Anatomy of a market technician.
This week I thought I would dwell on a little of what it takes to come up with solid actionable ideas that we look to take to the market each and every week, and will try to attempt to describe what goes on after hours, and throughout the week.
You see, the work don't stop once the markets close, each and every weekend I generally post 20-30 charts showing ideas, so members are able to follow ideas in FX and globex futures markets.
Some members trade FX markets, others trade the European or US equity markets, or the Commodities markets but having a number of ideas, it always keeps us having a choice, rarely is there a time when we can't find something we cant trade, as with 20-30 markets that I scan, I generally can find an idea or two.
I have received a few emails asking what is it we do, so an attempt will be made in this article as well as presenting some ideas going forward, so readers have some ideas themselves going forward, although I can't get readers up-to date with these ideas, that is strictly reserved for members, due diligence is needed before you take any trade positions.
At Wavepatterntraders.com, it's not just of case of "see how it goes" I try to come up with solid evidence to support ideas and themes going ahead into the following week, this is what is referred as inter-market analysis and is what helps me and members have solid plans and ideas, and most importantly knowing where we are wrong on ideas and getting out of those ideas or switch our bias.
This week was such a case for that, and I left readers with an idea that the market could indeed be setting up a trap for the bears, although not exactly as I expected, but close enough that we needed to respect the trend by midweek, as although we were on the right side and were not trapped short at the lows from Monday, we did have to adjust out bias and switch to an alternative idea half way through the week.
Although I will be the 1st person to tell you that the week just gone was far from easy, especially on the ES, the news flow from Europe was crazy, some crazy moves in the markets that made conditions tough, but equally as I wrote in last week's article "An aggressive move above 1175ES Sept and the bears need to respect that move, especially if it's being seen in other risk markets, such as the FX risk pairs."
Well that's exactly what happened, we got the aggressive move above 1175ES and we knew that one of our ideas was negated and reverted to the alt idea, although the alternative idea was tough to get an entry, so sitting on the sidelines was likely to be the 2nd choice, it was better than getting run over by the freight train.
SPX
I left readers with a potential trap that could of being setting up should the markets want to lift into Options Expiry.
I also wrote:
"Now the contrarian in me suggests that the market is about to setup a trap and burn the shorts again for the 3rd time in as many weeks, however being a contrarian is one thing, respecting price is another.
The obvious H&S is there and potentially a day or 2 away from being confirmed, however there is an idea that we are following should the market setup a trap for the bears.
Make no mistake we are traders at Wavepatterntraders.com we know when to kill an idea and reverse our bias".
Fast forward to this weekend and it looks like that trap could be nearing a conclusion.
We have a time & price target, we have already hit the time window target, but we have a price target of between 1230-1245SPX this is our preferred area.
The big news next week is the FOMC and if the FED will start another round of QE3, now I won't make a judgment call on if the FED will or won't start QE3, that's not what I am interested, in, what I more than interested in, is the reaction from that actual result.
Suffice to say, patterns are suggesting a resumption lower, or I should say I think at this stage based on some ideas we are tracking, that we could see a resumption to the downside.
But I am fully aware that the market could indeed get goosed higher on further QE3 news, but I am not going to trade on that notion or idea, I will wait till the news comes out then monitor the reaction to that news, regardless of the actual news, the news itself does not interest me one bit, it's how traders react to it that interests me, as price is all that matters to me.
ES
I also left readers with this chart and idea.
Sunday, globex opened with a gap down and the markets continued to push lower, but towards the middle of the US session on Monday, we had enough waves in place to suggest a low was in place, and that we needed to be getting out of shorts and if needed stay flat, if traders did not want to buy, or flip to the long side if you were an aggressive trader.
I leave that choice of trade to the individual, I know some traders are only interested in selling the markets at the present time, that's fine with me, my job is to let members know of ideas and my thoughts, not impose any particular idea, knowing where any current ideas are wrong and continually looking for other ideas to trade. Members are welcome to follow me on any trades I make take, but they are also fully aware of stops and the risk involved, as my style does not fit everyone, as I also trade various other markets particularly the FX markets.
So we had a 5 wave decline in place, the idea was to be looking to the upside at our target area, I had a target window of 1165-70ES on the DEC contract.
By Tuesday in globex we already my target, so it was time to be looking for a reversal, this is where sell side traders came back to the market, and stepped up again. Hitting our target the market retraced over 22 handles, so it was still a decent trade if you caught 15 or so of those points, but the market came roaring back again, and continued to vibrate my target once more, so it was a case of the market needed to move lower and reverse strongly or our 1st idea was looking wrong and we needed to reverse to the SPX idea shown above. As the market could indeed have ideas of seeing 1240SPX.
Again the market declined another 20 handles, but it came roaring back again, so I started to have serious doubts about our main idea, and by the end of Wednesday the market made its choice and rallied strong above our key 1175ES area, we knew then, that we were wrong on our original idea and that higher prices were looking ahead with 1240SPX our target and focus, and the market had indeed setup a trap for those trading the H&S and forcing the shorts higher as the rally this week has been intense, much like the previous 2 short squeezes.
Although one point I want to make, is that even though this week had been a tough week after the last surge, it still threw up some decent moves, it was only when it surged past the 1175ES area midweek, that it really failed to offer any decent chances to get back in on the long side, so it keep most of us out of the market.
Being flat is better than getting run over by a freight train, besides we can always find setups, with a little bit of patience, ideas will come together, as long as you continually look for them they will come.
As I write this article, we think the market has some more upside, and it's still a short term bullish market above the 1198ES area, so aggressive traders can start to look at buying dips around 1195-98ES with a view to see around 1230-40ES. It will need an aggressive reversal under 1195ES and an obvious impulsive heavy downside move to suggest that this current rally is under pressure, so we suspect early next week we have some un-finished business with upside.
However with the FED next week, it might be the case that the markets grind higher into the meeting and wait on what the FED announces, and then the fun and games really happen.
The current the idea is that we see a bit more upside into a price and time target around 1230ES seems a reasonable area, then we want to see an aggressive reversal where we suspect a resumption of the current bear trend.
It will need to see an aggressive upside move to negate that idea, but for now I am not going to speculate on what the FED might do, nor the reaction, I just follow price and our ideas, we know what we want to see starting from Sundays open, and also want to see if we reach our targets later in the week.
NDX
The NDX is coming into levels to make an important choice, this is a great opportunity for a trade, it either reverses from our target area or potentially new yearly highs are coming.
Our wave count (not shown here) ideally needs a little bit higher which we also would prefer to see the ES/SPX markets lift higher as well, baring a heavy gap down on Monday, we still tend to think more upside is looming for the US markets, most likely into the FOMC.
The cost to find out is small, although we would much prefer to see it hit our target window of 2323-2346 before we start to look aggressively for a reversal, seeing the NDX into that target should also I suspect see the SPX around 1230-40SPX and the DOW 11750, then the bears need to come out to play or the NDX might indeed see new yearly highs.
The reward warrants the risk, as an aggressive move above 2360 will likely suggest new yearly highs looming.
EUR/USD Vs ES
Recently I noticed a breakdown in some of our solid FX pairs that we like to follow, these being the AUD/USD, AUD/JPY and USD/CAD crosses, these are what I like to refer as part of a group called "risk trade".
Generally the AUD crosses follow the ES pretty well, as "risk" is being bought the AUD crosses move higher, the opposite to the USD/CAD, I have spoke about these correlations in past issues of these articles, so it's nothing new, especially to active traders.
However in the middle of the weak I notice that my usual edges had started to breakdown and what normally would be an aggressive move in the AUD crosses to the upside was muted.
Hence the article title "a tale of two markets" there is an arbitrage going on, either the ES is going to come down with a bang, or the AUD crosses need to play catch up, but atm the muted corrections in the AUD crosses is suggesting that FX markets are not buying into the current ES rally.
So that got me thinking, where was the buying pressure coming from?
The answer to that was the clue I found on Wednesday last week, as the DX was getting slammed, yet the AUD crosses never really rallied as aggressively as I thought, nor did I see an aggressive move lower in the USD/CAD, months back you would have seen equally strong moves in all 3 of those pairs, but I came to the conclusion that the move was coming from the DX puking lower and that the markets were possibly rallying on hope on the European situation getting resolved, hence you saw the EUR/USD pair rally which was helping the ES get a bid, and the DAX was particularly strong the past week which was further aide by rumors of the Greece deal resolved (what for the 20th time !!)
So my conclusions are that I suspect the EUR/USD is the culprit to the current trend in the ES and if we see a move lower in that pair then we could see the ES push lower aggressively as well, so we are actively looking for a conclusion to the current rally on the EUR/USD pair, and potentially think that seeing 140-14050 is a target from here if the ES sees 1230ES
Equally if the FOMC decide to start a QE3 program, that may see the US$ push lower and see both the EUR/USD and ES get a solid bid as part of the "risk on" play.
Conclusion
I tend to think that we have some upside in the early part of next week in risk markets, although we are looking higher for a bit more upside, its then that we are looking for a reversal, we are aware that the FOMC could pull a surprise, and the reaction from the FOMC, I suspect will finally see a directional move, but we have spent the past few weeks whipping up and down, so we might finally get a solid directional move away from this area.
Come join us, you are witnessing some of the craziest markets in a while, and if you're struggling for ideas and need some guidance, then you have come to the right place at Wavepatterntraders.com.
Until next time.
Have a profitable week ahead.
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