Friday, September 9, 2011

Trading Algorithm & Market Analysis - 9/9

Update: 9:9 AM - 9/9
If you missed the shorting opportunity yesterday, you can still short here or on a bounce because according to the Inflection Point Model the down trend should continue for another 1.5 weeks. Furthermore, we will most likely see a new low. So there is a long way to go. But be sure to manage risk. Stop at yesterday's high. If we decline sharply today, we will decrease the stop level. If market rises and we are stopped out then be it, NO TRADING AGAINST THE TREND FOR UST.

Original Post
SP500 (Closing as of September 7, 2011) = 1186

Market: Bear
Defining Level: 1207
Trend: Down
Defining Level: 1269
4/8 Trend Change Confirmation (Up to Down): Yes
Current Trade: Short SP500 from 1194 (allowed the market to reverse before shorting)
Profit Objective 1:  1158                                                Trailing Stop (closing): -
Profit Objective 2:  1122 / new low                                 EW Stop: 1209
Status: Low risk trade because markets are in a Bear Market - Downtrend. Hold Short till profit objectives are achieved or stops are hit. Risk: 1.1%
Next Trade / Model Based Approach: Probably long but will wait for 1/2 week
Stop:                                                                              Risk: 
Risk Associated with trade: 
Turn Window: September 20 (+/- 4 days)
Wait for the market structure to develop to identify top or bottom.
1-   Market bottoms in turn window
2-   Market tops in turn window
3-   Market double bottoms and breaks out
4-   Market double tops and breaks down
Observations:  Time wise, next turn date is scheduled for September 20, 2011. Markets can decline into a low during the next turn window. This low could result in a sustainable rally (October 2011 to December 2011). Since Trading Algorithm does not participate in counter trend trades until unless there is ample conviction through Inflection Point Model, it did not go long on the recent rally. However, it did Short the market at 1194 because the trend is down and the turn window is almost 2 weeks away. In order for the short trade to materialize, markets need to stop below their recent highs and the Bull/Bear demarcation line at 1208 (SP500). We will keep you informed about profit objectives attainment.

MARKET STRUCTURAL ANALYSIS: (Mailed to subscribers on Monday - 9/5/11)

The most important aspect of any analyst's performance is to listen to the message of the market and to adapt appropriately. Stubbornly holding on to one's market conviction can be disastrous to his/her trading account.

Friday's market action lead SP500 and other prominent stock indices to decline back into the Bear Market territory. This decline also generated a trading algorithm Sell Signal from all long positions.

From a Market structure perspective, the decline over the past few days has traced out a clear five wave decline pattern. This pattern suggests that the primary trend is now down. Moreover, it has brought the possibility of a new low (below 1101) to the forefront.

If we look at the broader picture, it seems like markets rose in a 3 wave fashion since August 10, 2011, followed by another 3-wave rise since August 23, 2011 low. 3-waves are corrective patterns, and are followed by down moves which retrace the entire previous rise.

When this pattern is viewed in conjunction with the broader downtrend and decline back into the bear market territory in a five wave fashion, it suggests that the markets will soon make a new low.  Therefore, 4th wave correction topped out at 1230 (SP500) - shown on right. Over the next few days we might experience a brief bounce, but it will be a shorting opportunity. We will keep you informed as signals are generated by the Trading Algorithm.

In terms of market targets and time overview, market can decline to 1070 - 1050 level. Next turn date is scheduled for September 20, 2011 (+/- 4 days). This time frame coincides with FED's 2-day meeting (FED might announce QE3) and Fall Solstice. It is highly probable that market could continue to decline for the next 2-weeks before putting in a sustainable low. With all of the above mentioned bullish developments, we will most probably see positive divergences on the next decline. In any case, risk-management should be the top priority.

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  1. Nice.

    Would be more helpful if you would send an email to subscribers when the Trading Algorithm indicates an action such as yesterdays short at 1194. If we don't find out until the next day the market could have moved. It closed at 1186 yesterday and today's futures are down so timely trade information is important.

    Many thanks.

  2. Dear Mike,

    I understand the issue but unfortunately I cannot send out exact trading recommendations because of logistic constraints (work and school). And there is no way of identifying exact levels before hand i.e. market can stop 4-5 point below a target or can over shoot a target by 4-5 points.

    Yesterday, I tried to identify clear levels but also mentioned that the reader should utilize his or her judgement to short the market on a reversal. For me the reversal took place when we broke below yesterday morning's lows.

    Thanks for the comment. Hope your finding the analysis worth wile.


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