March 19th, 2011
For the market to have healthy waves we need the market to correct. A correction in a bullish trend is a bullish pattern even though the price is going down. As long as the price is contained in the support zones it is normal and healthy for the market to go down in up-trends. This is why we teach to buy in the correction because in doing this you will get the most profit opportunity back to the new high.
When you are looking at a daily chart and the price is going up by nature we want to do the opposite which is short. Most people short to soon because they miss the entry to go long so they are stuck flat and since they missed the long the only thing to do is try to pick the top and go short. We need these people to go short to soon so they have to cover their shorts to push the market higher. When the price is going higher it is not just because people are buying as a bullish bet it is also people buying to cover their bearish bets that were placed too soon.
*New bullish legs are almost always started with a short squeeze.
Take for example the Nov 2010 correction. Everyone was saying that the 1227 high was going to be the high for many years. The result of what happened was only a bullish correction of the 1227 high. The pullback to the 1175 was bullish even though the price was going down.
Where is the short squeeze? See how we made a high at the 1200 on 11/18/2010 and went down from that level? From the low it made on 11/29/2011 the price went back up and broke the 1200 and you can see how out of all the bars in the correction the one that went up to break the 1200 was the biggest bar. It is much bigger than the bars coming down off the 1227 high isn’t it? It was that bar that broke the 1200 level that short squeezed to start the new leg up for 150 points.
*This also happened on 2/11/2011
You might look at this chart and say that this is obvious but in real-time you need to know what to look for as the corrections are building from one leg to the next so you have odds for the next big move.
It is important to go up a time frame and maybe even two time frames to get the bigger picture. In doing this we are expanding our views so we can get better odds of what is going on around us. Too often we talk to traders and they are doing this the opposite way and trying to go down time frames because they think the risk is smaller on the smaller time frames. In reality the risk is smaller but your odds of getting stopped are much higher. The end result of that is most traders take small losses but they talk a LOT of them to result in the same overall loss they would have no matter which time frame they are trading.
**Do not try to manipulate the market for what you want. The market knows when you try to do that and will stop you out every time even if you are right on the bigger move. It is important to really acknowledge that you are just a participant in something that is much larger than you or me**.
When I go to the bigger time frames I see that this high on the daily does have reasons for making a bigger correction. We noted this on this blog on Feb 25th 2011 called the “Big Picture Update”. We noted that the NQ made a top at a inside retrace level. Most people do not look at inside retracements on the extension tool but they are a great way to see a top early when the market is extended like it has been for a few months.
In that post we were saying the top needs to be confirmed and you might think that it should have already been confirmed as far as time meaning; it has been three weeks so in time it should be confirmed but it has not been confirmed. Confirming tops takes time for us to really say it is in for sure.
The top was definitely something to be aware of and that is why we did the post but it does not mean you just short the level and walk away. It is more a level to place tight stops on your longs which we also said. The market does not go from bullish to bearish in one or two bars. It makes a turn with multiple bars that end up becoming patterns on the chart and patterns is what gives you odds.
We are not here to convince you that patterns are valuable if you still think that all you needs is a MACD and RSI you might not even absorb what we are trying to say here today. The point is patterns either completes and the trend is back in play or they break and the start of a new direction begins.
**It is the bullish pattern that fails is what starts the new down trend.
Where we closed Friday is a buy level which means we are still in a bullish pattern. If the SPX fails at the 1313 area then we might have a bullish pattern than failed to start something to the downside. It is important to know that we could go a little lower next week in the leg we are still in but once we make this low it is the next two legs that you need to really watch out for and be ready to act if you are still 100% long this market.
Could we go up and break the 1344 high? Yes , we still can and if Monday we get a confirmation of this low it is a buy at least up to the 1300 area. The market will be emotional in the 1300 level just like it has been the last two weeks. You can see the emotion by looking at a 60 minute chart. There are big gaps almost every day and gaps are high emotions so you have to be careful at these levels if you are making longer term trades. Where the market is now you are better off day trading or taking your longer term position with options until it becomes clearer of the next week.
We teach everything in this article in our course. We have nightly videos that you can go back and watch how we played that 1200 breakout level and how we are playing it right now.
** If this high holds and we roll over we are looking for the 1160.
Happy Trading,
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