Lets update yesterday’s Clash-inspired Market Direction note where we laid out the key support levels which the market needs to hold in order to protect the rally off the April lows.
What started out as a great rally off the April lows is now in danger of failing and reverting to the longer term direction, which is, so far this year, down. Mapped out on the ES chart are the two likely scenarios. If price can fairly directly reclaim the 1170 level then the up scenario – overhead resistance turns into new support and price moves back in to the nearest range above – is fully in play.
S&P Futures – 135 minute chart, 30,000 foot view
Today’s oil and security-scare inspired clunk below support reversed neatly during the afternoon bringing price right back to what was old support, which now is new resistance until proven otherwise by a set of higher swing highs and higher swing lows above these support levels – 1460 NQ, 1170 ES, 10300 YM.
Nasdaq 100, S&P 500, Dow 30 Futures
With 40 minutes to go to the end of today’s session its unlikely price will gain enough steam to justify holding new longs at this point, so unless price really gets going here soon these price levels will serve as tomorrows indication of which side of the trade to be on.
The 135M chart is very useful in gaining a broader perspective within the daily bars, and is often helpful – like the 78M chart for stocks, in seeing patterns that appear as noise in smaller time frames. Here we have a rising wedge to overhead resistance; a break down through the rising trendline of the wedge, and a bounce back up to the breakdown.
The latter part of that last statement is key. I will always short underneath the first bounce back up to the underside of a broken wedge. You don’t need to short the market to take advantage of this – less aggressive traders can monitor the failure point and use that as an indication that its time to take profits or reduce market exposure on the long side. If price does come back down and trigger a short, it will be my cue to radically tighten protective stops on remaining open long positions.
Unless or until such time that support has been regained and confirmed, we have to be prepared for scenario two, failure at overhead resistance. The rising wedge has a typical target of the base of the wedge.
A final thought: This market’s real nemesis is oil and has been for far too long, which is quite curious since oil has been in a down trend since the start of April. The downtrend hasn’t helped the stock market much, so we can only imagine how the market would react if the down trend in crude were to engineer a surprise reversal this week and start to trend higher…
05.05.11 15:32 #