The Week in Crayons
The markets continued their slow march up this week with little to no real pull backs as the bulls relentlessly stepped in to support the markets any time there was a hint of a drop. We have now drifted in one direction(up) with relatively light volume and volatility for about a month on most of the major indices which is in stark contrast to the highly volatile back and forth movement we experienced for most of the latter portion of 2011. While we can’t truly know until we experience a substantial retracement on the current move, it appears that the market has had a change of character recently and is more likely to be bullish to neutral instead of the neutral to bearish undertone that characterized the back end of last year’s trading. In fact, the start to 2012 is somewhat reminiscent of the start we had in 2011 which also began with a slow and steady march up that seemed to defy gravity.
Looking at a near term chart of the e-mini futures contract for the S&P 500, we can see this low volatility uptrend clearly. Notice how the last several week’s worth of price action is confined to a single narrow range channel. As mentioned earlier, this is in stark contrast to the volatile oscillation that occurred prior to this move. We are now clearly above several key areas of resistance including all of the major moving averages and are poised to challenge last year’s highs. However, Stochastics has had an oversold reading for the entirety of the breakout and while we can continue this slow squeeze all the way to the highs, risk reward does not favor chasing momentum here unless your time frame is less than one to two days for a trade.
Of course, action has been completely bullish for several weeks now, and someone looking to short this should realize that the potential for us to squeeze to last year’s highs is very real. In fact, the nasdaq composite has already formed new highs this week and could be a harbinger of things to come from its relatively weaker peers. In addition to the possibility of a continued squeeze higher, another thorn in the short seller’s case right now is the potential change in character in the markets which could lead to a benign correction that drifts either sideways or slightly down and fails to offer proper rewards commensurate with the risk taken at this point.
As we can see on an older chart of the e-mini futures contract for the S&P 500, this exact scenario occurred during the end of 2010/beginning of 2011. Notice the long narrow channel which contained price action neatly for practically three months. Also note that we were oversold for basically the entire time as well.
While this scenario doesn’t have to play out exactly the same(and likely won’t), it should offer traders a hint of what can possibly occur over the next couple of months and serve as a good warning for those that are looking to short this type of action prematurely. On the other side of the coin, looking at the steep drops that occurred at the end of that run should also serve as a warning for anyone looking to chase extended price action into areas of potential distribution.
We are now a few weeks into the new year and while the character of the market appears to have changed, astute traders should keep an eye on price action and wait for the market to conform to their expectations/scenarios, instead of allowing the market to force them into poor trading decisions.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
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Stockguy22 Level 2 Chart Display
Introducing the Stockguy22 Level 2 chart display. This indicator displays the Level 2 Order Book for your datafeed. Chart examples use /TF futures because the ICE provides the full book as far as I can tell. /ES , /NQ, /YM, and most of the CME / NYBOT only provide around 5-7 deep to retail traders. Complete garbage if you ask me.
Showing Level 2 data that is way outside the current days range.
Intraday Level 2 with contract amounts.
Download Here: SG22_Level_2
To import:
1. From the Control Center window select the menu File > Utilities > Import NinjaScript to open the Import NinjaScript dialog window
2. Select the file you want to import
3. Press the “Open” button.
To add an indicator to a chart:
1. Open the Indicators window.
2. Left mouse click on the indicator (SG22_Level_2) you want to add and press the New button.
3. The indicator will now be visible in the list of applied indicators.
4. The indicator’s parameters will now be editable on the right side of the Indicators window.
http://www.ninjatrader.com/support/helpGuides/nt7/working_with_indicators.htm
Join the stockguy22.com Diamond membership to learn how we use the SG22_Level_2 to trade the futures everyday.
The Year in Crayons
The last week of 2011 in the markets was mostly uneventful as price action basically drifted sideways finishing the week right around where it started, capping off a year that also finished right around where it started. Of course, while the action this week was fairly quiet on low holiday volume, most of this year’s sideways action was done in a much more spectacular fashion as bulls and bears both were trapped on several occasions resulting in explosively volatile moves up and down the charts as the markets figured out the edges of our broad range of consolidation.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see that this year’s action was littered with several bull and bear traps as we probed the key levels of our wide trading range. We can basically divide the year into two periods;
(1)The massive head and shoulders pattern we formed in the first eight months of the year.
(2)The two staged recovery during the last few months as the bulls clawed their way out of the huge hole formed during the breakdown from period one.
Dividing the two phases of this year’s action is the slightly rising neckline of the head and shoulders pattern which supported price action strongly during phase one, but ultimately became a key level of resistance as it became a price ceiling during the second phase of the year. Keep an eye on this trendline as it figures to affect the direction of future price action as we open trading in 2012.
In examining the first period of trading of 2011, one important point to keep in mind is the context under which it took place. We had rallied sharply over the previous two years after a disastrous plunge during the back end of 2008 and there was quite a bit of debate as to whether the markets could break past the highs we formed just prior to the 2008 crash on the back of quantitative easing or if we would drop back down to new lows on a “double dip” move. Each of the key points of the head and shoulders pattern were moments where either the bulls or the bears became convinced that their scenario would win out only to see the market “inexplicably” run away from them. Of course, eventually in late July, the bears finally won out after a strong hammer candle fooled the bulls into thinking that the neckline would indeed hold on the “too obvious and easy” to see head and shoulders pattern.
This spectacular fall led to the second phase of our year’s action in which the previously shell shocked bears now dared to dream of a double dip while the bulls desperately tried to recapture the gains they had made during the previous year’s rally. The markets first attempt at stabilizing after the steep drop we experienced in late July and early August occurred during a volatile two month stretch that featured several swift moves as bulls and bears repeatedly fooled each other as price sharply fluctuated between the extremes of the short term range. In late september, price action finally exited this range to the downside, but ultimately failed as the market instead formed a double bottom as price quickly reversed course and headed higher. The bear trap formed during this false break down can be viewed as the sister move to the bull trap that led to the breakdown from the neckline and amazingly led price back to and through the level from which we had initially broken down from to begin the second phase of the year. Even more amazingly, volatility actually expanded during this tremendous squeeze and even continued for another month as price spectacularly failed at the new price ceiling formed by the neckline from the head and shoulders pattern and threatened to break down back to our lows after several days of repeated distribution with no buyers in sight. However, the bulls eventually stepped in and were able to push the markets back to ground zero to end the year and form a big doji candle on the yearly chart.
Below is a yearly chart of the SPDRs S&P 500 trust etf (SPY) showing the action of the last couple of decades. As we can see, this year’s action formed a doji candle reflecting the indecision that marred most of the year’s trading. This was to be expected after three years of strongly trending action (one down, two up) and is likely to be followed by more indecisive behavior as we are firmly in the middle of a fifteen year range that has now had two major tops and two major bottoms defining it.
The two multi-year tops occurred during the overly exuberant heights of the dot-com era and the real estate boom. The two bottoms occurred during the desperate depths this country experienced shortly after 9-11-01 and after the financial collapse/debacle that led to our most recent recession. These are all MAJOR events and traders should keep in mind that price will likely stay contained within these parameters until there is a proper catalyst to push it through. Of course, part of the reason why trading was so erratic this year is because the threat of major catalysts has become pervasive during the current environment. For instance, the last three years of free money can be construed as the third “good times” era of the last couple of decades and may end up culiminating in another major top if we continue to fall back on quantitative easing. On the other hand, the continued threat of insolvency across the world can ultimately lead to a calamitous drop either to or below this multi-year range and ultimately lead to another major bottom at some point in the next few years.
As we close this year and look towards the next, traders should step back and look at the big picture as they develop their game plan for the coming year(s). Good luck as you enter 2012.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
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The Week in Crayons
I mentioned last week that the bulls would likely be tested this week as the bears attempt to regain control of this market, and while the bulls can use the light trading / short week excuse to defend themselves, the bottom line is that they failed that test this week as we not only closed red on each session, but saw downward momentum actually increase as we followed through on last week’s breakdown. While we are oversold and due for a bounce, we have now negated much of the feel good rally we had in October and find ourselves back in the middle of the trading morass we resided in for several months this year. While a bounce from our current levels would still be very positive step in leaving behind are summer lows, the recent weakness gives us a strong reminder that we continue to chop around in a broad range consolidation and it appears we will be flying the same holding pattern for a bit longer as we continue to deal with the same regurgitated mess in Europe we have been dealing with all year.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see clearly that we are right smack in the middle of the 1100-1200 mess we were stuck in for several months after breaking down from our yearly highs. While we are still well off the lows we formed around 1080, we are forming new lows on Stochastics creating a bearish divergence hinting that we may have more weakness in store even if we can hold these levels and create an important higher pivot low.
Traders looking for a an oversold bounce should keep this in mind and continue to use the hit and run tactics that have been the only option available to swing traders for most of this year as we are likely to stall out on any bounces into the heavy supply just above our current price action. The 1180 -1200 area will likely be the first area of distribution if we bounce next week and traders should watch the action in this area closely as failure to get above our October breakout will potentially form a bear flag, not a new leg up. If we can reclaim 1200 and emerge from our current range, look for more supply to emerge just above 1215 or so as we begin to encounter several key moving averages. However, if we continue to have trouble finding a bid, we will likely test 1100 in short order which would serve as a critical level of support for the bulls to defend. Traders waiting for the Santa Clause rally should be very careful here and wait for momentum to clearly turn upward before getting sucked into any of the fakeouts that have become all to common this year.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
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The Week in Crayons
We had another week of mostly sideways action again as upward momentum in the broad markets continues to wane. While we finished off on a weak note, the bigger picture remains neutral as we have mostly traded in the same range for several weeks now. We are now at the bottom of this near term range and a hold above these levels would be a big win for the bulls as we approach the typically bullish holiday season. However, price action has been weakening throughout the recent consolidation and needs to firm up in order for us to resume upwards.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see the falling momentum clearly as this week’s close broke the upward trend we had maintained since breaking out of our late summer range. While the markets have shown impressive strength in holding above the key 1200 area as they digest the late October run, we are now below several key moving averages and on the wrong side of a short term trendline.
With momentum still on the decline as illustrated by both the declining stochastics readings as well as the red Momo Trend Bars, odds are that the bulls will be tested yet again next week as the bears desperately try to regain control and push price action back down to our previous range. If we pull back furthur, watch for the area around 1200 to 1800 to become a likely area for bulls to defend. If we fall and stay below that, it would likely signify a win by the bears and a return to the 1100 to 1180 mess we chopped around in from August to early October. If the bulls can regain control and push price back up, the first level that would need to be retested would be the 200 day moving average at about 1259. This would likely coincide with the top of our recently contracting wedge and would probably serve as a stalling point for the bulls.
As we approach the traditionally bullish holiday season, astute traders should continue to scan for strong setups that have begun to develop during our recent consolidation and patiently wait for momentum to turn back up and take price action with it.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
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Correlation between price action and VIX
Some background information for new traders about the VIX. A simple Google search has ‘several’ results for the question: “What is the VIX?”
VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period. The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized. The VIX Index developed by Prof. Dan Galai and Prof. Menachem Brener from Israel, introduced by them to the CBOE at 1987. 6 years later it was introduced in a paper by Prof. Robert Whaley in 1993 while he was at Duke University. Prof. Whaley is now on faculty at Vanderbilt University. ( http://en.wikipedia.org/wiki/VIX )
The VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange. It is a weighted blend of prices for a range of options on the S&P 500 index. The goal is to estimate the implied volatility of the S&P 500 index over the next 30 days.
So what does it really mean to your trading?
Here is a chart of the correlation between the daily ATR(3) of the /ES and the VIX. The /ES is the e-mini S&P 500 futures, btw. The upper area of the chart shows the VIX overlay on the /ES. At a basic level you should notice the inverse correlation between the market and the VIX. VIX goes up, market goes down. It’s not always the case, but let’s assume the correlation holds for our purposes.
The lower chart is the ATR(3) for the VIX and for the /ES. Again let’s assume that the ATR(3) increases in both the VIX and the /ES with a degree of correlation worth noting.
The next chart shows the /ES on the upper area, just for perspective. The lower shows the price of the VIX with an overlay of the ATR(3) of the /ES. If you haven’t guessed as the VIX increases so does the ATR(3) of the /ES.
The chart should tell you that the markets move a larger average amount each day as the VIX increases. Conversely, the markets move less on average with a lower VIX.
I trade intra-day price action using range bars, tick charts, and a larger time frame to play with the general trend. I noticed my stops were being hit much more during higher levels of the VIX and that the swing highs and lows became much larger. The significantly larger price action swings no longer worked with my standard stop of 2.5 points or less. Trading in general became much harder with an elevated VIX.
The easiest solution was to reduce contract size and wait for trade setups around key support and resistance levels. This reduced my % risk to my trading account while forcing me to refine my trading entries.
Think of the market as an engine and the VIX as the throttle, the more you increase the throttle the more vibrations you get. It is also the case with fear, greed, and price. Increase fear and risk going forward and price acts wildly.
I like to keep things simple at first to formulate a hypothesis then, if it’s warranted, expand upon my hypothesis. The VIX is a lot of calculus and voodoo that’s not important to the average trader. I know that many of the people who do statistical analysis of the VIX and the VIX futures will carry this out in excruciating detail. They will also calculate correlations and try to estimate volatility. The correlation is worth noting. So, if you want to do further research there are many articles and research papers at your finger tips with a simple Google search.
So what should you take away from this? When the VIX is up, try to reduce your risk.
There is one last question to think about: When will I finally get around to telling you the simple secret that will make you the next Warren Buffet?
stockguy22 ThinkorSwim Advanced MACD Indicator
Here is an chart comparing my smoothed MACD using Laguerre polynomials. I have seen a few implementations of this using difference indicators.
It performs similar to a faster MACD, but is relatively unaffected by gaps. Remember that even a standard MACD is not to be used for determining overbought and oversold conditions. What it excels at is determing momentum, and divergences in price patterns.
The Week in Crayons
Posted by stockdarts on January 27, 2012 · Leave a Comment
Despite ending the week somewhat off their new highs, the markets for the most part continued the slow and relentless rally that began about a month ago. As has been the case during that time, sellers have been few and far between and price action once again occurred on muted volume with relatively little volatility. Not much has changed since last week from a technical perspective and most of the analysis I mentioned in last Friday’s post still stands.
Looking at a chart of the e-mini futures contract for the S&P 500, we can see that we are still in the same narrow rising channel that has contained our rally after breaking out at the start of the year. Price is for the most part in the same range it was in last week except for a failed attempt above 1320 which occurred during the middle of the week off the back of strong eps reports(most notably AAPL). We are now very close to last year’s highs which should serve as a strong magnet for price action as the bulls will eventually try to push price to new highs mirroring the action that has already occurred in the nasdaq composite index.
However, we remain oversold and are beginning to see signs of waning momentum. Notice that we printed a yellow candle on our SG22 momo trend bars on Friday’s close, the first such bar in over a month. This is a hint that upward momentum is slowing down and traders should begin to exercise caution in regards to our current swing up. The first key level to watch if this weakness persists is the 1300 area. This was support last week, and a break below it would also likely take price out of our rising channel. After that, the rising 20 day moving average would likely become the next key area of support which would also coincide with the mid 1280′s which supported price nicely after breaking past our last major pivot high formed in late October. Trader’s should be wary that price dropping into these levels shouldn’t necessarily be seen as a sign to short this market as sellers have been virtually non-existant so far this year and a retracement at this point may end up taking the form of a benign sideways drift instead of a deep price pullback. If price were to remain in our channel and continue squeezing higher, look for the 1340 area to become a major test as we begin to probe last year’s highs.
While this type of slow rise can be frustrating to traders that feel they have not capitalized enough on it can be frustrating, continue to remain patient and wait for the proper setups to appear as we work off our oversold nature very close to some stiff resistance on the longer term charts.
If you have any questions or comments, feel free to contact me on twitter @stockdarts or in our great chat room if you are a stockguy22 member. If you aren’t a member, what are you waiting for?
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