Emmie been? Emmie?? You're not on vacation too are we? Four of our group out at once, we'd better watch out for comets or other flying space debris!
@Denise,2:25PM:"The biggest negative I see is declining volume on this rally every day. You want to see increasing volume."
ReplyDeleteWhile I rely heavily on volume confirmation for trading individual stocks, I don't feel at ease making use of volume when charting indexes. Maybe just an irrational feeling on my part.
But I consider it valuable when you and other fellows mention specific behaviour in volume nonetheless.
Everyone have a great weekend. Leaving tomorrow, but I will be checking in when I can. It will be quiet as a ghost town next week. Thor, watch out for the large tumble weeds passing through. :-)
ReplyDelete@Denise,3:35PM:"It was a terrible time fundamentally and things looked the worst at the bottom in 1982, after eight years of terrible markets. Yet the market rallied for the next 18 years, even recovering from the 1987 crash."
ReplyDeleteThanks for sharing such experience. I find it both useful and thrilling hearing more experienced traders' own experience going through previous cycles.
More important in my mind than their trading records, is when they write with retrospect about their state of mind/perspective over these periods.
Keep it coming!
Alright Denise. Enjoy your holiday then.;)
ReplyDeleteSP500 didn't tell much more in the last hours. Maybe monday will bring further hints at where we're headed short-term.
ReplyDelete@ Wolf, ICan, DSS, All...
ReplyDeleteGuess I ears were burnin... :)
Thx for the props, its looking good so far...
Wish I could have just gone short on March 1st and walked away for a few days. LOL.
On 3/1 I thought more downside for that first wave, and still do, maybe Jah Market is saving it for the next one.
I do think its good that a lot of traders were quick to shrug off the first move... hearing a lot of talk about "correction", "resilient market, "teflon market", JBTD, etc." Thats exactly the kind of psych you want at this juncture if you are looking for a new downtrend.
I still need to crunch some more numbers, but I will strive to update that forecast over the weekend.
Sorry aint been around much, its the spring salmon run, so I've been out the door right after market close every day.
I figured I'd come back at you guys when I had some better work done, hard to keep up with 2 blogs.
Good luck and 1 Love,
-I
Man, there is a lot of good stuff in the threads from recently, I'll try to catch up.
ReplyDeleteNice work!
Rock, the trading threads are awesome...
I-Man - Oh some of us see what you've been up to. And you're right, The other blog is a better place for the minute by minute tape talk that you have to engage in for how you trade. Totally understand and don't apologize, we know where you're at and how to get to you if it's really important. We're always here ;-)
ReplyDeleteAND congratulations to you for learning as much as you have as quickly as you have, it absolutely shows!
ReplyDeleteInteresting that Syria is now having unrest. I didn't expect that. The response though, I did expect that. Assad isn't going to mess around, especially seeing what's happened in all the other countries - even more so, that he knows the west would intervene if it really got going. I wonder if that's also emboldening the Syrian protesters? Maybe they think this is their chance, that if they get far enough, that the west will come to their aide like it has for the Libyan protesters.
ReplyDeleteHey all - no sunburn for me, thank you very much, but MUCH sun here, and now I'm wiped out. It looks like there has, in fact, been someone prosecuted for "liar's loans".......might not be who you think though! Truly unreal.
ReplyDeletehttp://www.nytimes.com/2011/03/26/business/26nocera.html?_r=1&hp
Read that whole article, by the way. Quite scary when you think about the lengths they will go to go after the little guy/gal and nail him/her to the wall to make an example for the rest of us. Truly frightening stuff if you ask me.
ReplyDeleteManny - so depressing. What's worse, is that it's all so blatant anymore, they're not even hiding what they're trying to do. GE not paying any taxes and being "very close" to Obama is the new norm. He's a liberal HOW?
ReplyDelete