Markets went down based mostly on the recommendation of David Tepper:
>> SnP500 Intraday EWA: img15.imagefra.me/i85f/jquint84/141u_397...
>> SnP500 Daily TA: g15.picoodle.com/ltd/img15/2/5/16/jquint...
>> Compq Daily TA: g15.picoodle.com/ltd/img15/3/5/16/jquint...
>> Russell2000 Daily EWA + TA: img15.imagefra.me/i15f/jquint84/141u_63d...
On the intraday chart; the vertical meltdown of the past 2+ days practically has no subdivisions for the iii-rd wave. In majority of instances it is a C-wave down and a new rally would follow. However, if (and only if) SnP500 rallies grudgingly in the next few trading days, then it will be interpreted as a corrective a-b-c up that should result in more run downs.
Note that the most recent intraday i-ii-iii already has the iii-rd wave over-extended when viewed on the 15min chart; thus, it is very possible the v-th might truncate OR the iv-th and v-th might not print at all and a sudden upside rally might happen tomorrow.
On the Daily Charts; we have 4 major indexes with SnP500 and Dow Jones practically same higher lows patterns with minor differences since May 2013. Compq and Russell2000 have diverged greatly from SnP500 and Dow Jones for the past 12 months and are now the targets of Sector Rotations.
Compq Head and Shoulders pattern (for the bears) remains unresolved. Likewise; Russell2000 diverged with the three major indexes by producing lower lows in the past few trading days while Dow Jones just made a new higher high 3 days ago.
Mr. Tepper has good reasons to be very cautious right now as the divergences between the performances of SnP500 + Dow Jones vs. Compq + Russell2000 became apparent for all eyes to see.
This type of divergence can easily result either in a massive vertical rally .. or .. a massive vertical meltdown to synchronize them back. Put it more succinctly "Damn if you Do; Damn if you Don't" for medium-term traders and investors.
I have been giving the same 'CAUTION' recommendation since May 2013 as SnP500 becomes a potential iii-rd wave on the monthly chart with 1823 to 1923 the potential Profit Taking Levels ... OR ... the Contrarians' Reversal Resistance Levels. Thus, I slowly raised 10% cash as SnP500 approached the 1849 level. See May 22, 2013 for the four (4) Potential Scenarios for SnP500, Dow Jones, and Russell2000 as they produced minor divergent patterns in May to Nov 2012 ... and ... expected to produce major divergences as the medium-term complex spiral meltup rally progresses (on the weekly chart).
SnP500 is now in the 127.2% to 138.2% Fibonacci Extension Levels (1823 to 1923) measured from the March 6, 2009 bottom. See previous Instablogs for the Monthly Bearish Views for SnP500 and Dow Jones.
Likewise; SnP500 produced a 261.8% Fibonacci Extension from the October 4, 2011 bottom with 1849 extended target. See my November 2011 Instablog regarding the 1666 2x nominal target for the Positive Reversal Buy Setup on the monthly chart. 1849 is the extended 2.618x target using Fibonacci Extension Method from the Oct 4, 2011 bottom.
Those are very important resistance levels that medium-term traders should at least take partial profits off the table. At least for those who initiated their trades in October 2011 and/or June-November 2012 bottom buys. See my October 4, 2011 Instablog and/or the June-November 2012 bottom buy recommendations and their upside targets.
- Bag in at least some profits off old trades.
- Make a new swing trade or another medium-term trade if you want to keep trading the current bull run on the medium-term basis.
Far easier to know risks/rewards on new trades than trying to decipher how to protect old positions from highly unpredictable bear market corrections.
Don't sell everything since it is far easier to hold successful old positions than the most recently acquired ones that are still highly susceptible to whipsaws.
Those who started their full-bore long positions in 2013 or later have lots to worry about. They were NOT the early birds and are the ones most afraid of another bear market correction. Like David Tepper?
We live for today and tomorrow is another challenge.
For Daytraders; we don't care much where the market goes for the medium term; the important part is that as long as SnP500 remains in higher lows higher highs then The Trend is the Friend.
Thus, we just have to wait for buying opportunities such as the one being offered by the potential C-wave down on the 120min chart by countertrading the run on shorter time frames such as the 15min or 30min charts or chasing it up at the early stages of a potential intraday rally - preferably by buying a minor a-b-c down on 5min chart after a minor strong bounce up.
Out task is to quantify and qualify what will happen next:
1.) If SnP500 suddenly goes down far longer than the maximum v = 1.618x of the i-st then the current intraday meltdown can become a Spiral Meltdown. Thus we have to set our stop loss below the 1.618x run down to prevent substantial trading loss;
2.) If SnP500 rallies with fits and starts (slow-grinding) rally in the next 3 to 4 trading days without breaking new highs; then it is more likely a corrective A-B-C up on intraday and further run downs should happen. Then the better trading strategy is to just take as much profits as we can. Wait for another opportunity ... or ... we may even switch side and become Bear Traders if the probabilities favor another downtrend or a bear market correction; and
3.) If SnP500 rallies strongly in the next few days. Well ... that's what majority of traders and investors can't help but to chase for fear of being left behind. Let them give us more paper profits in the short term basis. We will take bankable profits at or near major resistances and/or at the conclusion a 1-2-3-4-5 rally on the 120min chart. Nominal Target for a 1-2-3-4-5 intraday rally is 2003 with Upper Range of 2047 measured from the April 15 bottom. We trail paper profits on successful trades for as long as possible tightening them as SnP500 approaches the nominal target. Taking partial profits off significant resistances - illustrated on the 120min and daily charts - depends more on trader discretion.
Those are just SOP Trading Strategies I apply to majority of my short-term trades. Trading is what it is. Plan the trade then trade the plan. No Fuss No Muss.
Likewise, for swing traders; Compq successful test of it's daily 200ema Support is a positive potential trade to the upside. Those swing traders who bought the Dow Jones' 200ma test in Oct 09, 2013 and/or the Feb 05, 2014 test are now in the money. The 200ma is a favorite major support for swing traders. It does not work all the time but during bull runs, it works most of the time.
Russell2000 is a 'yummy' Divergence Buy Signal on the daily chart. The last time Russell2000 produced a divergence buy signal was in August 30, 2013 which proved to be an excellent swing trade to the upside. Prior to that was the divergence buy signal of June 4, 2012 that resulted in an excellent medium term trade to the upside. This type of medium-term counter trading has high probability of success thus many traders prefer to play the probability game in as many trade setups they can find.
Russell2000 has an acceptable 1-2-3-4-5 run down which may or may not be an impulsive type. Thus, it may not result in a new higher high rally but at least can provide palatable profits if R2K forms an A-B-C corrective rally in the next 2 to 3 months comparable to it's 2+ months of slow run down. Just be very careful on this one since Compq HnS on the daily chart might suddenly trigger dragging R2K down faster than many contrarian traders can expect.
One particular troubling case at this juncture is that Russell2000 and Compq are in direct divergence against the SnP500 and Dow Jones who are making new highs being caused by the massive Sector Rotations that have been going on since April 2013.
One that has to be taken into consideration but not necessarily a good reason to stop trading the markets as it is another one of those 50-50 probability of another vertical rally or vertical meltdown scenarios. Nobody really knows how long those divergences can last. The longest divergence I know was in 1974 to 1982 when Dow Jones was dying unable to compete against Japan Inc. while Compq was rallying vertically like crazy with more than 700% gain in 8 years.
Another possible 'Monkey Wrench' is the Potential Bearish Ascending Wedge that may or may not form on the SnP500 Daily Chart. Right now; it is not worth being a 'knee jerk' while the pattern in still far from being formed for at least a few weeks. We just have to be aware of potential supports and resistances in advance. Just try not to create mountains out of molehills. Let the markets decide for us.
Which of the bullish vs. bearish scenarios will eventually pan out is not for us to predict. We trade based more on well tested trading setups and/or high probability scenarios rather than speculate on the highly unreliable predictions by the media-centric analysts and neophyte traders/investors.
Trading opportunities do appear at bottoms; at the middle sections; and near the tops of bull runs.
- Just make sure to use hard stops right after entry and use trailing stops once initial rallies started to happen if you happen to be a trend trader as the risks of a trend reversal become larger as the bull run progresses.
Trend Trading had proven to be more profitable than Counter Trading specially during bull runs. Only a few of bear traders have the skills, patience, and discipline to be able to eke out profits counter trading a bull run.
More often than not, bull runs persisted longer than majority of contrarian bears could possibly anticipate - or as the saying goes in recent times: Irrational Exuberance Rally can last longer than what the trading accounts of early contrarian bears can survive.
- Case in point was the persistent contrarian bear calls of 1994 to 1996. SnP500 rallied 256% from 1994 and 156% from 1996 to the March 2000 top.
Contrarian Bears would later gloat of their victory in 2001 to 2002 Bear Market Corrections but many of them suffered greatly during the 1994 to 2000 Irrational Exuberance Rally. Extremely few bears would survive such rally if they kept holding on to their short positions.
Same happened during the 5 years Bubble Rally of 1982 to 1987.
Those contrarians who kept calling the vertical rally of 2013 a Bubble Rally missed the point that Bubble Rallies usually have at least three (3) vertical sub-rallies. See my latest comments for illustrations of past Bubble Rallies.
But traders are traders. We almost always are highly protective against possible trend reversals. Thus, even if trend trading is highly profitable; there will almost always be pitfalls in becoming over-confident the trend will remain our friend forever and ever.
- My YM Buyback of May 07 proved to be a successful daytrade as it produced i-ii-iii-iv-v rallies on the 30min chart that lasted for 5 days of rally (an a-b-c rally when viewed from the May 7 higher low bottom using the 30min chart but a very complex a-b-c up when viewed on the 120min chart from the April 28 higher low bottom). It was not very successful as I decided to use trailing stops instead of selling it at the top run of the 5 days.
- Will try to buy YM again if Dow Jones and/or SnP500 make a divergence buy signal on the 15 to 30min charts. OR ... if they suddenly make a strong intraday rally on the 5 to 15min charts, then waiting for a minor a-b-c down would be the next option.
- For the SSO buys of April 14, 2014; I already sold the Daytrade portion in April 29. Still holding the other half as a Swing Trade with stop loss near the $100.16 buy level. Still holding half the YM buys of April 14 and the NQ buy of April 15.
- Still holding 25% of SSO Swing Trade buys of June 24, 2013.
- Still holding 25% of SSO Medium-Term bottom buys of June and November 2012;
- Still holding 1/3 of SSO Medium- to Long-Term buys of October 4, 2011.
Note that I usually go 125% to 155% leveraged account during bottom fishing expeditions with the 35-65% as short-term to medium-term trades. Then go back to 90% (which is the long-term portfolio) selling those short-term to medium-term positions as the rally progresses - or if their hard stops and/or trailing stops got triggered.
Guess, I'll have to keep the remaining SSO buys of Oct 4, 2011 and the June/Nov 2012 bottom buys as long-terms with my current 10% cash position as of Jan 2014.
If a bear market correction becomes a high probability; then I would rather go short the ES futures to protect my portfolio. The 10% cash is just for the sake of 'peace of mind'.