Market Analysis Feb 15, 2008

I have decided that blogging takes up a lot of time, obviously. For this reason I will do my best to update this blog on a weekly basis. Hope you enjoy.

The recent volatility might be driving you crazy, but if you have discipline and a solid trading plan then you are probably enjoying the profits. I can’t stress this enough, discipline and a trading plan are your edge. Everyone goes through their cycle to find the Holy Grail in search for an edge, but the edge relies within you. Once you realize this simple concept and grasp it then you will be well on your way to becoming a successful trader.

First off are the YM and ES. Since both charts look nearly identical I won’t spend a lot of time on the YM and focus more on the ES. On the daily there is a small trend line and strong resistance, forming a nice wedge. There are a few ways to play this, you can wait for a breakout and CLOSE above or below the trend lines. If price closes above resistance then it would be a safe play up to around 1400, and a close below would be a nice short to around 1325. Both scenarios can bring good risk/reward setups if you plan the trade properly.

The ES weekly is rather interesting. Old support around 1300 is holding very well. If you look back several years you’ll see how important this level is. Also the bullish trend that was started in 2004 was broken a few weeks ago and is now acting as resistance. As of now the safe play would be to buy at the support level and short at the resistance. Of course if 1300 is broken I think we will quickly test 1250. If we are truly in a recession and more bad news is to come, then I wouldn’t be surprised for 1250 to be tested in the near future. But of course I won’t trade that direction until my charts tell me to do so.

Crude is also giving us a nice range bound channel to trade. On the daily we have a spinning top at $95 which is a resistance/support area. If you look back a few weeks to $100 you’ll see a similar setup that paid very well. This is where combining the daily and weekly charts can come in handy; looking at the weekly chart I wouldn’t be jumping to short yet, whereas at $100 we also had a spinning top to confirm the daily. If $95 holds, then I would be long to $100. If $95 breaks, I will short to $90. Simple trade, manageable risk/reward.

Now onto gold; gold looks to be setting up a nice triangle formation which in my opinion would be a continuation pattern. The declining volume and tightening price movements are noticeable. If the market continues to fall then gold could sky rocket from here. Sometimes it pays off to learn how to combine various markets to see how they correlate. Sometimes it works, sometimes it doesn’t. Gold could still fall here though, and if it does I would see $880 as a reasonable resting point.

Good luck this week, and good trading.

Today proved to be another volatile day. Ben Bernanke came out and announced that deeper rate cuts will most likely be needed as the economy is slowing(story). This initially drove markets higher only to sell off, then rally again. Tonight Merrill Lynch announced they will take down $15 billion mortgage write down which is double the initial estimate (story). Overall this is bad news, and I think this is just the beginning.

Today provided some good trading setups if you took your profits fast enough. You have to adapt everyday and take the opportunities the market gives you. That’s the lesson I’m learning every day, that not one day is the same but the opportunities are still there. You have to keep a clear head and move swiftly from one trade to the next.

Let’s start with the YM. Between July and October the YM fell from an all time high around 14,200 all the way down to 12,800 – back up to 14,400 then down to where we finished today around 12,800. What does this mean? It means we have a double top formation and the support line has broken. Conventional wisdom would tell us that our next target would be around 11,600. I don’t necessarily think it will hit that target, but with the recent volatility I could see it happening over the next year. Remember it won’t be a straight decline to that level. Bear markets are tough to trade because you will get huge sell offs followed by huge rallies. Of course this double top could fail, but until that happens I will continue to use the 13,000 area as resistance.

Similar story for the Naz, the long wick on the spinning top tells me there’s a fight between the bulls and the bears. In order for me to have confidence to go long on the NQ I would want to see more demand with stronger conviction. That doesn’t mean I don’t think we will test 2,000 again, I think that’s entirely possible. But my target of 1850 still stands.

Today CL broke the $95 support level along with a trend line. My next target for CL is around $90. I think we will fall back to $90 and possibly even $85 before rallying past $100.

I hope everyone has a great Friday and good trading. If you have any questions feel free to send me an email or leave a comment. Thanks for reading.

Overall the market was choppy today; but there was still plenty of money to be made. Screen time is essential with trading. Today was the day that screen time paid off, along with the ability to control your emotions and not expect anything from the market. You had to take your trades and let them work, if they turned out to be a profit or loss was irrelevant, as long as you were following your plan and following sound money management rules.

I want to start off with the NQ as I believe it is the most interesting setup right now. Yesterday the critical 2,000 support level was broken; which is obviously very bearish. I pointed out my next target would be 1950. That target was hit today and turned out to be near the LOD (low of the day). After 1950 was hit price rallied and formed a nice hammer. Normally I would jump at the opportunity to take a hammer on support, but there are a few reasons why I will NOT be taking this trade. The first one is the risk reward. Remember the support at 2,000? Well, due to a change of polarity 2,000 is now resistance, so the close around 1979 means our long position would only have roughly 21pts to work with. The potential risk would be our stop below the bottom of the wick, which is under 1950. I am not willing to risk over 30pts to profit 20, which is not a good risk reward ratio for me. There are several ways to take this trade and none of them are right or wrong, but that is how I would take it according to my plan – which also means that’s why I won’t be taking this trade.

Next up is the YM, I don’t really know what this candle is called but it shows buyers were present around 12,600. Interestingly enough 12,600 is the low from the 400pt decline on February 27, 2007. I find it crazy to believe that we are already trading back at those levels, but we are and buyers were definitely present. Looking ahead tomorrow I see 12,800 as a potential level to short as that is now new resistance. I think we might touch that tomorrow and could see another bounce in the 12,500 – 12,600 range before going lower.

Last but not least, CL. There are two inverted hammers in a row on the $95 support line, along with a wedge forming. The wicks on the hammers tell me that price has tried to move higher twice but lacked any conviction so the breakouts failed. I will wait for some form of confirmation before making any trades.

Hope this helps, if you have any questions feel free to e-mail me.

I haven’t updated this blog in a while and I figured I would give it another shot. There will be a few slight changes but nothing major. First off I will only analyze the markets I actively trade, the YM (e-mini dow), ES (e-mini S&P 500), NQ (e-mini Nasdaq), and CL (Crude Light). I will occasionally talk about the USD since that has a lot of news surrounding it. But for the most part I will only focus on the YM, ES, NQ, and CL. If you have any questions or would like to contact me, my e-mail is james.lengyel@gmail.com

First I want to talk about the YM. On Friday we tested the mid August lows and closed somewhat near that low which is bearish, the small wick on the candle indicates there are buyers in the area. The MACD finally rolled over and that adds to my bearish argument. Although going short right on a support level isn’t attractive in the risk/reward category I would look to go short if we broke those lows and my swing target would 12,500.

The NQ has been setting up a box play for nearly two months now and finally broke out of the support. I wouldn’t be surprised to see a retracement back up to 2,000 then a selloff down to my target of 1,950.

The ES hit support made in November, but I don’t like this setup compared to the YM and NQ so I will stay away from this market for now.

Crude light has been generating a lot of news this last week since the first trade hit $100.00 a barrel. This would have been great news for the bulls had it not immediately sold off. CL finished the week with a spinning top against the $100 which is actually bearish. I don’t like the idea of shorting CL in this market but I definitely wouldn’t buy until a close above $100. The daily chart shows a possible evening star against $100, but it’s missing the gap up into the doji. Nonetheless it’s still a doji against resistance which indicates a tug-of-war between the bulls and bear; the doji was confirmed Friday with a selloff. I think we might see sideways trading for a few days or a small retracement then another push into $100.

Hope you all have a great weekend and good trading. Feel free to contact me with any questions.

Today was a slow day for the markets, the Feds meet next week and several key reports come out later in the week. Although it was a slow week, the charts still speak and never lie. Resistance was reinforced on the YM and ES and the NQ fell below the .618 Fib line to start the ambush play. This would indicate a potential short setup for all three markets.

CL held its recent change of polarity at $90, the high of today’s candle was $90 and that didn’t hold. The current candlestick could be bullish, but I would wait for price to move above $90 before entering a long position. If price crosses above $90 I would take that trade to the long side because of the risk/reward, the first target would be $95 and my stop would be just below $90.

Hopefully everyone had a good weekend and a good Monday.

The market continues to push higher with more news that the Fed may cut rates in a few weeks. Never forget to listen to your chart, that’s the mistake I made a few days ago and that’s why I was wrong. Now that I plotted support and resistance lines again it is clear the YM is about to hit the current trend line and a few more resistance levels. I do believe this will hold, but only time will tell. The ES is very similar, like usual.

The NQ broke out a few days ago and went the opposite direction than I had thought it would. The past two trading days we have seen dojis which indicates the rally may be losing steam, there are more sellers in the market now than before which is preventing price from auctioning higher.

CL moved below 90, and this is a clear short setup. Pay careful attention since this is a very volatile contract and could easily test $90 again next week. If $90 holds as resistance then this will be a change in polarity, which is very significant.

That’s pretty much it for now; I will update the blog on Sunday with weekly charts and a few stocks that I will watch. Have a great weekend.

Yesterday we saw a huge rally in the markets, and I will admit I was wrong thinking we would continue to move lower and test the mid-August lows. Like I have said before, bear markets have steep selloffs followed by fierce rallies; you have to pay close attention so you are on the right side of the trade. Capital preservation is key in a bear market, if you don’t know what to do then it’s best to get out and stay cash until you see a clear setup that fits your trading plan.

Since I was wrong this also shows that in order to be a successful trader you must embrace uncertainty and take full responsibility for all of your trades and the risk associated. A successful trader will trade all of his setups and understands that some of them will lose and some of them will win, but if he sticks to his plan and preserves his capital then he will come out on top. You don’t need a magical technical indicator or an expensive setup, all you need is the right mindset and discipline.

Let’s first take a look at the YM. The MACD crossed over which is a bullish signal, one thing I do want to point out is the declining volume as the rally ensues. We also have a spinning top that kissed resistance, which is also bearish. This isn’t enough for me to jump and setup a short, but the market is telling us that the rally may be coming to an end, and a possible short play might be around the corner. If price falls below the low of the spinning top then that would confirm the spinning top and warrant a short setup.

The ES is very similar, but the spinning top is more of a doji which is more bearish. If price breaks through 1480 then the next resistance level is 1500.

Crude has sold off over the last few days and volume has been increasing which is very bearish. The $90 support level has held so far, but if that breaks then a short play would be obvious and I would like the risk/reward associated with that. If the $90 support area can hold then a long would also work, the first target would be just shy of $95 and the second target would be around $100.

I hope everyone has a good Friday and a good weekend. Remember, embrace uncertainty and you will be successful.

First off I want to apologize that I haven’t had a chance to update this blog in quite a while. I will do my best to post more frequently. I hope everyone had a great Thanksgiving and enjoyed all the football.

The YM has clearly been in a abrupt downtrend since the beginning of November, so you should avoid going long unless it’s clearly written in your trading plan. Last Wednesday the YM closed below support and on Fridays light trading price bounced back for a small rally. Evidently no one took Friday’s rally seriously since there was no volume, and Monday’s bearish engulfing pattern tells us the bears are still in control. The next support is the low of the hammer established in mid August. In general I would expect this level to be hit after a few trading days, but considering that a 200+ point swing is common in this market I wouldn’t be surprised to see Tuesday or Wednesday. The Trin did close above 2.00 on the YM, so I would support a long position to sell at the open.

The ES broke through another form of support today; a bearish engulfing candle was formed. One thing I want to point out is the low and the close; both are nearly identical which indicates substantial selling pressure into the close. I stated the Trin closed above 2.00 and that would call for a long position into tomorrows open, but I would immediately cover and look for a potential short play since the bears are clearly in control. Granted if the market internals tell me to go long, then that’s what I will focus on.

The NQ is very interesting here, there is strong support around 2,000 and price continues to make lower highs. I believe this will break soon to the downside and price will fall substantially like it did a few weeks ago. If the breakout occurs to the upside I would be cautious.

That’s it for tonight; I will take a look at the other markets tomorrow night. Good trading.

I asked myself today, why do people still make such a big deal about the Dow falling 360 points? It’s happened several times this year; one would think it’s almost expected on a monthly basis. Anyways, the YM and ES closed on support, no surprise there but the candle is very bearish. The ONLY way I would want to go long tomorrow morning is because of the TRIN, it finished today at 2.13. I won’t lie to you, after a 365pt drop I would expect it to be higher so that doesn’t scream buy for me.

If the ES breaks through support the next leg is around 1500 and the YM roughly 13,400. There is a short squeeze firing off for the YM and I don’t think this move is the end, I think it’s the beginning and we will get a nice wave down before bouncing off support.

The Nasdaq is still my “favorite” index right now since it closed on support and has the strongest chart. But if the ES and YM continue to fall, it will only pull the NQ down with it.

CL continues to impress me, even though it fell today and the candle could be a potential spinning top. I don’t see it that way at all, I think it’s a minor pullback after a huge gain and some people want to take some profit and enjoy themselves. Don’t fight the trend.

Gold is still a great play, and in my opinion should be in everyone’s portfolio in some form. Gold pulled back to the 8 EMA, and I think it could be a good buying potential before it reaches $800.

I would talk about the US Dollar and Euro here, but what is there really to say? Short USD and go long the Euro.

GS (Goldman Sachs) is an amazing company that always finds a way to be on the right side of the trade. All the financial stocks are taking a beating and are in a serious down trend, but not GS – they made more money hedging sub-prime indexes than they lost with their GSAMP mess. What does that tell me? It’s okay to buy GS and short everything else because they will still find a way to make a ton of money. GS fell today with everyone else, but found support at prior resistance. There was less volume today with the sell off which is bullish to me, and the long squeeze continues to fire off.

This weekend I will post a longer blog with several stocks I have been following and other things I’m looking at. So make sure to check back Sunday night.

Tonights blog will be short because I am tired. The Fed lowered rates but a quarter basis point, and the market liked it so there was a rally. I saw a bearish chart, and I was wrong. The YM and ES are still trading in a wedge and both ran into resistance with the rally. Technically I should be bullish because of the bullish engulfing pattern, but I would like to see price break through the resistance before looking for a long setup to occur.

Check out the charts on the YM and ES.

The NQ broke out of resistance with strong volume, so as you can imagine this is my favorite trade for the indexes.

Next up is CL, crude is absolutely awesome right now. We got the pullback I was waiting for and a confirmation that the rally is still intact today, and the best part is the strong volume. If you can’t buy a CL futures contract, look for an ETF and maybe play some options around that. This way you can manage risk and if CL swings a few bucks in one day you won’t get a margin call.

GS broke through resistance today with a strong bullish candle and strong volume. GS is my favorite financials play right now and I will look to get back in tomorrow. LEH looks strong too, but as I have pointed out in the charts I want it to break resistance with strong volume before I enter again. The reason for this is the risk/reward, right now your reward is potentially limited while risk is much higher. If you wait for the breakout then your reward is much higher than the potential risk. You should be more concerned with how much money a trade can lose you rather than how much you can make.

Thanks for checking out the blog, I’ll have something more detailed tomorrow night.