Rhody Trader

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Today was another ticklish one. The levels on the upside were clearly defined. It was the downside that posed the problem. Those upside levels were 1360, above which prices were rejected Monday. Yesterday’s point of control was 1354 and 1357 was an equal value peak. The market opened a bit lower than that.

The closest downside level was 1349, below which prices were rejected, but that one was weakish. You had to go down to 1339, which was the point above which prices had been rejected on Wednesday.

The market rallied up to those two value peaks, providing a really nice sell entry regardless of which one you chose. The problem was when to get out. The 1340 level was a good target, but the market fell a bit short of getting there, so unless you put the target at about 1342 you never got filled on the buy.

I get to work late today because I have a meeting after hours to accomodate a colleague in Adelaide, Australia. Now the Aussies have treated me quite well, but I this is a bummer. It means I’m going to be in the office for like 11 hours today.

Ugh!

The subject? A proprietary technical indicator we use in-house that we’re looking to expand to a wider usage. The gentleman from Down Under has some things he wants to do, not all to do with this indicator. As for me, I’ve developed a whole proposal to create a website with that as it’s focus.

If my trade today had made some money I might be a bit more enthused. As it is, I’m dragging with tired eyes and sore fingers.

Today was a tricky one. No doubt about that. The market opened between last Wendesday’s point of control at 1335 and the point above which prices had been rejected that same day (1339). Given that these prices represented both an opening gap (many of which have been filled of late) and a situation close to previously rejected levels certainly suggested a sell opportunity. 

Alas, that was not to be the play that made the profit today. It was actually the drop down to the 1335 point of control level which was to provide the best entry, a long one. The market ran of very nicely from there.

According to the most recent Commitment of Traders report, the small speculators took a head-long bullish plunge into the NASDAQ. Based on the figures from March 18, they are now 62% long, the largest bias I’ve seen in a while. Not only that, but they are net long by more contracts now than they’ve been in over a year.

Given that the small players are almost always wrong at the major points, I can’t help but be a bit nervous here. The NASDAQ is trading up into a very interesting zone - one where resistance could quite easily come in. Are we about to see another flush, like the one we saw a couple weeks ago when the small specs were something like 69% long the S&P?

Yes, the market is closed today but I am still in the office. I’m that much of a trading addict.

Of course I’m not actually trading. I’m just working on trading related stuff. I had to meet up with a guy on an interesting trading social networking project he’s developing focused on forex, so I figured I might as well make it here. As things develop, I’ll pass along more info on that. Not sure yet what my involvement might be. He’s talking about some kind of advisory type role. We’ll see.

Aside from that, I’m working on my new book and some other bits and pieces. I’ve been rather wiped out the last couple of weeks, and a lot of stuff I should have been doing wasn’t getting done.

After today I just about wanted to throw myself in front of a city bus. Talk about frustrating!

The market opened a bit above 1300. The key reference levels were 1301, which had been the level on Tuesday below which prices were rejected. Then there was 1317, the top of important value areas from both Tuesday and Wednesday. Higher up was a minor level at 1324, with the next big level coming at 1335, yesterday’s point of control. Below was 1293 where Friday’s point of control was, though given the flatness of that day’s value zone, it wasn’t a great reference point.

Apologies for the tightness of the graph, but I wanted to be sure to show the full picture so you can see why I was such a dope.

As was proper, I used the dip down from the open toward 1300 to introduce a long position. That good action was nullified by my bad one - putting my stop at 1296, just one tick below Tuesday’s and Wednesday’s lows. I got stopped out. The market dropped down to 1295.50, the turned around and eventually ran al the way up to just short of that 1334 level with very little pain. Instead of taking a 30+ point profit, I lost 5 points.

My head hurts.

This has been a brutal week.

I have done 10 trades on the S&P to-date and only one of them made any money. I haven’t taken any big losses (only risking 4-6 points per trade), but it adds up quickly when you don’t mix in a few winners. It’s quite possible for me to turn a good profit even at 40% or fewer profitable trades because my winners average better than twice my losers, but 1 of 10 just ain’t going to cut it. I need to stop taking bad trades. I’m definitely pressing.

To make matters more frustrating, while my winner yesterday was a 4R+ gain, it could have been more like 7-8R.

I suppose I shouldn’t complain. This has been my first negative week of the year.

Today actually ended up being pretty straightforward and easy, at least until the end of the session.

Trading started off in the upper 1330s as the chart below indicates. The nearby reference points were 1340/41, a combination of a point of control and level above which prices were rejected back on March 5th. Down at 1324 was the topping area from March 13th.

As you can see from A period, the market traded up through 1341, which presented a great sell opportunity. It then failed quickly, but didn’t immediately run lower. It spent a bit of time consolidating through E period, then finally gave way in F & G. From there the market fell steadily, going through 1324 level without a blink. You could tell that was likely in the way E/F/G was doing lower highs and lows. Had there been a bit more back and forth and less outright weakness, it might have been different.

Then came the break of 1318, which was significant in that it put the market into Tuesday’s value zone - a flat one it was likely to run all the way through down to near 1300. The hard part was sticking with that move as there was a big bounce in L period. An ideal play would have been to sell the return back into the area below 1318 once more.

After sitting through the volatility of the last few sessions, it’s worth taking some time to see where we are in the greater scheme of things - specifically, why it is that while we might see a rally or consolidation and reduction in volatility over the short-term, the longer-term view is bearish and volatility could get even higher.

Consider volatility. We’ll look at Normalized Average True Range (N-ATR) to allow for a historical comparisson of period ranges. Early in 2007 the monthly N-ATR reading bottomed out at about 4%, meaning the average monthly range was about 4% of it’s average price. That was very near to the lows put in back in late 1993 and early 1994. As of February of this year, N-ATR had reached almost 6%. That’s a long, long way away from the 2002/2003 peak level (11%), but it’s only taken about a year for that rise up from 4%. By comparisson, it took about 3.5 years to accomplish the same thing following the ‘93-’94 low.

To provide some historical perspective on that, since 1981 the N-ATR has made a 2% increase in 12 months or less on only four occassions. It happened in 1982 on the rally that kicked off in August of that year. It happened again in 1987 on the Crash, of course. The third time was in 1998 during the Asian crises and whatnot. The last was in 2002 running into the market bottom.

Shortening up the timeframe to the weekly chart, at the start of 2007 the N-ATR was just below 1.7%, the lowest level it had reached since at least the 1990s. As of the end of last week, the reading is now a bit above 4%. That’s about a third of the way into the 1999-2002 range for N-ATR. The peak in 2002 was just above 6.2%, so again we have a fair way to go before reaching that kind of extreme level.

It is interesting to note that as of Tuesday the daily timeframe N-ATR has reached almost to the peak level seen at the end of January. That’s by far the highest level in the last couple of years, so it’s definitely worth looking for an easying back of volatility some time soon. This level of N-ATR was held for a couple of weeks in Jan/Feb, so we shouldn’t necessarily expect an immediate narrowing of daily ranges, but the chances do seem good to expect a retrenchment in volatility in the not-too-distant future.

The conclusion to all this is the following. While we may see a bounce of some kind, perhaps just a consolidation of some kind, in the near term, we should be very cautious about calling a bottom here. The VIX dropped 10 points from peak to trough between Monday and Tuesday, meaning a lot of fear came out of the market. That seems a bit too rapid under the circumstances. The weekly chart view is clearly bearish and we know that bear market rallies are just as sharp as the sell-offs. That strongly suggests we haven’t yet seen the bottom and that more volatility and downside action can be expected in the weeks to come.

Today was not an easy day at all, and given the Fed rate announcement, probably wasn’t ever going to be. The market opened right around 1300, putting it between the 1307 and 1295 reference levels. Above the market, the next major levels of note were 1326 and 1335. Below the market was 1283. 

Really, the only good play was buying the market on the approach of 1295. A short at 1307, which would have been triggered early on, would have been stopped out for a loss. Had you been able to buy the lows, the hard part then would have been holding on through the whole move higher, back through two notable reference levels and all the way up to a third.