Bear Food and a Top Down Approach

 

I don’t think I stress the importance of looking at multiple time frames in a top down approach enough.  When I am trading I always have 15 min charts of ES, TF, NQ, and YM up and running.  It helps you keep perspective of the direction as well as support and resistance.   The volatility over the last week has given many opportunities for some great trades.

2 days ago the world was ending, double dip recession, and the zombie apocalypse was not far off.  This evening after quite an intra-day reversal to end green, I am getting emails telling me that this is the time to buy stocks and we have hit a bottom.  As one trader in our chat brought up – markets don’t just bottom, they double bottom or more. On the same token markets don’t just top, they double top or more.   Parabolic tops are their own topics of discussion.

I thought it would be a benefit to everyone reading this to start with the daily on my favorite instrument and work down through a basic technical analysis.

 

TF Daily

The daily chart made a nice bottoming candle after breaking the prev low of the prior day. But was unable to get above the prev high.  If you look closely, we stopped at the prev low of  the last bounce candle. Seems like this 700 price area is going to be an area of contention, what was once support is now resistance.  GMMA Ribbon looks extended as well, so a bounce seemed in order.

TF 240 Min (4 HOUR)

This chart shows the are of contention around 700 much clearer than the Daily chart.  You can also see levels around 650 on the low side  and 720, 770, and 800 on the high side.  I also drew a trend line for the drop and as you can see we were pretty extended, so a bounce was inevitable.  So it seems we might have some trendline resistance around the 700 area. Mean reversion folks are cheering.

It’s worth noting that the current high to low (if it holds) fibonacci retracements line up with those areas we talked about in our analysis above.

Full disclosure: I am long SPY IWM and have been adding at key levels on the way down and selling DEC covered calls with strikes above my entries.  My way of shorting the VIX. :)

 

TF 30 min

Working our way down the line to the 30 min chart the reversal is much more obvious as are the intra-day levels. The 30 min chart shows and interesting resistance area around that 700 level, the gap from Sunday.   Trend line resistance still @ 700.   You could draw a more recent secondary trend line through 739 and angled down, giving us some support near term around 680.

The chart also shows a pattern of higher lows, from 623 to 636, and if we fall back to 680 and support.

 

TF 15 Min

Now we are getting down to the smaller time frames, the 15 min chart shows a very similar patter to the 30 min.  You can also see some support in the 640 area, we will be liberal on the dip because of the release of FOMC minutes.  We can also see a clear break of  the 680 area and resistance around 700.    Zoomed in like this you can also see that the gap fill could go as far as 714,  notice the sideways action of the previous days in that area.

TF 5 Min

Finally a 5 min chart, by now the important levels should be pretty evident to you.   If you noticed, the smaller the time frame the more bullish we look.  This is the importance of starting at the long term and working to the short term.  The long term is still in a down trend, but is extended and has some overhead resistance.  The short term time frames have clearly reversed and overcome near term resistance.  The 680 level is now support and should act as such on any technical retrace.

I drew several trend lines, the most important is the down trend line at the breakout over 665.  If you were short as soon as we broke over that it was time to get long or stop out.  You can also look back and see that the sub 700 area was going to be resistance because of all the previous sideways action.  And you can also see that if we continue to rally the real area of sideways action is around 720-730.

 

 

 

Food for Thought

Just too keep some perspective, because as Mark Twain said “History doesn’t repeat itself, but it does rhyme.”  Compare the 2009 financial crisis with the current debt crisis.  The swing drop was just over 3000 ticks on /TF, the current correct is just over 2000 ticks.  Is this correction almost over ?  History would suggest there is some down to sideways action coming, but there will also be up days.

The point I am trying to make is that as a trader you should stay nimble.  The market will surprise you when you least expect it.

2010-2011 Market Crash / Correction

 

2008-2009 Market Crash / Correction

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