Market Update: Trading Both Ends of the Trend

By: Dominick | Sun, Feb 18, 2007
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We came into the week on the heels of a moderate selloff, but I refused to say the top was in because there was a clear bullish setup. As you might recall, the February 11th update stated:

"Those that went home thinking for sure that Friday marked a top might want to look at the chart below. Have we not, "been here, done that"? We are still in an uptrend and Friday's bar is not too much different than the other 3 circled ones.

The good news is we're unbiased and we trade the market as it directs us and we're only several points away from being able to project the next outcome. Overall, I think trading next week will be easier than confirming where we exactly are in a count. Sentiment readings once again argue that a top has not been seen yet, but then again real time sentiment last week was very bullish. With that in mind, next week can turn out boring as the option expiry kicks in or very exciting as biased traders will be caught wrong as the market once again attempts for that "1 more high".

The chart from last week's update was worth almost 30 points to readers that either went long off the support or were saved from a premature short. Below, the updated chart shows how well the market fooled the bears and took off.

The operative idea going into Monday's trading was to buy a new low that was finishing only a limited downward move instead of what almost everyone had thought was a start of something big. We initially keyed into the SPX 1433 level but, as we approached the end of the pattern, were able to issue a target at SPX 1431, which was the exact low on Monday. From there we were confident we'd soon see a rally to new highs.

But, at that low, posting a chart as I did that was looking for a move 40 points higher must have looked ridiculous, and yet I'm sure many members watched to see if the setup would work and then traded it. The chart below was posted just prior to the reversal that trapped all the bears looking for a meltdown. By now members know the work that gets put into these charts and that they've been finding lows and highs just when it seems impossible!

It looked reasonable on Tuesday, as the SPX hit 1443, to sell our longs and fade the measured move at 1448.75 in the S&P futures. Technically we were correct, but had to take a small loss on the trade when the market's bullish reaction to Bernanke erased the pullback we should have seen in other conditions. I admit feeling totally abused by missing those few points, but it reminds me about how many people we've prevented going short since last summer and what it must have felt like to be caught short back then. I have no idea how the bears have been able to stand the heat from the June lows. The Bernanke rally, though, once again shows that sentiment is being taken advantage of at the perfect spots to produce key reversals. In other words, just when the bears thought the rally was nothing but a bounce and went short, they got trapped because the market did turn and go for that "1 more high."

With our losses minimized, we quickly moved to the second half of last week's strategy and avoided making the same mistake twice. Using my proprietary trend charts, we stayed flat on Thursday's late day up move and were therefore not trapped into Friday's gap down. We also didn't go short Friday and were able to make some progress on the upside as markets nearly filled the gap. Below is the 15min ES chart showing why we refused to take the long side on Thursday.

Many members are now using these trend charts and planning successful trades accordingly in the four markets they cover. Afterall, there's no reason not to trust the trend charts after what we've been witnessing for the last eight months. The next chart is the weekly on the all ordinaries, and talk about the trend being your friend! The weekly chart of the S&P has been on a buy since August!

Last week I mentioned my concern about blindly selling the NYSE target. Totally expecting a return from underneath, I even said that a new high would be welcomed in both the NYSE and the S&P. That promise was delivered this week and we now sit above the 9314 area. The SPX has some targets above us and the reaction to them is very important here.

We now have the potential of either seeing a final diagonal that the forum has been alerted to for months now, or an acceleration that will have most traders on the wrong side and flat broke within days. I haven't changed a thing about my view, but I'm not going to force a position if the market's out to get me. As members already know, I'm prepared to trade both ends of the trend.

Many weeks ago I had an upside target of 1472, and since last Monday's post, the target has been adjusted to 1462/1470. At this point that level is very doable, but much higher than that won't be a good thing for short traders. More important to me this week, though, will be levels that CANNOT be seen, and these will be discussed in the forums by Monday. Once again, I plan on paying attention to where the market can't go.

Now that many traders are focused on March being the top, it has me concerned of such a simple and publicized invitation. Maybe it will, but I'll keep my eyes opened for other times as well. Nothing against cycle analysis, I have March 5th - 8th as a possible turn also. It just seems too easy, but if we see sentiment readings come in bullish, that would seal the deal. Plenty of traders are now talking about the transports. Sorry to say, I tune out those older methods as I didn't believe the Dow theory bearish talk for the last 8 months, and I don't believe their bullish setup now.

We have also been watching this next cycle chart and, as you can see, we are about to get volatility one way or another. Some interesting setups are unfolding and a weekly update simply won't capture them. You now have the overall idea, but if you want to profit on the interesting times ahead, join for at the low membership fee of only $50 per month.

Metals

Joe has been covering the precious metals markets for us with his unique perspective. For broad-reaching analysis, be sure to read his weekly Precious Points updates.

Have a great week trading, and don't forget:

"Unbiased Elliott Wave works!"

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Dominick

Author: Dominick

Dominick,
a.k.a. Spwaver
TradingTheCharts.com

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