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  • The Thrill Of The Chase 0 comments
    Nov 8, 2013 12:24 AM

    UP HERE ... is among the most dangerous places to keep trading on the long side with shallow pullback buys. A tiny pullback of 3% (or less) pales in comparison to a possible 10% to 20% loss if a market correction happens. Far bigger losses can be incurred if a Trend Reversal actually happens.

    That can be another contributing factor for 'The Thrill of the Chase' for the more aggressive traders who don't want to be left behind by a sudden strong momentum run with little to no warning of an impending rally.

    Definitely not suitable for value traders who prefer deeper pullbacks before they make a buy entry.

    Problem with value trading is that the markets tend to become more or less irrationally exuberant near the top and pullbacks tend to become shallower and shallower as the impulsive rally progresses toward it's final conclusion we call the 5th wave or v-th wave on the weekly chart (see previous Instablog for weekly charts).


    Of the four major indexes SnP500 and Russell2000 have the viable common types of price pattern pullbacks for buy setups:

    >> SnP500 Short Term: http://img10.imagefra.me/i5b7/aarc/141u_bb2_ubk5c.png

    >> Russell2K Short-Term: http://img10.imagefra.me/i5b8/aarc/141u_0f6_ubk5c.png

    SnP500 is still an acceptable a-b-c Flat with the c-wave = 127.2% the a-wave despite the possible Bull Flag Failed Trade among conventional traders who use TA as their primary tool. Once the potential c-wave goes more than 1.382x of a-wave then higher probability it will become a 1-2-3-4-5 run down.

    Russell2000 is a potential Zigzag down with the c-wave still shorter than the a-wave. A sudden rally can cause massive short covering among the counter-traders while a sustained run down should result in massive profit taking (while they can) among the short-term to medium-term trend traders.

    Dow Jones and Compq are bearish:

    >> Dow Jones Bearish View: http://img15.imagefra.me/i5b7/aarc/141u_156_ubk5c.png

    >> Compq Bearish View: http://img15.imagefra.me/i5b8/aarc/141u_d3c_ubk5c.png

    Obviously, majority of traders will be selling their short-term trades at or near the Upper Trendline Resistance as a protective trading strategy for Dow Jones. With a successful bounce off the 200ma Support; medium-term traders will more likely try to hold their grounds.

    For Compq; it has gone so far down the on daily and intraday charts it is considered already broken and any attempted rally (corrective rally) will be a good chance for the short-term to medium-term bears to initiate short sell orders or to add more shorts.


    Trading Strategies:

    The pattern divergences among the major indexes are becoming much more pronounced as the large trading houses kept implementing their Sectors Rotation Game. Nothing we 'mere mortals' can do about it but either to join them (if we can decipher patterns of how they move from one sector to another) or simply try to cope up with the situation.

    - For me. I specialize in analyzing the major indexes and in finding tops and bottoms. This is more than enough in majority of cases but usually results in whipsaws and failed trades when patterns become too complex to analyze with high-confidence.

    As indicated in the Back to Fog of War Instablog; I would be waiting for a few weeks of pullback down (preferably less than 3 weeks) before making an entry. 7 trading days of pullback may be sufficient enough to support another rally if the majority of short-term to medium-term market participants (Day-Traders and Swing Traders) become 'irrationally exuberant'

    Right now, for the more nimble trend traders; SnP500 should be able to rally toward the 1874 to 1924 target range if a 1-2-3-4-5 rally happens. Major Fibonacci Resistances on the monthly charts are the 1823 to 1923 levels. Which can fit right into a potential 3rd wave target of 1825 minimum (1847 nominal). And an upper range target of 1924 for a complete 1-2-3-4-5 rally measured from the October 9 bottom.

    What's important right now is how to make a trade entry in this highly divergent market conditions without suffering considerable losses and possibly making the optimum entry in order to maximize potential profits before starting the trade:

    - Plan A: A strong bounce off the SnP500 20ema (with or without a minor penetration) is considered a good buy for the more nimble Trend Traders. Preferably on a re-entry back into the Potential Bull Flag;

    - Plan B: IF SnP500 keeps going down and the potential c-wave down becomes more than 138.2% longer than the a-wave; better to abandon the trade and scratch it for the records;

    - Plan C: To avoid possible multiple whipsaws; wait for a strong bounce on intraday basis that may last a few hours then buy a slow-grinding pullback down that should last a few hours too (I usual use equal time method: That is, if price rallies for 3 hours I wait 3 hours higher-low pullback down before making the entry and use the last low as the hard stop loss) or use shorter timeframes such as the 5min chart or 15min chart for precision entries - but keep looking at either the 30min or 60min charts to gauge time consumption;

    - Plan D: For the more conservative traders; a breakout buy above 1775 can be considered 'last chance' to join the party without being too stretched to the upside. This type of entry usually can result in whipsaws caused by false breakouts that kept happening more often than expected. Thus, I consider this as a 'last resort' entry for trend trading.

    Obviously Plan E is to provide Hard Stops immediately upon entry and Trailing Stops when price starts to rally = as a Standard Operating Procedure (NYSEARCA:SOP) when conducting a Trend Trade. Tighter stops are needed when trend trading as the reward/risk ratio becomes smaller and smaller. Wider stops when counter-trading either after a prolonged rally or counter trading a prolonged selloff since the rewards vs. risks can be huge if and when the trend finally reversed. Problem with counter-trading is that sometimes the trend can last far longer than expected.

    One big mistake can cause devastating losses for traders who insist not using hard stops and/or trailing stops if they entered too early or too late.


    For me, I sold the Oct 9 YM buy trade in Oct 24 on a potential a-b-c corrective rally. Irony was that the seemingly weak Dow Jones proved to be extremely resilient last week as Compq and R2K started going down (Sector Rotations?). Thus, I decided to buy YM again last Tuesday with fair warning on my Comments, of that date, and sold it as Dow Jones approached the Upper Trendline Resistance. The SnP500 30min Continuation Inverted Head and Shoulders illustrated last Tuesday (on my Comments) failed to rally according to expectation but instead formed a potential b-wave up on the intraday and daily charts followed by a potential vertical c-wave down yesterday.

    For my long-term portfolio; I am now able to raise 5% cash as SnP500 approaches it's major Fibonacci Resistance of 1823 on the monthly chart. Objective is to trim down the portfolio to it's previous state of being 90% of total account - before I started diversifying into the European equities last year. I use the other 10% for trading. Too small so I usually leverage the whole account 115% to 155% depending on whether the trade is either Day-Trade or Swing Trade or a combination of both. Also use YM and/or ES as supplementary trades but mostly for Day-Trades and sometimes Scalp Trades.

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