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!

Understanding the Head-Fake Move... How Technical Analysis Went From an Asset to a Trap

I write nearly every day about a head fake move, a possible head fake move, a probable head fake move, how common head fake moves are before a reversal, etc. In fact I write about it so often, I almost get sick of typing the words and often wonder if you too feel like, "Oh, here comes the head-fake".

However, this isn't a theoretical phenomena, it isn't something that I "think" is happening, in fact it has nothing to do with me at all beyond the fact that I have observed so many that I know them pretty well.

First I want to tell you why I know what I do about head fake moves, a sort of history of their development, it will help you understand them more and help you learn to identify them, know when they are likely and use them to your advantage.

I have been in the market for about 14 years now, however my personality type is when I become engaged or interested in something, I really go overboard to learn as much as I can about it. I first started with Fundamental Analysis after reading several books, I quickly found that it didn't work for me, my opinion is it barely works at all for several reasons: 1) the market isn't about fair price, it's about perceptions, fair value has nothing to do with it. 2) To come to valid conclusions using Fundamental Analysis, you have to have accurate data to analyze the stock, how many times have we seen data that is clearly misleading or down right untruthful ( Global Crossing, Enron, Lehamn, MF Global, etc-these aren't small companies, they were giants and they spread untruthful fundamental data). 3) You have to believe you have an edge in analyzing the data, in fact you have to be better than the analytical departments of some of the biggest banks in the world with hundreds of millions of dollars invested in those department, the best minds with the best information and programs. Do you really think you can outsmart them analyzing a stock after you get home from work?  4) As mentioned above, the market has nothing to do with fair value anymore and fundamental analysis is about determining fair value and looking for stocks that are either below or above fair value to either buy or trade short, but look at the Tech revolution, look at the P/E multiples of companies that weren't even around a year-over 300! Look at the home-builders, were they really worth the prices they were fetching? Again, it's about perceptions, not value. There are many other cases to be made against fundamental analysis, but those are enough to convince me it's not useful.

After a string of horrible trades using Fundamental Analysis, I turned to Technical Analysis. At the time T.A was considered,  "Voodoo Analysis";  people made fun of Technical Analysis, saying things like, "Oh yeah, price crossing a line is a real metric of value" or "All of those lines you follow, do you also watch the lunar cycle or the Zodiac to tell you what to buy or sell?"

I remember this clearly, but I also remember it made a lot of sense to me, the idea was to figure out what the big boys were doing and then follow them and do the same, that is where Technical Analysis has it's roots.

THE SHIFT TO TECHNICAL ANALYSIS...

Almost overnight there were more Technical Analysis books than you could shake a stick at, something changed in the perception of Technical Analysis nearly overnight, at least it seems that way looking back. What was this shift? The Internet.

As soon as the Internet revolution became mainstream all kinds of things changed, low cost online brokers popped up and you could now make a trade for $7.00 instead of $80 that you use to pay to a typical broker. More and more people decided to start managing their own money, especially after a bear market in which their mutual funds declined in a huge way and they sold them right at the bottom for massive losses.

The problem for all of these new-would be traders and portfolio managers was that they didn't have any idea how to decide what to buy or sell, they had jobs, they didn't have a lot of time to research a stock so Technical Analysis with some of the more simplistic concepts such as moving average crossovers as buy/sell signals became a very attractive answer to the problem and the books pushing these ideas cherry picked examples to make it look infallible. MOST WHO TURNED TO TECHNICAL ANALYSIS DID SO OUT OF PURE LAZINESS!

CEMENTING TECHNICAL ANALYSIS AS A LEGITIMATE WAY TO MAKE MONEY

With all of these new books popping up, each with some new indicator or trading system, it became very important for these authors to prove their system worked, that Technical Analysis worked, so if you read enough of these books or went to enough weekend seminars, you were slowly, but steadily indoctrinated with the idea that if an indicator or trading approach did NOT work in a trade, it was because YOU did not use it correctly, YOU did not show sufficient discipline to the principles of Technical Analysis; this would later have huge repercussions.

Technical Traders were brainwashed in to believing they must follow Technical Analysis almost like a cult and if their trade failed it was because their discipline toward the concepts of Technical Analysis faltered so what you ended up with was a group of traders who all did the same thing, all saw the market the same way and none questioned Technical Analysis, in fact to this day even as Technical Analysis is used against traders EVERY SINGLE DAY, they STILL haven't changed, learned or modified their techniques, they just search for a better indicator, the newest and latest "Holy Grail of Trading" and it just doesn't exist! What may work for one stock in one type of market for one type of trader may be a total failure with another stock or in another market atmosphere.

However, this all cemented the legitimacy of Technical Analysis in place as well as the idea that if T.A didn't work for you, it was something you did rather than a flaw in the concept or a changing environment.

Watching Technical Analysis Lose It's Value

I must say, for a while, the VIX below 20 or above 35-40 was a useful reversal signal. Price patterns worked, it seemed Technical Analysis could deliver what it promised, but slowly trade after trade would go wrong, things didn't work out or look the same way they did in the textbooks. Soon it became difficult to feel a high degree of confidence in Technical Analysis, your favorite price patterns that worked so many times before were now less reliable and some of your favorite indicators became less reliable. Some spoke out and did studies and showed how Technical Analysis was either a 50/50 proposition or that it was very effective 20 years earlier, but had lost its edge over recent years. After devoting so much time to understanding Technical Analysis, using it, promoting it, it was difficult to look at these critiques and take them seriously. After all, if Technical Analysis was losing it's effectiveness and Fundamental Analysis was nearly useless, what in fact was left? Out of that dim view, it became easy and almost essential to dismiss any critiques of the effectiveness of T.A.

*I don't mean to say that Technical Analysis is useless, there are still many elements that work especially over a long time horizon, but there's not doubt that it was no where near as useful as it use to be.

YOU CAN'T ARGUE WITH YOUR OWN LYING EYES...

I taught Technical Analysis for nearly 4 years at our county school system's adult education program, it was one of the most popular classes of some 60 or 70 classes and we almost always had to turn people away for lack of a big enough classroom. People were starving for a way to manage their own money, to find out what they were doing wrong, why the concepts in the books weren't working for them. It became harder and harder to justify and sing the praises of T.A. so instead I started showing students ways they could use conventional indicators and techniques in unconventional ways, to effectively "See what the crowd was missing", to modify or modulate the ideas.

However after years of trading exclusively for a living and even more years do nothing but watching the market all day, every day, something became clear to me. There was a repetitive pattern that occurred over and over again, it was Technical Analysis in the short term (the area where institutional money could afford to manipulate the market)  that these failings were most obvious.

After some thought about the history I had lived through with Technical Analysis, the markets and the perception towards Technical Analysis I had noticed, mainly that it was nearly infallible unless your faith or discipline failed you, that it became obvious to me. I realized I could write a book and justify any technical concept I wanted, there are so many stocks, so many time frames and so much history that I could justify any view I wanted with all of this information and all of these scenarios, if I was predisposed in to believing in that view, but was that objective or subjective? The tricky thing about the market is it will give you enough ambiguous information that you can make and back up any view point you want if you look at the information that supports your view and disregard the rest as being some sort of anomaly.  

If an assessment of Technical Analysis was subjective, what was the purpose? You're hopefully in the market to make money, not to justify a way of doing things that you have grown to know intimately, a technique in which you have spent years trying to perfect,  but perhaps is no longer as effective; so it took a very objective view that was oriented to succeeding in the market. It took the willingness to say, "Everything I've learned up until now-thousands of hours of study, MAY NOT BE AS EFFECTIVE AS IT ONCE WAS" and then to ask the question, "What is my purpose in the market, to try to keep doing things the way I had always known and understood like the back of my hand or to maybe step in to a new world that challenges all of my prior views and one in which there is no road map?" The answer to these questions really comes back to that basic market maxim, "Do you want to make money or do you want to be right?"; sometimes the two are VERY different things.

HOW TECHNICAL ANALYSIS BECAME A GIFT TO WALL STREET

By the year 2000 with so many discount online brokers and charting software, the Broker-based Wall Street business model that had been alive for decades was suddenly fading away in to obscurity. College graduates weren't going for their series 7  and other licenses to become a broker, who were people who knew little more about the market than any of us, but had a license to sell (or buy) and collect monster commissions from you, discount brokers too that away.

It didn't take Wall Street very long to understand mainstream Technical Analysis, after all, the big money on Wall Street had been using the most advanced forms of Technical Analysis for decades on monster computing systems that none of us could afford or fit into our home office. It didn't take Wall Street long to realize that when presented with a specific price pattern or indicator signal, that all traders would react the same way. Because Technical Analysis in its attempts to stay relevant to sell more books and seminars had conditioned traders to believe that if the technique failed it was because they didn't stick to the technique, it was the trader's fault for not showing enough faith in Technical Analysis. In a strange way, the proponents of Technical Analysis made the way traders looked at charts so uniform, so predictable that it became very easy for Wall Street to now use those views against these traders.

What was once a system for finding the footprints of smart money in the sand and following them had now been totally turned against Technical traders and their belief and convictions in the validity of T.A. just made it and still make it that much easier for Wall Street to use Technical Analysis against Technical Traders...

In the next section we will look at examples of how Technical Analysis is used against traders, how to spot it, how to validate it and how to use it to your advantage.