Sneak Attack

After the Stealth Rally on Thursday last week we got a Sneak Attack by the bears Monday on President's Day holiday:

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The Earning Season is practically over and many economic indicators are starting to show weakness. 

For the Medium-Term TA;  the Rising Wedge keeps ES and YM trapped within it's borders:

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It was nice of YM to make an attempted Ascending Wedge breakout last Friday but ES, and NQ in particular, did not follow YM's lead.  The absence of traders (and investors) made it too easy for the bears to make a Monday Meltdown - at least for the futures market.

I stopped trading US stocks/etfs (including SSO) to the long side last week in order to avoid this type of market shock and instead concentrated with the ES and YM futures since I can protect them with trailing stops even during off-hours and holidays. 

These markets are very hard to anticipate at this stage since the tsunami of liquidity coming from the Fed's QE2 is only half-way through but the rising tide of unrests around the world can not be ignored for too long. 

Traders and investors (and the media) pooh pooh the ongoing EU Financial Crisis after they looked stupid with an schizophrenic panic selling in April to August 2010 and instead concentrated with local Corporate Earnings, QE2, and Bush Tax Cut Extension.  

This time it is the ME riots adding to the mix of global problems that may undermine the new-found confidence of traders and investors in the US stock markets on a prolonged basis. 

Caviat is that the unrests in the Emerging Markets may make the US the 'Safe Harbor' investors usually flock to in times of global crisis if the US can show credible leadership in the global arena just like the way it did in the 20th Century.

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For the Early Birds;  this is the developing story on the weekly chart:

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SnP500 is now trending on the weekly chart (for the Trend Traders) with the usually expected potential divergence sell signal setup just waiting for a trigger (for the Short Sellers).

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Notes: 

For the ES 240min chart:  The sub-wave price run ups (since the start of the rally in Jan 30 per last week illustrations) do not correspond well with their supposed run rates dictated mostly by how deep their intraday retracements were (retracements of less than 38.2% for the initial rally usually result in the 1st wave the longest).  Thus, today's vertical meltdown does not necessarily mean the start of more run downs if the wavecount proved to be a complex 1-2-i-ii-iii-iv-v-3-4-5 rally instead of the assumed usual 1-2-3-4-5 simple wavecount.  It is still very much possible for ES and YM to break above their Wedge Resistances this week. 

An Extended 5-th Wave Rally is usually characterized by numerous shallow pullbacks and less than stellar run ups that may seem to go on forever until a massive run down, significantly much bigger than the previous pullbacks, happened that will indicate a reversal (to the downside) has finally started.

The ES Conservative Wavecount still holds true until proven wrong since the break above 1340.75 was not particularly strong.  Likewise, the ES Aggressive Wavecount still holds true until proven wrong since today's meltdown is still far from making a confirmation the rally has already ended.   At this moment, none of the above 2 has been proven wrong that makes trading the ES, YM, and NQ extremely risky in both the upside or the downside but may prove very rewarding later on for those who may succeed entering, either long or short, at the most appropriate intraday levels. 

But then again, the Daily Chart Ascending Wedge is still the pattern to recon with.  At this stage;  ES and YM are at their resistance levels that makes shorting them the preferred course of action for many traders.  The ME riots did nothing but help the Short Sellers up their ante but not necessarily the primary reason to go short ES , YM, and/or NQ.   A hard break above the Upper Trendline Resistances of ES and YM should produce a painful short squeeze for the bears.

A 'Guerilla' or 'Hit and Run' type of trading may be employed within this week in order to minimize potential losses if the trade goes wrong either to the upside or downside scenarios.

A 'Confirmatory Type' of trading will be more suitable for those less technically inclined but the losses may become substantially lopsided against the potential profits when executed on a breakout or breakdown basis instead of the pullback down or pullback up method in either going long or going short respectively.