Wednesday, October 29, 2008

Helicopter Ben

Wow what a whipsaw Wednesday if I've ever seen one. The first half of the day was utterly boring as everyone watched and waited to see what the Fed would do. Big Ben came in and dropped rates 50 bps to a new rate of 1.00%. Hard to see them cutting much more than this so watch for a rebound in the dollar soon. Like I was anticipating after the cut (which was priced in after yesterday already) the market spiked down sharply then grinded up back to the low 940s on the ES futures. It was the unbelievably tight narrow consolidation in that area that caught my interest and I called for a long in the markets at precisely 3:14 pm et. The market rallied higher to the 970 level with incredible speed and volume. So much happened in the last hour of the day, lets try to break it down slowly.

First off how the heck did I know the market was ready to rally at the time I went long the futures? Look at the chart below of the SPX and notice the initial selloff after the rate cut, then we ran back up to the 940 level and stabilized. During this time we formed a beautiful bull flag (as I illustrated in the chart for you) while at the same held above those key moving averages. Simply textbook. I called for a rally once we broke out of the flag which was at the 945 level. At the same time we also saw the stochastic indicator stabilize and then curl higher as the arrow points out. When the stochastics start to point higher and spread out at the same time the market breaks out of a range after hitting a key moving average you must take the trade. The market exploded in warp speed from there and I was up huge on my futures trade in just minutes. Thus, I took profits a bit prematurely in the high 950s as I saw resistance coming and walked away smiling. Its these sort of high probability setups that I look for each and every day to pounce on in the futures market.

Flags are consolidation patterns that indicate a continuation of the most recent trend is ready to continue when the current retracement turns. Flags can be bullish or bearish and usually provide some of the best risk/reward entry setups out there. Volume confirms the move on most occasions and this time was no difference. Shortly after breaking out over the 945 level the buy side volume came furiously. Charts don't lie, people do. Listen to the charts and act when they give you a signal as reliable as a flag pattern. Plan the trade, trade the plan. Its as simple as that people. If you think about you will hesitate everytime and miss the move. Do your analysis then trust it and take action on your thesis.

Getting off on a tangent I know, but anywho; the market had that great run-up but it was stopped cold at 970 with a double top and extreme selloff into the last 10 mins. This is why, as short term futures traders, we take profits when we get them, as the futures offer up incredible leverage but you must not be greedy with it. So what happened in the last 10 mins. Well my first instinct was the normal hedge fund and mutual fund selling that has gripped this market lately. But it was then reported that GE ceo Immelt came out with some negative comments on 09 earnings. Nevertheless, it looks like this market has to prove itself once again tomorrow after the selloff. I am a seller underneath 940ish. But there is also so much pessimism out there that it could lift the tides higher into the end of week. Who knows, but as OSCAR points out here; 2 days up in a bear market equals sell more often than not! Obey those stops traders!

1 comment:

MarketAddiction said...

Thats a great pic of uncle ben! i'm glad to hear you caught some of that today :)