For the better part of two months the $ES has engaged in an elaborate 4% range ping pong game between several key levels and pivots. The action has whipsawed traders in both directions and set multiple traps in the process with repeated fake outs and fake downs. In fact, most price expansion has come from sudden bursts to the upside or even on the downside on occasion that has been difficult for traders to latch on as magic buy/sell programs emerge suddenly. This action has been very difficult for most traders to read as one is either positioned for such a move or not. And if not, one either misses out (which is actually ok) or one gets hurt if not disciplined with stops.

To illustrate the point here’s a 5 hour chart of the $ES over the past 2 months. Think big time ping pong:

This does not mean this action is not tradable. It is very much so, it’s just not very straightforward in this choppy environment and one needs to keep a close eye on the signals. Last weekend in “Misconceptions” we had outlined why we closed remaining longs and saw increasing downside risk in this market despite still seeing upside risk. This seeming contradictory concept is confusing to many people. A market may be on a “sell”, but still achieve higher prices. As traders our job is to identify favorable risk/reward entries and then execute these trades with a defined risk.

For example, Mella who is an ardent market bull and who rarely shorts the market, had sniffed out this sell move with absolute perfection and advance warning in the member feed:

Nice trade indeed, but not a swing trade. Swing trades continue to remain elusive in this market. Friday’s strong bounce hurt those that remained short and as I’ve pointed out repeatedly on public stream, one simply cannot short into the hole in this market or algos will rip you to shreds.

So where do markets now stand? On Friday I had outlined the notable monthly closes on key charts in “Bears Unleashed?” By Friday’s close, many of the breakdowns had been fixed and turned them into fake downs yet again.

In fact, one has to stand in awe how every breakdown is saved at always the precise moment when things look to unravel. Think I’m exaggerating? See for yourself:

$NYA:

$DJIA:

$SPX:

The index most in trouble during last week’s downdraft was the $RUT losing 10 weeks of price gains in just 1 week. It bounced the least on Friday, but the save operation had one mission and one mission only: Save the trend line.

Mission accomplished:

Impressive isn’t it?

How’s a trader to trust any action like this? First off by not being stubborn, second by paying very close attention to indicators.

Take the $BPSPX for example: Trend line support and bounce:

Even the much aligned $VIX has been a key signal here. First a bounce toward the 50MA was rejected, then the tag of the 200MA was rejected:

It’s a repetitive ping pong as well and as far as symphonies are concerned this one is well orchestrated, but a one day rally does not a bull market make. In the assessment of upside versus downside risk the monthly charts still ring true: From “Bears Unleashed?” the $WLSH index:

One chart that is really sticking out is is the percentage of stocks above their 50MA. It has constantly put in lower highs from new market high to new market high. This past week’s high in particular was the lowest we have seen yet:

The message: Fewer and fewer stocks are holding this market up. Friday’s strong price bounce notwithstanding there was no strong TICK action suggesting a board based advance on the buy side, in fact strongest TICK was a down move:

Of note also is that the principle argument for higher prices going forward has devolved  down to two principle arguments:

1. Buybacks 2. There is no alternative.

In a low volume environment the thin to win argument may well be successful and hence a realistic risk assessment has to acknowledge this possibility. Germany and Japan had sizable downside moves this past week largely currency driven and are currently short term oversold:

While an oversold bounce is very much in purview one can clearly see how prices are simply subject to a currency ping pong game as well. In other words: Central bank policy.

Early May seasonality is generally positive and buybacks are coming back and there is no alternative and so one could make a solid case for a 2014 repeat: Ever shrinking volatility into the summer months as volume dwindles even further:

Yet note this descending upper trend line is making for less and less breathing room. A closing breakout above could quickly and radically change the complacency aspect of this market. Whether it’s in May or later in the summer is almost secondary. Any closing breakout above is likely powerful as this pattern has been building since last October.

And keep in mind the larger context:

Retail is all in:

Retail is not on the sidelines, but “all in” http://t.co/fHespw7YXa pic.twitter.com/8KYMPGuXaz

— Northy (@NorthmanTrader) April 30, 2015

While insiders are selling:

So keep this in mind while many will tell you Sell in May no longer applies. Somebody is selling, and is selling hard and it’s not retail.

None of these things matter however until they do. No trends have been broken as the save programs continue to prevent lasting damage. For now we can observe that Friday’s bounce has pushed the $SPX back toward the upper trend line with a save at support. But we can also spot a heads & shoulders pattern that appears valid below 2,113 on the $SPX and would trigger on a break of the neckline:

On a neckline break that target would get us into the 2030/35 $SPX range. Keeping mind that the 200 MA is near 2026 and gap fill is near 2020 making this 15 handle range a large area of support confluence. On break above 2113, then the doors are open again for new highs.

Ping Pong.

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