The Good The Bad and The Ugly

By: Nouf | Sun, Nov 21, 2010
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US Markets

Last week I left readers with a key important area that we at WPT were using to trade off, and the decision around that area would decide the near term tape over the coming days.

"1205ES is now the Bull/Bear line that we are using."

Monday's session started with a choppy advance but smacked up right in the 1205ES area we had been using with success the previous week, it's been an important area and going into next week, should equally be an important area.

Mondays session highs in the pit session hours was 1205.75ES, we knew that any failed attempt at that level was getting us short and a target of 92ES or 85ES were the initial targets, although the initial decline from the 11/9 highs still had a corrective look to it, we still were looking lower against 1205ES.


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We went into Tuesdays session with a couple of ideas, but as we were still looking lower against 1205ES it never made much difference to us which idea was working, as long as members were on the right side of the trend that is all that matters to bank the $$$$.

Tuesdays' Globex session opened down with a decent gap down, and gapped under 92ES, so the 1st target was already met, but the European markets looked sick and overall the markets in general were not looking too healthy.

Members were advised to keep a watchful eye out on support at 85ES, as that was an area I expected some sort of bounce from, the initial open was very weak, in fact it failed to even cover 50% of the gap down.

A trick I learnt many years ago from some floor traders, is a setup that most will have probably seen yet seldom know about, it's called the ambush trade.


Ambush trade

It involves a large gap up or gap down, and the market attempts the cover the gap (generally the locals buy a gap down or sell a gap up), but if the market is weak in its attempt to cover a gap down and if it can't get above the 50% retracement or what is called the ambush area, or in a strong market, if it can't get break below the 50% retracement ambush on a gap up.

That's a clue on a trend day, depending on the direction and how it responds to any gaps.

So with the weak opening, and the poor attempt to even fill the 50% ambush, the market eventually cracked the 85ES handle, and that saw a ton of sell stops get hit as the buyers were swamped with the triggering of sell orders.

How do I know this?

I hear this information day in and day out via www.tradersaudio.com.

I get to hear it from the best guy in the business.*

Ben is the best commentator I know, and knowing what goes on in the pit is worth its subscription fee, as the information is invaluable to me and members as we use that with my technical work.

* I have permission to post occasional comments in the chat room, advising members who are moving the markets. I.e. is Goldman a seller or buyer etc or is large size coming through the pit, as its makes a big difference.

Below 85ES was the 75/77ES area I had for reserve, but can't say I expected it so fast, the decline was just plain ugly, as seen in many markets like Copper, Crude and even other commodities, there was sure a rout of selling across the board on Tuesday, so at that stage, we did have a Bearish potential setup going into Wednesday.

We also had a Bullish setup that would require a move back above the 82ES area quickly.

Wednesday was pretty much a non event, I had the 72ES area penciled for a bounce, but more importantly I was suggesting to stay with the trend until back above 82ES, Wednesday just ping ponged between 82-72ES.

In fact the high on Wednesday was 82ES so we were working the right areas.

I left members with the idea of respecting a move above 82ES, but as long as under 82ES it was a sell.

[Nouf] 82ES now important in Globex
[Nouf] should offer clues
[Nouf] staying under 82ES is one weak market and a world of issues coming for the Bulls
[Nouf] so let's keep it simple, and frankly i am surprised at the lack of bounce
[Nouf] either this gaps up via Globex and traps many shorts or
[Nouf] this market is in trouble
[Nouf] not even thinking about long side till above 82ES as the trend is strong atm
[Nouf] if it can't get a bounce of more than 6-8 handles ie above 82ES the Bulls are in trouble

"You do not want to be short above 85ES if this forces a short squeeze, as today could be nasty day for both sides, if the Bears can't get this market below 82ES pronto, then the Bull's have the edge and buyers will come in and force the shorts to cover, hence you get the squeeze"

"Time to pay special attention here as I see a trap for both sides".

The locals in the pit have a rule and it's an old rule that has been used for a long time and it's called the "10 handle rule".


10 handle rule

In sustained trends as long as bounces or dips are below 10 handles (depending on the direction) generally the trends will persist, that's pretty much keeping it very simple, and not complicating things.

If you have read any information about the local's or maybe you have read some stuff about the "pit bull" or had any contact with these guys, you get to find out these sorts of tricks and how they move the markets.

This was the reason for the 82ES#, as under 82ES was still a sell as far as the market was concerned.

Well I think we all know what happened on Thursday.

I find these gap ups very disturbing these days, not because they traps shorts, as members were advised to respect any move above the 82/85ES area (allow for wiggle room), but simply put, most of the move comes from the European Globex session, and by the time the US markets open, it generally just sits there in a 3-6 handle range, for the remainder of the us session cash hours, so basically chop land.

It seems "the magic hand" loves to make mince meat of traders these days.

Thursday opened with a large gap up, and never even looked back, so from a risk/reward point of view, if you were not long, which frankly unless you were trading the Globex session, you were stuck either jumping in with a poor risk/reward trade, or left waiting.

I can't say I was expecting to see such an aggressive move that quickly, but such is the market, it never does what you expect all the time, and you just have to adapt to it.

There is an old saying in this game, and that is:

"No trade is still a trade"

What that means is, sometimes doing nothing is the best trade.

Thursday was such a day, if you were not long already, jumping in and chasing the tape, generally tends to be a bad idea, so that left us with trying to find an idea on Fridays session by the end of Thursday`s session, I had the idea that most of Thursday`s move was some sort of small 3rd wave, so the idea was suggested to members, was that we could start to look to buy into a pullback around the 92-89ES area, as a small 4th wave, as if the market had put in a low in the week, we could use the 82/85ES as the dividing line.


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That's exactly what we did at WPT, we had a great setup to buy into the dip, so whilst most of us never got in on the large move on Thursday.

We had a sweet setup with very small risk for decent upside as the target was?, yep you guessed it 1205ES (there's that # again).

I couldn't be sure if the wave iv low was in, but had ideas of looking to get into buying a dip around 89ES on Friday.

[Nouf] 89ES ok to look higher as wave iv of ES
[Nouf] under 85ES is wrong and something wrong for the near term Bullish idea as too deep
[Nouf] this should be a small 4th wave or its simply wrong and market is going to trap the bulls here but ok so far
[Nouf] finds a low here or its going to puke as under 85ES starts sell stops
[Nouf] really fighting this area
[Nouf] need a big move here if Bullish
[Nouf] still ok for wave iv

Well Friday held well and we got in and got ourselves a sweet setup for the suspected 5th wave of the move that started earlier on in the week.

So whilst the Move on Thursday was pretty much a non event for most traders, if you were switched on as we were, you could have been looking to buy the dip into the 89ES area, as the low was only a touch below and look for the 1202-5ES area, or simply put any new high.

As of Fridays close, you could have taken the risk, and looked for a little more upside on Monday, or got flat and banked the coin, either way, that is how it's done, controlling risk with setups that you can understand and not chasing markets, where you then get trapped as you just bought the highs or sold the lows, as I am sure the most bears were thinking that a big reversal was kicking in on Friday, however we had other ideas that paid off.

Small risk, 2-3 points as we were working a small 4th wave, so we knew where it was looking wrong, and the upside was a new high above 1200 with 1205ES as the target.


Going forward

So where does that leave the US markets going forward into the New Year?


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Well there are a few ideas, but if the lows last week marked an important low, from here I suspect we have a date around the 1250SPX area, and if you look at the Nov 2009 period, you will note an idea and potential path the market could be taking.

Members from here know the important areas I am looking for to hold on any pullback as long as that holds I am looking higher and Bullish going into the holidays and over the New Year.

A break of my lower support areas, and we need to address that and work out what is going on, but with the shorted week next, it generally tends to have an upside bias.

Maybe the Bears get the long awaited crash to 300 on the SPX, but that's for another time.

At Wavepatterntraders.com don't trade 5 year projections, we trade what we see that's in front of us, and if the ideas get violated, we simply chuck it away and come up with new ideas.

It's that simple.

But as long as the market keep throwing up setups, we will trade it as we see it, we are not interested in some super macro count that tells us the SPX is going to 3000 by 2016 or 300

I will leave that to the "da experts", as there is a big difference between painting a load of labels on a chart and actually trading that in "real time".

If you're interested in following the ideas going forward on the ES or indeed any of the other markets we trade, then I can suggest signing up for the 2 week trial, where you get to test the site out.

If you looking for quality analysis from someone that actually looks at multiple charts and works hard at providing members information to stay on the right side of the trends and making $$$, why not give the site a trial.

Until next time.

Have a profitable week ahead.

 


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Nouf

Author: Nouf

Nouf
www.Wavepatterntraders.com

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