Markets – Macro – Technicals

Less is More

lessYesterday’s decision to step aside and not get involved in the chop and rather let positions ride with occasional scale outs on spikes was a wise one. We saw 30-40 handle rips and drops, enough to make anyone question everything. We consciously didn’t want to get ground up and it was a really good move. There are times when less is more.

Some traders got chopped up in the in-between, we just booked scales. And this is an important lesson going forward for 2016. The noise will be incredible all through the year and the key will be to keep an eye on the larger picture.

This week we stuck to our guns when the going got tough and bought weakness and the results speak for themselves. We booked 500+ point scales on DAX & $YM and 67 handles on the $ES and are running remaining positions hopefully much higher.

As yesterday’s action showed none of this will be a straight line, but the point is not to catch every move, but to book gains.

The technical picture is now showing the potential for improvement with higher prices yet to come. Namely MACDs are now turning and RSI’s improving:

ES

The timing of all this shows the 2008 analog still to have validity here:

SPX AN

If this is so then a move toward 1950/1960 into early February continues to make sense. Even a move toward the .618 fib or 1971 $ES cannot be excluded as a possibility here. Is it a guarantee? No. But we remain highly oversold and technically speaking a relief rally can go a long way:

BPSPX

NYSI

Another reason the 1950/1960 $ES zone is of great interest: It represents confluence with the infamous pitchfork. Price finding its way back up there would constitute a retest which would likely result in an initial rejection.

How far would this rejection go? The ’08 analog says a .618 retrace is coming so a sizable one. Were this retest to resolve bullishly with a rally into April/May markets could still be in a for a major bullish surprise and I’ve drawn a speculative roadmap into Mella’s pitchfork chart here:

pitch

Should price never recover above the lower pitchfork trend line then of course the bear case will take over. But I do want to keep a real open mind here (sorry bears).

The reasons are as follows:

  1. We just went through a MASSIVE correction and the oversold readings are not only historic, but are commensurate with a major bottom.
  2. As Mario Draghi said yesterday: “We are not surrendering”. He literally said that. And I am listening. In March they will relook at their stimulus program. I expect a hydrogen stimulus bomb. The timing could well support a massive move yet again. Yes I’m that paranoid, but I’m listening. As I said yesterday: They’re not going to just roll-over.

So in this context I noticed an $ES pattern that emerged off of this week’s lows and I find the symmetry intriguing. I have no idea whether this plays out, but I’m putting it out there anyways as a possible scenario:

ES bull

I haven’t seen it posted  anywhere and for fans of the evil clown scenario this would be the ultimate in your face surprise of 2016. It basically implies we could have seen the lows for 2016 and a break above the upper trend line targets 2,400. Not kidding. Yes given current realities it seems a highly unlikely scenario and the bear case still remains the base case, but I want to keep track of this.

Another thing I’ve now noticed: The $SPY printed a slightly higher low versus the August flash crash and the structure of the decline is oh so similar. This could set up for a massive double bottom and a potential W of giant proportions.

While January OPEX, as in 2015, was a bust I have no evidence to suggest that the OPEX pattern just died and a February come-back cannot be excluded. In this context we can see a replay of the structure as a strong possibility (and look at the 2015 February OPEX run):

OPEX

What’s this all tell me?

Well for one it tells me that playing the large structures gives us incredible trading opportunities. My main goal now is to ride positions into 1950$ES and then aim for a short trade on the $ES. However I’m also cognizant of the possibility that we just made a major low, hence I’m inclined to keep the DAX, $TF, and $YM positions on as swings. I’ve scaled out of all of them so they are now vastly profitable trades either way. The $ES will be my main trading vehicle and with it I will aim to catch a short trade in the days ahead.

TRADE PLAN: As with yesterday I aim to tread lightly on the trading front today. Today markets are lined up to finally achieve a close above their daily 5 EMAs. This would represent a trend change as since December all Friday’s have seen poor price action. So I want to see how this plays out. I’ve taken a big scale on the DAX this morning and may close another $VX short scale if they crush volatility today.

Another number to look at: The weekly 5 EMA. A close above at some point would be an important signal:

SPX W

It seems unlikely that this could be accomplished this week, but nothing would surprise me here. So many people are still short or are aiming to sell every rip that the potential fuel for a fire rally up is plentiful.

I certainly do note that the weekly candle in the chart above looks eerily similar to key bottom candles over the past few years. And if this is a replay then we could be looking at a multi-week rally into 2053 SPX. Frankly if I was short right now that weekly chart would scare the crap out of me. So it seems to me sellers need to force a big reversal lower or potentially face a big spike higher.

Either way, we booked incredible gains this week and I’m willing let positions run here. Fill them gaps and tag them MAs I say. Less is more.

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