Sunday Night Open / Multiple Trends at Once

In this post we are going to look at the early opening of the Futures and Currency markets, remembering that this is the open on Sunday night, it is VERY early to draw any solid conclusions as a number of other very influential markets remained closed, as well as it simply being a long night with the European open and what is often early misdirection in futures in pre-market US trade.

The second slightly more complicated topic that I have been trying to convey are the multiple trend signals that all occur at once, they are all in different timeframes (different length trends or of greater or lesser importance and they occur at different times, yes the signals hinting at them are often present all at once).

That was a mouthful and probably a little confusing. Most of use look at the market in a simple way, "Bullish" or "Bearish", either the market is going up or down and that's it. The reality is the question of whether the market is bullish or bearish depends on what timeframe and trend you are trading. For a swing trader the market may be bearish, for a day trader or short term trader the market may be bullish, for a position trader the market may be bearish, for a trend trader the market may be bullish while for a long term investor the market may be bearish and yes, all of those signals and trends can exist at once and often we can see them. While it sometimes makes it confusing (and what makes it more confusing is when short term trends change, but really have no effect on longer term trends).

However the advantage of having an understanding of all of these multiple timeframe trends is that you can trade all of them or only the ones that fit your style, but in both cases, understanding what the highest probability outcomes are allow you to get the best positioning at the lowest risk and highest probabilities.

I'm going to try to give you an example from 2011 in which we were right on with all of the trends from 2-3 day quick trades and quite a few of them to what the larger underlying picture was telling us and how it was useful in not only trading multiple trends, but setting up trades based on highest probabilities for each of the trends in different length timeframes.

This is the 2011 example which was one of the finest pieces of analysis I think we've had in quite a while in what was otherwise a market that was an absolute meat-grinder for most traders, we were hitting nearly every trend in every timeframe and many members doubled their portfolios in a few short months.

Here's what the SPY looked like on a daily chart back then...

During late July we had a negative 3C signal, the market fell nearly -20% right after that, we actually predicted the end of the decline within about 2 days while most traders had no idea when or if it would end.

From there a choppy sideways/lateral range developed, we didn't know much about the future, but we were able to trade every single move up and down in that range using 3C 15 min charts and used 2-3x leveraged ETFs to do it, the average gain on the model portfolio trades I tracked during that time was an amazing +80%, almost doubling the portfolio in 2 months, while most traders were going long and short and getting stopped out of their trades in 2 days, we were right on every move.

As the lateral trend developed, the longer term 3C charts started to show us that this lateral trend wasn't there by accident, it was an accumulation zone for a much larger trend to come, a bullish trend.

However, as we watched the different timeframes of 3C charts, it became clear by September that the market would put in a head fake - new low before this strong new uptrend that the market had been accumulating for could take place. This not only showed up in 3C charts, but made perfect sense, trap bears with a new low, shakeout any weak longs and then send the market higher and it went higher than even we expected, but we did expect it. October 4th we had the new low in place and from there the market took off to the upside.

This is a 60 min chart of the same area showing the long and short trades we made in the range, the new shakeout low we expected and the strong longer timeframe uptrend that developed and back then, just as we are seeing now, the probabilities looked very strong, but they also showed us multiple trends: you could swing trade the short trades in the range, you could set up a quick short trade for the move to a new low or you could wait for the new low to buy a large long position, or do all of the above. The point was, the market was not so simple in saying the market is bearish or bullish, it depended on which timeframe you were trading. For the short term swing traders in the range, the market would be bullish for a couple of days and then bearish, for long term traders, the head fake new low was a perfect spot to enter at the best price with the lowest risk.

We have signals showing us a similar situation now.

Looking at a little bigger picture and not worrying so much about the day to day trade, the probabilities look strongest for a trade something like this....

 This move that started on 11/16 is being oversimplified here, but the probabilities look highest for the move up we have seen to turn to the downside and likely put in a low below the 11/16 low where this move up started. Why?

This 60 min chart of the SPY (each average shows something similar, sometimes on different timeframes and different depths of divergence) shows confirmation of the move up early on, imagine the rounding over to the downside as I represented it above, that i the expectation for this trend and the probabilities with a leading negative 60 min 3C divergence suggest it makes a new low. However, the short term trade, day to day is not that simple and that is how Wall Street works, they don't want anything to be simple, they don't want anyone to know which way the market is going to be heading and short term trade often is strong enough to move emotions enough to throw you off the trail.


The QQQ

 The 60 min chart of the QQQ shows nearly the exact same thing as the 60 min chart of the SPY above, it shows the probabilities are strongest for a move to the downside in the QQQ that likely makes a new low (you can even call it a head fake new low like we saw in 2011 on October 4th) below the 11/16 low that started this move up. 3C is in a leading negative divergence on a 60 min chart, that is a serious timeframe and a serious signal which is why this is high probability.

However, just as we saw a new low coming in 2011, but still expected a strong uptrend to follow that new low (which told us the new low would likely be a head fake and the best area to enter longer term long positions), we have similar signals now suggesting after this high probability move down in the market and probably a new low below 11/16, we will see a longer term, stronger move to the upside just like 2011.

Why do I say this?

Because this longer term trend of the QQQ on q 30 min chart has shown a long term positive divergence that even led to the start of the 11/16 move yp, but unlike the signals suggesting a new low, this longer term trend suggests (taken with the other charts) that there are very high probabilities of a strong move to the upside after the new low. We can't understand the market by looking at 1 timeframe only, we must see how all of the pieces fit together and establish the path of highest probabilities and let the market confirm our analysis.

Now to make thing even more interesting, we also have a shorter term trend to deal with, we can think of this as day to day, a few days or even intraday- we have signals for this too. It's important to understand though that the longer term signals are usually the most reliable, the shorter term signals are reliable, but they can often change quickly with market events or technical events.

Here's an event that I predicted not only because of signals, but because of years of watching and understanding market behavior or better said, Wall Street behavior, you might call it, "Using Technical Analysis against Technical traders and as that series continues, you will understand why it is not only profitable for Wall Street, but it also helps them achieve their longer term goals and in the process helps them make as many traders wrong at any one time as they possibly can which is nothing personal, it's business.

The IWM resistance and head fake breakout...

Even though our expectations for thie trend were for it to turn down and head to a new low, the very obvious range in the IWM meant one thing, there were going to be a lot of short order stops and limit order buys just above that resistance level. I must have said 20 times that this level of resistance (red trendline) would almost surely see a head fake breakout or shakeout to the upside, there's simply too much money there for Wall St. to leave it on the table. Wall Street can create huge demand (from shorts buying to cover and longs buying) and Wall Street can sell short in to that huge demand at very favorable prices considering we expect the market to move lower ultimately, why would they not take advantage of that scenario? They can see the orders line up there just as anyone with something like Totalview can, but even without it, we know the stops and orders are there because technical traders are so predictable in acting on a breakout above clear resistance.

What happened? Exactly what I said would happen, the IWM broke above resistance, hit all of the orders and moved below so they could make even more money as the longs who bought the breakout are selling their positions when prices crossed back below the resistance/breakout level and their positions were at a loss, it's textbook manipulation of Technical Traders' predictability.

Thursday and Friday I started expecting the same thing to happen in the QQQ for the exact same reason, this doesn't change the probabilities of this trend moving lower to probably make a new low before the market ultimately heads higher, but it does delay it and it gives us opportunities to make quick short term trades like AAPL calls which can make 100% in a day or
two and be sold.

The QQQ range that has become noticeable and the more noticeable it becomes, the higher the chances are for a head fake breakout to the upside. You might wonder why I sat head fake breakout and not a true breakout, the reason is the 60 min chart which is a very strong signal is still leading negative, that means the probabilities are still high that this trend ultimately moves lower and probably to new lows so a breakout above resistance can't start a new uptrend if we still see higher probabilities of the market moving lower first, thus the move is likely to be a head fake like the IWM move was. I should also say just to be clear that the market usually moves together, this past Friday saw a lot of dispersion, but most often the averages move together so that may mean the IWM heads back to that breakout area if the QQQ makes the move to breakout above its resistance, speaking of which....

On a daily chart here's the resistance in the QQQ, it's becoming clear, it wasn't there earlier, but as the IWM's resistance was taken out, the market had enough strength and time to create a similar formation in the QQQ, to me it doesn't look as strong as the IWM breakout/head fake probabilities at this time, but it still looks like a decent chance. Again, this is short term day to day or a couple of days trade, it doesn't change my view on the higher probability that this move up from 11/16 ultimately heads lower and likely makes a new lows, this is why it doesn't bother me to hold QQQ leveraged short positions like SQQQ because I believe eventually as higher probabilities are fulfilled, the move lower will make that SQQQ position profitable.

Now I've talked about head fake moves occurring in all timeframes and before nearly every important reversal (at least important for that timeframe), this is because Technical Analysis is fractal, the same patterns you see on daily charts or weekly charts you see on 60 min charts of 5 min charts, there are all kinds of technical traders following the same principles, but trading in different timeframes, for example some may think of themselves as swing traders, day traders, position traders, or trend traders.

Head fake triangles intraday on Friday...

 Here's the consolidation/continuation triangle in the SPY on Friday, it has the preceding downtrend before it is formed, it has lower volume as it develops (yellow arrow) and Technical Traders expect it to behave in this exact fashion (following the red arrows), a break below the triangle which in their view (taught by Technical Analysis) will start the next leg lower, but I said Friday I not only expected these triangles to see a move on Friday to break below (because traders almost always wait for price confirmation making it necessary to have a break below the triangle), but I also said I think they will be head fake moves that will be a marker warning us that the market and especially QQQ will make an attempt to break above that resistance level you saw above on the daily chart just like it happened in the IWM. The yellow box represents the break below the triangle and what I also believe to be a head fake or false break below the triangle.

 QQQ triangle on Friday on a 5 min chart also saw the same break below the triangle and one way to see if this was an effective head fake move for smart money is to watch volume; if volume picks up on the break below the triangle then we know there were a number of orders right below the triangle's support that was broken and traders executed orders as soon as the break gave them that confirmation, but it gave Wall St. a bigger gift, cheap shares and a lot of them al at once.

Another way we try to confirm a head fake move is to look at 3C, did it make a new low with price? Or did it show a positive divergence to suggest exactly what I just said, "It gave Wall St. a lot of shares they can accumulate at a cheap price all at once". We see here a positive divergence on the break below the QQQ triangle.

Now putting it together, there's not too many reasons Wall Street would buy a break down in price, one would be they expect to sell those shares at a higher price and make a profit. We do have that daily resistance zone in the QQQ, if Wall St. is going to make a run for that and another head fake breakout above that resistance zone, they can sell these shares at a nice profit, thy can also sell short to all of the retail buyers and finally move this market down as our higher probability 3C signal suggests. Do you see how 1 shorter timeframe helps execute the trade on a slightly longer timeframe, which in turn helps execute the move to the downside on the entire 11/16 trend to a new low, which just like October 4th of 2011 (when the market made a new low) allows them to buy shares as retail sells them and sets them up to make money on the larger uptrend reflected in the long term 3C charts?

I know there's a lot there, but this is multiple timeframe analysis and if you use it the same way Wall St. uses it, you can benefit from the same trades and take advantage of the predictability of retail, you are no longer one of the retail sheep, you are the wolf.

This is the true essence of Technical Analysis, understand what smart money is doing and follow along, even if price "seems to be doing the opposite" there's a reason for that as I will explain further in the next part of tonight's article.

Of course we don't just want to look at the probabilities, we too want to confirm them, but to do so when it counts. We don't want to chase price, but let it come to us, so we try to confirm head fake moves and then get in on them to get the best entry at the lowest price.

Also realize you don't have to trade all of these trends, for people who don't have as much time to watch the market, you may just want to look at adding to the short position such as SQQQ if we get a break above resistance on a head fake move, you will get a better price, less risk and higher probabilities.

Last week and Friday in particular, we didn't only have the divergences pointed out above, but we had some VERY odd behavior in which the market did break below the triangle even though the Euro was higher (they usually move together) and the dollar was lower (they move opposite each other), so it seemed like those manipulating the market ignored the normal market correlations Friday just long enough to pull off their head fake move.

We also had a number of leading indicators (short term) acting a bit more bullishly than we might otherwise expect, hinting that the market (short term) is most probably looking for a short term move higher which I suspect (just like with the IWM last week) that the QQQ resistance area is the head fake target, but even though we have probabilities on our side, we will still listen to the market and try to confirm all moves using 3C, leading indicators and a number of other assets that have proven useful in confirming or predicting market direction.

Opening Indications...

These are the opening indications captured before I started this post, so they may have move a bit, I expect they'll move a lot more overnight, but so far this is what we have....

ES (S&P E-mini Futures)

 ES 1 min opened the new week tonight with a gap up above Friday's close, the yellow box represents the triangle that was seen in the market on Friday intraday and the red arrow down is the suspected head fake breakdown-note that ES has a positive 3C divergence in to not only the break lower, but the entire day. On the open tonight 3C looks like ES should pullback a little in the next hour or so and since I captured the chart, it did exactly that, but has stayed above Friday's close and 3C is starting to turn more positive.

Currency EUR/USD

 This is both last Sunday's open, all week and this Sunday's open, note the Euro has been higher virtually all week, this would normally carry the market higher with it, this is one more reason I suspect Friday's break below the triangle was a head fake and the market near term will shoot for the QQQ resistance level on yet another (albeit larger) head fake move just like the IWM last week.

This is a closer view of the open in the EUR/USD tonight.

And here's the normal correlation between the EUR/ USD (Euro) and the SPX and the odd positive divergence in the Euro on Thursday and notably Friday as we suspect that break below the triangle to be a head fake that will lead to a move higher in the short term, again targeting the resistance level in the QQQ.

SPY (green) and Euro (red)

At the green arrow you can se the normal relationship, Euro higher usually means the $USD lower and that means stocks higher just as you see at the green arrow, but Thursday and Friday and especially at the move on Friday below the triangle (remember I said the "Kids were too quiet"?) the Euro is higher, the market lower, this is not normal. If it were just the Euro I might dismiss it, but...

Other leading indicators were also positively divergence in the short term, including the $AUD, $EUR, Yields, FCT, High Yield Credit,  and notably, commodities.

I think most of the analysis from Friday was right on, it is just a bit confusing to put all of the divergences and different timeframes together, but if you do, you see that all of the short, intermediate and longer term trend's and their probabilities all fit very well with the market action and many of our indicators.

I'll update again if anything significant changes, other wise have a great week and I'll be throwing some trade ideas at you as I find them and confirmation of the probabilities!