Today the S&P 500 turned in its largest sell off in the past 10 days. No doubt many market participants were surprised, but around here, we’ve been sounding a cautionary note for a while.
In Market Direction, Thursday December 2 we started to zero in on the pending test of top in S&P 500 futures.
What does caution mean?
What I’ve done is raise trailing stops now quite tight to positions held – in most cases I have my exit stops at the low of today’s daily bar, or, off of intraday patterns using 20 or 78 minute charts.
On Friday in Market Update we outlined a short swing trade in S&P futures entered approximately 5 minutes after the high of the day and set out a case of even more caution:
Where to?
Since the market is clearly not trending down in daily and weekly time frames, there is no reason for us to yet believe that a significant down swing is before our eyes here, but we do have a number of data points that suggest caution.
On Monday before the open in Market Direction we looked at market internals and noted in particular that new highs have been contracting even as the Nasdaq was pushing to new 2004 highs. This is never a good sign for a rally.
And then last night in Market Statistics I briefly mentioned :
In the meantime we are on yellow-alert for a more significant pull back. It doesn’t hurt to be ready.
Finally, this morning in our real time discussion forum, TrendVue Trader Talk, before the selling really got going we had another look at market internals and noted that the advance / decline stats were continuing to roll over. We’d stalked the short side earlier, and had been prepared to go long as well if it made sense, but all the work we’d done over the prior few days certainly added justification to our bias and allowed us to be on the right side of the market again:
12:32:31 Mike: sorry for the squished view here but I wanted to show two things: 1 the failed test of top on the 1M chart. 2, perhaps more importantly, note that the pattern of higher swing highs and lows is now broken?
12:33:29 Mike: So under any bounce to the trendline I want to sell.
12:38:47 Mike: SELL STOP LIMIT 1/2 size YM 10557 under the last 1M bar.
12:39:10 Mike: 5M bull flag in NQ
12:39:14 Mike: This really is now or never.
12:40:47 Mike: NQ is the strongest of the bunch but if it pulls back much more…
12:44:21 Mike: Short YM
12:44:27 Mike: 10560 initial stop.
And the result: Markets closed at their lows, most clients took profits. Myself I’m hunting larger game here so I finished the day holding both Friday’s ES remaining short position and today’s new YM short with 104 points of profit.
While it might seem that these intraday trades were highly opportunistic and short-term oriented, in fact we’ve been taking a longer term view by keeping in mind what has been happening over the past few weeks and specifically the last few days. What we have been seeing is a steady stream of data points suggesting at least an important short term top was approaching. Having this knowledge in our back pockets gives us confidence to do two things:
- Tighten up stops on existing long positions, to be sure that profit taking is automatic if the market does move down as we were expecting; and,
- Speculate on the short side more aggressively.
Over time we can refine our sense for when price has moved too far in either direction, and this is one of the key abilities I hope to pass on to clients.
04.12.07 22:29 #