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ECB Sings

EU's QE put a fire on major averages for Germany, Italy, and Spain among others I monitor in Europe with Greece's remaining in the doldrums waiting for what will happen next after the elections.

Not to be left behind, US markets were also able to make a reasonably acceptable rally despite being buffeted by the lackluster earnings season's initial results.

>> SnP500 Daily:

>> Intraday EWA:

Spx produced a wide ranged bar (W.R.B) but failed to produce a follow-thru rally while Spx is still inside the wide trading range 2093 high and the more recent low of 1972. As the last instablog made it clear, these markets are in a 'Tenuous Trip' aggravated by the earnings season. SnP500 might as well form a Complex Head and Shoulders Pattern with 2079 the next Right Shoulder Resistance and the lower heavy blue line the next Neckline Support. Or a complex combination pattern might form for that matter.

The pattern being formed to date is far from the usual majority are used to trade. Majority of expert and master traders I've known before would rather avoid doing anything while price actions whip around inside a prolonged consolidation range for fear of being whipsawed repeatedly specially during earnings season. Better get positioned near bottoms then let the markets decide whether to make another higher high rally or not.

At any rate, with the ECB QE supposed to take effect March 2015 traders should be pushing European stocks up until March then perhaps a few weeks pullback once the official start got announced similar to what happened to QE2 when it was 'rumored' in August 2010 and was formally announced in October 2010 that resulted in 3 weeks pullback. The difference is that ECB QE is not a rumor but an officially approved plan. But then it is still a plan until the day it becomes officially launched.

With the US and European major indexes much more correlated than not; it is imperative that US markets will at least rally in sympathy to the European markets unless something very bad actually happens along the way. Until March 2015, that is.

The intraday is self explanatory with an unfinished EWA count if a i-ii-iii-iv-v rally is going to happen. At any rate, the lower and mid-sections do not follow EW Rules and thus there is a good chance this rally is not impulsive but rather corrective and therefore is not sustainable in the strictest sense. Otherwise, if Spx is able to keep rallying in the days and weeks ahead to new highs, then that's the time to consider an impulsive rally should be the correct analysis. But then again, with new highs, there should be another bigger divergence sell signal forming on the weekly chart. It is a never-ending process of bulls vs. bears struggle for short-term to medium-term traders.


Trading Strategy:

Do not forget this is a Daytrade and as such should be treated accordingly with an option to convert this into a swing trade due to the most recent development in Europe specifically EU QE.

For the more nimble daytraders:

- Sell 1/2 positions at or near the i-ii-iii-iv-v target on a successful intraday rally. Alternatively, close the trade and wait for an a-b-c pullback down then buy again for another daytrade to the upside.

For those who are not well-versed in intraday trading:

- Sell 1/3 positions near the 'Next HnS Right Shoulder Resistance' or near the i-ii-iii-iv-v target on a successful intraday rally to remove the edge off possible 'knee-jerk' reactions during intraday pullback downs that may last at least a few days to several days.

Since the FOMC meeting will conclude in Wednesday, then based on past patterns markets tend to preemptively rally before the press releases and in most cases continue to do so for days more. Thus, perhaps better to utilize the remaining 1/2 to 2/3 positions as a potential Swing Trade that can be correlated later to the ECB QE more than anything else - until March of course when the expected 'Buy the Rumor Sell the News' type of trading is more likely to happen. For others, why not just use trailing stops if they want to speculate the EU QE + FOMC good news will keep the markets afloat. Selling some positions for profit taking is optional and recommendable most of the time.

Needless to say that the intraday patterns are far from ideal and in fact may actually be corrective rather than impulsive. Thus, better to use tighter trailing stops on at least 1/3 positions. If the markets unexpectedly collapsed in the days/weeks ahead, at least some paper profits are protected. If the 1/3 got whipsawed then markets rally again, then at least it is only 1/3 not the whole daytrade.

For those who are much more aggressive then why not buy some ETFs for Germany, Italy, and Spain which are spiraling upwards these past few days. Spirals are very hard to do timing thus most of the time buying tiny pullbacks or new breakouts can be the better trading strategy. Then use tight trailing stops since a spiral should keep rallying until it finally runs out of steam. The Holy Grail Trade Setup I illustrated on the monthly chart last October 17, 2014 may be used on the daily chart. But then vertical spirals seldom go toward the 20ema support thus even the 10ma can be used as a support - or simply buy on next day breakout rally. And when the spiral finally runs out of steam then a huge pullback/correction can happens such as what happened in Japan's QE in 2012/13 after 6+ months vertical rally. Obviously, Japan's QE was so much bigger than EU's and the US's for that matter.

I already emphasized the strong reactive rally of Germany, Spain, and Italy last Jan 16 Comment amidst the Switzerland fiasco which was emphasized by the media for several days. Traders who listened mostly to the media have lost out on the very strong rally in Europe boosted by the QE announcement late last week.

For swing traders and/or medium-term traders who executed the October 17 Trading Strategy; there is nothing that can be done better than just nurse the trades until maturity. But be sure to use some tighter trailing stops on at least 1/3 positions with perhaps at least another 1/3 positions using wide trailing stops or at most at b/e costs to prevent unnecessarily being whipsawed prematurely.

For me:

- I sold the ES position when Spx tested the daily 50ma resistance. It is more a trading discipline I would rather keep practicing despite high probability the markets would keep rallying much longer than initially expected. It helps me to hold on tight with the other positions and sleep well not worrying what might happen next;

- Still holding YM and SSO daytrades bought last Jan 14 and started to tighten their trailing stops;

- Will sell half the SSO daytrade on completion of intraday i-ii-iii-iv-v rally then hold the other half as a possible Swing Trade. Perhaps just hold on to YM until it's trailing stop got taken out or until March 2015 whichever comes first - start of EU QE or eminis' expiration date.

Then wait again for the next opportunity to execute another daytrade.

* I'm not fond of trading foreign equities since my short-term to medium-term capital are mostly tied up with US equities/futures most of the time. But for those with extra cash, why not take advantage of this vertical rally caused by the EU QE announced late last week. So far, I hold positions in GREK, EWI, and EWP bought in July/August 2012 as long-term investments.

** Am still holding half of October 15 SSO swing trade buys with moderate trailing stops and the TNA medium-term trade with wide trailing stops (but above b/e costs).

Addendum Jan 27:

Markets collapsed as I have feared the intraday rally could be corrective rather than impulsive:

>> SnP500 Intraday:

Not a good pattern for the bulls regarding SnP500 but very good one for ES:

>> ES 240min Chart:

I bought back the ES daytrade near the 138.2% contrarian buy level after a minor breakdown of that 2014.25 support.

Lost the YM daytrade on whipsaw. Bought it back at lower prices together with ES.

SnP500 also re-tested the broken downtrendline illustrated on the daily chart (red downtrendline) with the Dip Trip Whipsawer a potential support this time around. Hard to gauge but then 'downtrendline support' + 'whipsawer turned support' is better than just one strong support.

Dow Jones and Compq are very different patterns compared to SnP500 and to each other on intraday charts. Thus, these markets are much harder to analyze now than ever before on the intraday basis. Either a strong rally or a vertical meltdown should synchronize them back.

Hopefully, the FOMC meeting does not upset the markets.