Wednesday, September 28, 2011

Trading Algorithm Update - September 28, 2011

Market: Bear
Defining Level: 1210
Trend: Down
Defining Level: 1245
4/8 Trend Change Confirmation (Up to Down): Yes
Current Trade: Short from 1186 (Shorted market on break below 1187 in the afternoon)
Profit Objective 1:  1150                                                Trailing Stop (closing): 1211
Profit Objective 2:  1114                                                EW Stop: 1220
Status: This short trade can be a 1-2 week swing trade. Risk is moderate b/c stops are a little wide.
Next Trade / Model Based Approach: N/A
Stop:                                                                              Risk: 
Risk Associated with trade: N/A
Turn Window: September 28 (+/- 4 days)
Market is in the turn window. Market might have put in a double top.
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:  On Tuesday US markets staged an impressive rally in the morning. However, this rally evaporated by the end of the day with SP500 losing almost 30 point in the last trading hour. Monday also witnessed a strong market rally.

Although recent market action seems to be bullish and there is pessimism in the market to support this rally, overall market structure gives a different picture. In the context of the overall market structure it seems like recent rally was only a partial retracement of the previous impulsive decline. As seen below, market has risen in a three wave fashion since last week's lows. 3-waves suggest a corrective market pattern. Once this pattern is complete, we will most likely see new lows.

As shown above, yesterday's market rise reached the 78.6% (Fibonacci relationship) retracement level of the previous 5-wave decline (1220-1114). This is a common retracement for a corrective wave.

Moreover, recent rally had following disturbing attributes:
  1. Rally was accompanied by lighter volume, showing lack of market conviction
  2. Rally was accompanied by very low TRIN value, depicting buying exhaustion
  3. Rally resulted in lower Put/Call rations, exhibiting a pacified attitude of market participants

All of these developments symbolize a corrective wave, rather than an impulsive advance.

Alongside these indicators, we are in the Inflection Point Model's turn window. One should be vigilant during the turn window because market can turn at any time. Primary turn date is scheduled for September 28, 2011. Keeping in mind this date, it is possible that market might have topped yesterday afternoon. Furthermore, market reversal towards the end of the day also supports this observation. 

Since the broader trend is down, market has been rallying recently and we are in the turn window, the Trading Algorithm went short yesterday on break below 1187. In order for the short trade to materialize, markets need to stop their assent below 1211 (SP500). We will update this sheet with Risk Management levels.

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