A month passed by with several whipsaws and we are back near the May 20, 2015 all-time-high of 2,134.71.
The usual pattern of extremely shallow retrace or 'Uncle Scrooge' pullback proved not adequate to sustain another multi-week rally to new highs and all-time-highs on the daily chart.
<< Before: drive.google.com/file/d/0B9dBZPXNckXYWjB...
<< Post Brexit: drive.google.com/file/d/0B9dBZPXNckXYaGF...
>> SnP500 Now: drive.google.com/file/d/0B9dBZPXNckXYUWg...
>> Compq Now: drive.google.com/file/d/0B9dBZPXNckXYb0g...
Brexit can be considered the blessing in disguise as SnP500 was able to go down to the more palatable 38.2% Fibonacci Retrace. And Compq actually proved a much better pattern than Spx for trend traders and value traders who can understand the implications of Fibo Retrace > 38.2%.
As a refresher on 3 basic types of rallies:
- Type I Rally: Is when the 1-st wave is retraced by much more than 38.2% but less than 100%. The 3rd wave usually becomes the longest and extended wave and the 5th approximately equals the 1-st in most cases. This is the most common type of basic 1-2-3-4-5 rally.
- Type II Rally: The 2nd wave retraced the 1-st wave by 38.2% or less; then the 3rd comes up shorter than the 1-st and the 5th becomes the shortest. Very common next only to Type I Rally. This type is also the one that sometimes morphs into Type I or Type III rally. No way of knowing early in the process if it will morph or not or which type.
- Type III Rally: 2nd wave Fibonacci Retrace > 38.2% of the 1-st and the 3rd becomes longer than the 1-st but failed to become extended. Hence the 5th qualifies to become the longest and extended. However, extended 5th waves seldom happen.
Type II is the least profitable specially for discretionary traders who prefer to wait for a strong bounce first before buying a minor a-b-c down. Type III is the most profitable if the v-th wave actually becomes the extended wave.
SnP500 is qualified as Type II Rally. Compq is qualified as Type I or III Rally depending on how far the 3rd goes up.
At this early stage, it is not practical to speculate which type of rally will happen. We don't even know if a 1-2-3 or A-B-C is going to happen too early in the process. But for trading purposes; these are what should happen for the medium-term trade of February 11, 2016:
>> SnP500 Medium-Term: drive.google.com/file/d/0B9dBZPXNckXYMkk...
>> Compq Medium-Term: drive.google.com/file/d/0B9dBZPXNckXYaVh...
>> SnP500 Long-Term: drive.google.com/file/d/0B9dBZPXNckXYUG1...
Those expectations are now very feasible as the markets were able to produce 9-10 weeks of consolidation range or give-back for the 10-11 weeks of very strong rally. Not very ideal for SnP500 with only 38.2% Retrace but very satisfactory for Compq with 50% give back.
And the other 'factors' remain bullish to date:
>> DAX Factor: drive.google.com/file/d/0B9dBZPXNckXYMlB...
>> IEV: drive.google.com/file/d/0B9dBZPXNckXYMWR...
>> Nikkei225: drive.google.com/file/d/0B9dBZPXNckXYZFB...
>> Shanghai Index: drive.google.com/file/d/0B9dBZPXNckXYci1...
>> EEM: drive.google.com/file/d/0B9dBZPXNckXYeDR...
>> Amex Oil: drive.google.com/file/d/0B9dBZPXNckXYYWl...
>> Crude Oil: drive.google.com/file/d/0B9dBZPXNckXYMHY...
The above charts bullish pattern remained intact for at least a bounce toward 38.2% or 50% of the i-ii-iii-iv-v meltdown specifically for the EEM and Amex Oil/Crude Oil. No need to update them often since they are long-term charts. Of particular importance are the potential Inverted Head and Shoulders that have formed on the weekly charts for EEM and Amex Oil for those who might want to check out shorter term charts such as the weekly and daily.
A global synchronized rally remains not only a possibility but also a very good probability, if not a high probability for at least a few more months. For example; the US markets, EEM, and Amex Oil have 70-80% probability at least a follow through rally will happen since they were able to produce credible impulsive i-ii-iii-iv-v rally on their daily charts from Jan/Feb 2016. How synchronized and for how long not possible to know at this early stage.
The possibility some markets might actually collapse is still probable but better to prepare for the meltup scenario since it is the higher probability - until proven wrong if some unexpected or unpredictable crisis actually happens again which if far beyond anybody's capability to know nor the better strategy since they happen ever so seldom compared to numerous times markets just kept rallying even for no reason at all.
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Trading Strategies:
Practically nothing has changed except that value trend traders got better price entries for a swing trade as Spx gave up 38.2% of the February to April rally and Compq by very amenable 50%. Also, with 50% Retrace for Compq, the probability of Type I or Type III Rally provides far bigger profit potentials than a Type II Rally. Worth the efforts despite being whipsawed on the way down.
The initial FOMO Trade instablog served it's purpose of preventing being left behind just-in-case the markets become irrational and just spiral upwards from the May 19th low. There were numerous occasions in the past when several weeks of a rally was retraced for only a few weeks before another several weeks of rally followed through. The initial FOMO Trade failed to become among the previous many. It is not a bad strategy nor a failed trade. It was just a preventive or a hedge that did not pan out as as a hedge. But it actually resulted in at least a few successful daytrades and scalps along the way with very little losses on failed bottom fishing attempts on the intraday charts most of which ended up with b/e results.
- For medium-term traders who bought positions in February 2016 lows , perhaps taking 1/5 to 1/4 paper profits at or near the All-Time-High Resistance can prove a wise decision. But then, the markets will decide whether that is wise or not.
- For swingers who bought the June 27 low or the next day rally; selling 1/4 to 1/3 positions is not that bad either just for keeps or to prevent being jittery in the days ahead. Then use either b/e or June 27th low as hard stops for the other 1/3 to 2/3 positions. For Spx (or SPY), I think better to take some profits. For Compq or QQQ, there's so much allowance not very practical to take partial profits.
- For daytraders who used the Friday's Jobs Report; they can take more profits at or near the All-Time-High Resistance as SOP Trading Strategy since a kick-back can easily result in SnP500 to collapse below Friday's breakout entry. They also should use hard stops at b/e for most, if not all positions. And perhaps allocate 1/3 positions for a Spiral Meltup since if SnP500 breaks above All-Time-High, there is a very good possibility it can result in traders and investors to be chasing that breakout.
As a general guideline: A retrace of more than 61.8% of the most recent rally usually results in a re-test of the most recent low. When it comes to how to use Trailing Stops; there are thousands, if not millions, of how to do it but none so far has been acknowledged as very effective. Thus, it is more an individual's preference what type of trailing stop or supports to use for their trades which mostly depend more on where they entered rather than the general guidelines or strategies traders have invented in the past.
>> Compq Special: drive.google.com/file/d/0B9dBZPXNckXYb3V...
I've illustrated Compq long-term scenario first in April 2015 before it collapsed with 19.53% correction very much suitable for a blue iv-th wave as a complement for the ii-nd of a i-ii-iii-iv-v cycle run. It is a special case since IF it actually breaks hard above the March 2000 All-Time-Major Resistance, then expect a highly volatile BOOM that might substantially exceeds the illustrated run up for the blue v-th wave. And if it happens, then better start re-evaluating how far SnP500 and Dow Jones could be 'pulled up' by Compq.
>> SnP500 Short-Term: drive.google.com/file/d/0B9dBZPXNckXYWHZ...
>> Spx Intraday: drive.google.com/file/d/0B9dBZPXNckXYeGR...
Those are my bird's eye view on the short-term.
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I keep using eminis in recent years almost exclusively for short-term trades. Reason is that I stopped leveraging my account, and mostly avoided using 2xSSO as a swing trade since early 2015 in expectation of the extended blue iii-rd on the monthly chart for SnP500. Which means a major correction cannot be far away. And since I have this psychological tendency to keep holding positions longer than necessary; I have to use eminis to force myself to use hard stops and trailing stops for YM, ES, or NQ since they have expiry dates and highly leveraged. Otherwise I might end up in the poorhouse if I keep trading and holding tons of 2xSSO with leveraged account (and of course the eminis) through major downturns.
For newbies, not practical to use highly leveraged eminis since emotions will almost always win against high-probability trade setups and trading strategies that can result in numerous whipsaws and being unable to finalize trades to their conclusion. Better use SPY first for at least a few years, as an 'investment for experience' and with zero% intention to make money --> just to learn the setups and strategies first - and acquire the very important 'confidence' to keep using same old same old setups and strategies profitably through their conclusion as first intended and through the years. Then after several years of experience; switching over to the eminis can become less traumatic and perhaps far less hard to hold onto profitable positions, if not outright very profitable on the first few years with them. Even many expert traders I knew avoid using eminis despite having more than a decade of experience already. Master traders usually kept using ES almost exclusively for short-term trading. But not for medium- to long-term trades and for investments which usually involved carefully selected stocks.
* Still nursing two positions of ES and YM for a swing trade @b/e stop loss. Also bought half positions of ES last Friday using breakout method based on the Jobs Report as a possible daytrade with 2,163 nominal target on 240min chart for ES. I'm starting to use trailing stops on YM swings. One of which is now at $17,777 to lock-in more than half of paper profits.
** Also, I've got so much cash already earned from swing, daytrades, and scalps for the first half that I usually withdraw much later. Thus, instead of letting them idle, I'll use to execute the SPXL/SPXU Pair Trade illustrated last week or the week before as a testbed of that trading/investing strategy.
For example, SPXL rallied 1,988% from March 2009 to May 2015 with the SPXU practically losing perhaps 99% if it were available back then as a 100% hedge to the SPXL. That's amazingly profitable with 100% hedged long-term trade or investment for that matter. If the markets kept on tanking for years and decades, then the SPXU will presumably rally thousands of percent. Thus, the SPXL/SPXU is a two-way hedge not just one way. And since they are two-way hedged then finding the correct entry timing is practically not necessary - but of course should prove more profitable when executed at or near expected bottoms or tops.
Good luck and profitable FOMO Trades.