Thursday, May 31, 2012

Thursday lower unless pivot passed

The Hoot 
Actionable ideas for the busy trader delivered daily right up front
  • Thursday lower if pivot not passed, else higher.
  • ES pivot 1316.92. Holding under is bearish..
  • Rest of week bias lower technically.
  • Monthly outlook: bias down.
  • ES Fantasy Trader goes short at 1310.50.

I had this sneaking suspicion that yesterday's rally was fake, and that suspicion was confirmed today in the form of a nasty 161 point dive in the Dow in a broad-based decline where losers outnumbered winners five to one.  Since Europe seems to be running the show now it may seem like just an academic exercise to run the charts, but we might as well - you never know what you might find...

The technicals

Dow daily
The Dow: There's something strange going on here.  For six days now the Dow has been making higher highs and lower lows.  This is a quite unusual pattern that goes by several names such as the inverted symmetrical triangle, broadening triangle, or the name I like - megaphone top, because, well it looks like a megaphone.  Check it out.  This one is striking in its symmetry and indicates not just growing indecision but growing instability in the market.  I'm calling this a top because it follows the  bottom put in on the 18th and the following big up day.  In any event, this is quite a bearish pattern.  And the candlesticks remind me of a three outside down pattern which is also bearish.  And to add to the gloom, the indicators all topped yesterday and the stochastic is a hair away from making a bearish crossover.

The only bright spot here is that the Dow has some good support at 12,370, just 50 points below today's close.  If we break that, then the 200 day MA at 12,246 is back in play, then the 12K round support level.  Overall, I'm really not liking this chart tonight.

The VIX:  Last night I mentioned the possibility of a higher VIX by the end of the week and it delivered in a big way today with a whopping 14.8% pop right out of its descending RTC for a bullish setup.  And that also caused a bullish stochastic crossover and caused all the other indicators to hook up from oversold levels.  This all suggests even more upside to come.  With no resistance until 25 (and then the 200 day MA at 25.22), the VIX certainly still has some room to run.

Market index futures: So with all the gloomy charts, why are all three futures in the green at 1:54 AM EDT?  ES is leading the way, up a non-trivial 0.23% in a move that began, oddly enough on the stroke of midnight.  There's certainly no cause for joy in the daily ES chart.  A big red candle that stopped right on the edge of the rising RTC , indicators that have now clearly topped at overbought, and a stochastic that made a bearish crossover today.  In fact, this action is causing the new candle to look like a hammer.  With no immediately obvious news from you-know-where, all that comes to mind is "dead cat bounce".

ES daily pivot: Tonight the pivot takes a big step down from 1328.42 to 1316.92.  ES was below before, and now it's still below, just not quite as much.  But it's still a negative sign.

Dollar index: The dollar is like a broken record here, advancing yet again for the sixth straight day, this time up 0.61% to remain solidly in its rising RTC on a solid green candle.  I had to move out to the weekly chart to find any resistance - it's at 58 in the first week of January this year.  Of bigger interest is that today the USDUPX closed exactly on its 200 week MA: 57.61.  Thursday is make or break day for the dollar.  Pushing higher again will break above the MA and provide even more steam to go still higher.

How likely is that?  Well just look at the poor euro.  I've been saying here for several days now that the euro is trudging downstairs to pay a visit to 1.20.  It dropped again today to 1.2369 at the close, before recovering slightly in the overnight.  At the current rate of descent, the euro should hit 1.20 somewhere around 6/11 to 6/18.  This isn't good for stocks either.

Transportation: Adding to the feeling of impending doom, today the trans got clobbered.  Where the Dow lost 1.28%, the trans were down 2.12%.  Worse, this took them out of the rising RTC for a bearish setup.  And the indicators here have all peaked at overbought levels.  And the stochastic just formed a bearish crossover today.  That's four strikes - you're really out.  This isn't pretty at all.

History: According to The Stock Traders Almanac, Thursday is historically just slightly bearish.

Accuracy (daily calls):

Month right  wrong  no call  conditional
April   7      9      2
May    10      7      3           1

     And the winner is...

Absolutely everything is just screaming "lower" right now - except the futures which continue to rise as I write this.  Modulo that, the call for Thursday would be easy - down.  But it is never wise to ignore the overnight movement of ES.  I always assume someone knows something I don't (generally an easy assumption to make).  And right now, ES is in a clear uptrend that will intersect the pivot at 3:25 AM.  It could be a DCB, or it could be another fake-out.  No way to tell right now.  So here's my call: if ES hits the pivot Thursday morning and bounces off, we'll close lower.  If it breaks through decisively (by which I mean goes above and stays there), we'll close higher.

2:15 AM Update:  Here's the break (finally)  in that ES uptrend.  This really increases the odds of a lower close Thursday.

ES Fantasy Trader

Today's short trade worked out nicely and we took a 12 point profit just before lunch - yum!

Portfolio stats: the account now rises to $123,500 after 38 trades (29 wins, 9 losses) starting from $100,000 on 1/1. Tonight we're going short again, with some misgivings, at 1310.50.

Reminder - you can follow the entries and exits for these trades live on Twitter @NightOwlTrader.

BOT    10    ES    false    JUN12 Futures     1315.00    USD    GLOBEX    11:35:23   
SLD    10    ES    false    JUN12 Futures     1327.00    USD    GLOBEX    00:50:14   

CUA (Commonly Used Acronyms)

BB - Bollinger Bands
DCB - Dead Cat Bounce
MA - Moving Average
RTC - Regression Trend Channel

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