Monday, May 7, 2012

Monday looking lower

The Hoot 
Actionable ideas for the busy trader delivered daily right up front
  • Monday lower, medium confidence.
  • ES pivot 1371.00Overextension under is bullish.
  • Rest of week bias uncertain technically.
  • Monthly outlook: bias up.
  • ES Fantasy Trader goes long at 1349.50..

Last Thursday night, the market direction was too tough for me to call technically so I said to just watch the jobs numbers instead.  Well the numbers came out and they were stinky indeed, so down we went again to the tune of a hefty 168 point plunge for the Dow.  And if that wasn't bad enough, tonight comes word that the French have given le Sarkozy le boot.  Zut alors!  Should be another interesting week coming up...

The technicals

The Dow: Candlestick-wise, Friday's daily Dow chart looks awful.  A hanging man on Wednesday confirmed by a loss on Thursday followed by an even bigger solid red candle Friday.  And all that has only brought the indicators maybe halfway down from overbought.  The only good thing here is that the 13K support line was respected Friday.  But I said the same thing about 13,200 the day before, and that fell like it wasn't there.  After that, there's nothing til minor support at 12,930, then major support at 12,650.  And there's no sign of a reversal on this chart.  Just plain ugly.

The VIX:  The VIX's big move up on Friday just put it into overbought territory, but at 19.16 it is still well short of the upper BB at 20.57.  It's not a given that we'll reach that level but the futures support more upside with two solid green candles and indicators rising off of oversold levels.  All of which bodes ill for stocks.

ES daily
Market index futures: All three futures took a big gap-down dump right out the gate Sunday night on the French news.  At 1:14 AM EDT, they're all still way down, with ES lower by 0.95%.  This merits a chart.  It looks bad, but there may actually be some good in here.  Notice how ES is forming a hammer and how the last four days of negative action have brought all the indicators deep into oversold territory.

And note how we punctured the lower BB tonight and then recovered back to it.  And finally note how the recent decline has that exponential waterfall look to it.  Those are encouraging signs.  The horizontal blue line is where I went long a few minutes ago.  Tonight's gap down feels like a selling climax to me. 

ES daily pivot: Tonight the pivot, unsurprisingly, drops from 1391.08 to 1371.00.  With the gap down on the Sunday evening open, we're now way below the pivot.  Being under the pivot is normally bearish.  But being way under the pivot can be bullish, as no chart likes to get too far extended from this magic number for very long.  This, perversely enough, is a bullish sign.

Dollar index: On Friday the dollar continued a four day march higher with a strong 0.37% move.  But even that was not enough to reach overbought levels.  And tonight the euro is taking a powder on the French election news.  A long bet on the dollar Monday would seem like a reasonable idea - but bad for stocks in general.

Transportation: Two big down days here too brought us right into the Twilight Zone, halfway between the BB's.  Although there is a support level at 5225, both the candles and the indicators support further downside here.

History: As if it wasn't bad enough, according to The Stock Traders Almanac, Monday is historically extremely bearish.


Month right  wrong  no call
April   7      9      2 
May     2      1      1

     And the winner is...

It's a funny night.  I think the futures are going to drag the market down on Monday so I will call for a lower close on that basis.  Well, that plus some ugly looking charts as detailed above.  However, I also think that ES has gotten overextended to the downside here and a bounce is not out of the question which is why I'm going long tonight.  We'll see how that works out.  That's all she wrote!

ES Fantasy Trader

Portfolio stats:  the account remains at $142,625 after 34 trades (27 wins, 7 losses) starting from $100,000 on 1/1  Tonight we're going long at 1349.50.

Reminder - you can now follow these entries and exits live on Twitter @nightowltrader.  And let me note that I always buy on the ask and sell on the bid to make things more fair.  This way there's no question that the trade would have executed for real.  But also don't forget that because ES often moves quickly, the price may have changed in the time it takes me to type in the Twitter post.  Also keep in mind that these trades run with no stops and no preset targets.


  1. I've been your reader for a couple of months, and you are THE most amazing trader and blogger I've seen!

    I have a feeling that SPX has been manipulated. Your short at 1387 was great. The later 1400 was actually forming a divergence with stochastic, which confirmed your short. Really glad to see your profit!

    This is first time I would like to comment (and hope to comment more in the future). I am not sure about your es long. The hourly chart is still in bearish trend. Normally, it's a sell mode, that we short the bounce instead buying the low. I know there would be a bounce sooner or later (hourly stochastic is moving up slowly), but I feel hard to do long. Why not short the bounce instead? Do you have suggestion to trend?

    Again, thanks for all the insightful posts!

    1. Hi SC - thanks for reading and thanks for the compliments! I'm always happy to hear from my readers.

      It wouldn't surprise me if the SPX (or lots of other things for that matter) was being manipulated. But I don't really want to go there, partly because there's no way to prove it and partly because it doesn't really matter. The charts don't lie.

      And I'll be honest here too - I wasn't all that sure myself about my long ES trade from last night. Why not short the bounce? Because at that point (1 AM), I felt that given the magnitude of the drop and the fact that it seemed like an over-reaction, it hadn't bounced enough yet.

      Though after watching it sink more than a point after entry, I did briefly consider yanking it. But patience, once again, paid off and we sold this morning for a nifty 15 point profit. Not too shabby for 11 hours work, eh? :-)

    2. Great call, Michele. When I saw your long ES tweet on my phone last night, my final thought before I drifted to sleep was "man, she has some guts!"

      Nice work.

  2. The rebound during the day confirmed this great trade! I chickened and didn't do any trade today, but it's a great learning opportunity.

    Again, congrats on another great trade!

  3. Thanks for your comments, I have been reading now for 4 days and I enjoy the read and analysis each night before going to bed and in the mornings.

    Thanks and keep up the good honest work.

    One question, any reason you don't use stop loss after the trade? Just asking. I am trading the ES for now 3 months.


    1. Thanks for the kind words. Stops are such a complicated issue. I've been wrestling with this for years now and I still don't have a good answer. In short, I've simply empirically determined that I make more money when I don't use stops than when I do.

      I got really tired of having my stop hit and then watching the stock instantly reverse and head back up without me. If you do a good job of picking entry points, you shouldn't need stops anyway. All too often, all a stop does is guarantee you taking a loss.

      Perhaps others have had better luck with this than me. But in any case, the record for the ESFT speaks for itself: 28 wins and 7 losses so far this year.

    2. Thank you Michele for being straightforward about the stop loss.

      I can totally agree with you. Majority of my loss come from getting stopped out within about 2 points, just to reverse and go the direction that I had planned in the beginning. Then emotion kicks in and chasing begins.

      I still have not decided what stop loss works for me yet, the market makers have a way of getting those stops.

      Your record is impressive and I like your analysis. Thank you

    3. Oh man - been there, done that. Do not, I repeat, do not chase. Ever! Revenge trading is one of the best ways to torpedo your account in a hurry. Ask me how I know.

      If you decide to set stops, get taken out and see your stock reverse, just walk away. I finally had to just delete that line from my ticker to keep from obssessing over it. Use the emotion to find a better entry point for some other stock.

      Stops are like hand grenades. It's all too easy for them to blow up in your face instead of protecting you.

    4. I agree with you. Because we can never know what the market makers are about to do once we enter the trade, so we must follow the charts as our evidence.

      The stop loss is a pain, but for sure I know after some practice (and small losses), that 3 point loss on a counter trend trade, want work. Not even a 5 point. Still working on how wide of stop loss to use. But judging from you, and some practice, not using a stop loss in some cases will protect losses, especially if all the evidence line.

      Your track record is nice. Good work.

    5. You might want to take a look at this post I wrote last year on where to place stops:

  4. And here's a comment that I received an email notification about but somehow strangely never appeared in the blog so I'm copying it in myself here. I didn't want JT to think I'd deleted it or something:

    J-Trader has left a new comment on your post "Monday looking lower":

    Great call, Michele. When I saw your long ES tweet on my phone last night, my final thought before I drifted to sleep was "man, she has some guts!"

    Nice work.


    Thanks also for the compliments. It's a nice feeling when a trade works out like that. And I have to compliment you on your last short last week - you held on longer than I did and made a lot more on that one.


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