Trade Guideline for Tuesday

NQ's breaks below Friday's low near the open on Monday failed to attract more sellers to cause a trending down day on Tuesday. A combination of intense buying by the breakdown buyers and profit-taking by the short sellers pushed price back up above 2270 key Line-in-the-Sand.

NQ's failure to break-back down below 2270 on a re-test attracted enough buyers  to cause price to rally from it to close at the day high.

Bullish close on Monday implies two possibilities for tomorrow.
1) A fast short-covering rally on Tuesday if price can stay above Monday's high, and
2) A break-back below Monday's high has the potential to start a wide-range trending down day on Tuesday particularly if NQ can break below 2270, and then breaking below Monday's low.

I will be using 2270 on NQ as a key Line-in-the-Sand again on Tuesday, and 1278 on the ES.

Trading Guideline for Monday

All major stock market indices got whacked very hard the entire trading session on Friday, erasing four day's gain in just one trading session, closing at the low of the day. What is going to happen on Monday will depend on what the Plunge Protection Team a.k.a. the Working Group on Financial Markets will decide to do as they meet for their regular morning briefings before the market opens for trading on Monday.

Should they decide on supporting the market, we will see the market rallying back up to test the high. Without any intervention the market would either consolidate Friday's decline, implies a choppy narrow-range day, or resume Friday's decline by giving us another wide-range down day.

Regardless of what the PPT decides to do on Monday, I will use 2270 as Key Line-in-the-Sand for NQ, bullish above, bearish below. 

First and key resistance is 2279-2283, and a sustained break above could trigger a fast short-covering rally. Below Friday's low, I will be looking for a liquidation decline.

For ES, my Line-in-the-Sand is 1275, and key resistance is 1278. A sustained break above could trigger fast short-covering rally. Below Friday low, I will be looking for another liquidation decline.

Friday Re-Cap

A 5-wave rally from Wednesday's consolidation low that was followed by end of day decline at the end of Thursday's trading session was a setup for two likely possibilities for Friday trading action:

1. A larger ABC decline, to be follower by another trending upleg, or

2. Trend Reversal Decline that should retrace the whole prior upleg.

It became fairly obvious very quickly, as the market opened for trading on Friday, price action was telegraphing a trend reversal, and short-sell were the correct trades.

Friday Guideline

On the 5-minute chart, Thursday's high was likely wave 5 of 3. If so, I would be looking for a choppy ABC wave 4 decline in the morning on Friday before commencing wave 5 up.

Thursday's end of day decline could be wave A of an ABC decline (wave 4). If so, wave 4 usually retraces .382 to .50 of the range of wave 3, but it could be less.

.382 = 2314.50
.50 = 2308.25

As long as any decline is less than .50, I would be looking for wave 5 which should terminate at a higher high above wave 3 high. However, a breach of the 50% retracement of wave 3 would imply that any move back up should terminate at a lower high.

My NQ Trade Guideline for Thursday

Wednesday's morning gap-up opening above prior swing high and above FT Pivot, followed by a successful test of breakout level implies a high probability breakout continuation pattern that started at the end of Tuesday's trading. The 1:1 upside target was not only achieved but exceeded by a few points.

Soon after the target was reached, as expected, the market went into a consolidation mode that lasted until the end of the day, thereby setting up a high probability trending move on Thursday morning.

Since Wednesday's afternoon pattern is similar to Tuesday's pattern I will be looking for another leg up in. Whether the market needs to pullback down to support zone first thing in the morning before running back up, or run-up first in the morning before coming down, depends on the opening price..

I will use 2312 - 2316 as my LIS Zone in the morning. If the morning trend is up, I will look for price to push up above 2333 swing high before reversing or consolidating back down,

And if the morning trend is down, I will look for price to drop down to 2294-2298 support zone before reversing or consolidating back up.

My Wednesday's Trade Guideline

Nasdaq (NQ) on Tuesday spent almost the entire day consolidating the prior day uptrend. With an end of day breakout to the upside, I am looking for the late day breakout to continue up on Wednesday as long as it can stay above the FT Pivot Level of  2295.

If so, on the 30-minute chart, my upside target is 2317 (1:1) to 2338 (1.618) of first up leg.

FOMC decision will be announced at 14:14 NY, so we can expect some choppy action ahead of the decision.

For Tuesday

Tuesday is the State Of The Union Address by Barrack Obama. The Fed may want to make sure that the market is bullish.

However, I will be watching the 2288 - 2300 range for Line-in-the-Sand.

Above the zone, I will be looking for NQ to rally up to test the 2333 swing high .
Below the zone, I will be looking for NQ to test Friday's low.

For Monday

NQ Line-in-the-Sand for Monday is 2278 - 2280.

I will still be looking to be on the short side below the 2278 - 2280 zone, targeting next support zone 2250 - 2255 area.

Above the 2278-2280 area, I will be looking for NQ to rally up to 2300 resistance Zone

For Friday

NQ Line-in-the-Sand Level for Friday is 2280 - 2282 Zone.

Below the LIS Zone, I am looking for a bearish day on Friday, targeting below Thursday low.

Prep Chart for Thursday

Strong selling in all indices with a bearish close on Wednesday. I am looking for more selling on Thursday as long as any rally in NQ can stay below 2308 - 2311 Line-in-the-Sand Zone.

Should NQ breaks clearly above the LIS Zone, I will be looking for it to test the recent swing high.

Stocks in U.S. Are Within a Week of `Significant Market Top'

Bloomberg: "U.S. stocks are within a week of “a significant market top” that is likely to precede a drop of at least 11 percent in the Standard & Poor’s 500 Index, said Tom DeMark, creator of a set of market-timing indicators.

DeMark’s Sequential and Combo indicators, designed to identify market tops and bottoms, are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007, he said in a telephone interview. The S&P 500 began its 57 percent plunge from a record in October 2007.

“I’m pretty confident that in one to two weeks, the market will be in a descent,” said DeMark, founder and chief executive officer of Market Studies LLC. “It could be pretty sharp.”

Keys To Successful Trading

The are two Main Keys to Successful Trading or Speculation or Investing.

1. By trading in the "Direction of the Trend", and

2. By using a "Logical Stop-Loss Strategy".

If the trend is UP (Bull market) we want to be buying every decline or pullbacks, and when the trend is DOWN (Bear Market) we want to be selling rallies or pullbacks.

The questions that needs to be answered are:

1. What is an up/down "Trend"?, and

2. What is a "Logical Stop-Loss Strategy" once we are already in a trade?

The answer to the above 2 questions is the Key to Successful Trading, Investing or Speculation.

Here is a chart example, just for illustration purposes, of how to manage a trade in a downtrend (bear market)  once we are in it

Note: Once the market makes a new Lower-Low, stop-loss can then be moved down to just above the last pullback high.

Successful Trading

Legendary trader Bernard Baruch said, "Successful Speculation (or Trading) is about Anticipating the Anticipators."

"My Money Is On The Big Guy"

Scalping / Counter-Trend Trading

Here is a quote from a famous scalper Marty Schwartz,

"Most books on trading say that you only have to be right 3 or 4 times out of 10 if you cut your losses quickly and let your profits ride. That does not work for me. I cut my losses quickly, but I take my winners just as quickly. I need to be right 7 or 8 times out of 10" - Marty Schwartz, Pit Bull

Trading Without Stop-Loss

"If I were walking along a railroad track and saw an express coming at me at 60 miles an hour, I would be a damned fool not to get off the track and let the train go by. After it had passed, I could always get back on the track, if I desired" - in Reminiscences Of A Stock Operator

Trend Trading

Trend is Your Friend Until it Bends

Are you a Trend Trader or Counter-trend Trader

Are you usually shorting uptrend and buying downtrend?. In another word, are you usually buying declines after the uptrend has ended and are you usually selling rallies after downtrend has ended? For most traders, the answer is yes, and probably why most statistics claim that only 5% of traders are consistent winner and 95% of traders are consistent loser. There is nothing wrong with being a counter-trend trader, but it is hard work, very stressful  and high risk.

In order to win in the long run, a counter-trend trader must have a very high winning percentage because the winning sizes are mostly relatively small compared to the losing sizes. A high winning percentage is very difficult to get, hence why most traders loses in the trading game.

With prudent money management, a trend trader does not require a high winning percentage to win in the long run. Depending on the ratio of their average win size relative to their average loss size, it is possible in the long run to win with just 20% - 30% winning percentage because a trend trade usually provide a very large win size compares to a prudent stop-loss size. It is usually very possible to achieve a  4: 1 win loss ratio when trading in the direction of a trend. Assuming a 4 to 1 win-loss ratio, a trend trader only need about 20% winning percentage to break-even before brokerage fee.

Most traders started out as a counter-trend traders and would remain a counter-trend trader their entire trading career because that is how human brain works. One way to change that habit is through re-programming. The first key to successful re-programming is awareness. Only when we are aware of our weakness can we start to work on changing the habit. One great book that I would highly recommend is "Mean Market and Lizard Brain" by Terry Burnham.

If you like to buy the book please click the link to Amazon provided to the right.

In Mean Markets and Lizard Brains, Terry Burnham, an economist who has a proven ability to translate complex topics into everyday language, reveals the biological causes of irrationality.

The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc with our finances. Going far beyond cataloging our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics: the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes happen, and why people are built to want to buy at irrationally high prices and sell at irrationally low prices. Most importantly, by incorporating the new science of irrationality, readers can position themselves to profit from financial markets that often seem downright mean.

Mean Markets and Lizard Brains skillfully identifies the craziness that is part of human nature, helps us see it in ourselves, and then shows us how to profit from a world that doesn't always make sense.

Wednesday's Guideline

Daily trend is still UP.

Tuesday's narrow-range day implies consolidation day, and that a trending move is coming. A large gap-up above prior day high may trigger a trending-up day, hence caution on shorting for gap-close.

I will use 2286 - 2288 as Line-in-the-Sand for Wednesday. I am looking for a gap-up open for short and a gap-down open for long as long as it has a balanced opening.

NQ For Tuesday

Daily Trend = UP and Strong and in Wave 5 of 5.

I would still be looking for the morning trend to be UP if a price decline can stay above 2274 area. If so, then the morning uptrend target is a move up to the ADR zone.

However, a sustained break below 2274 area implies the morning trend is more likely DOWN, first target is the down-trending trendline, then targeting a break below Monday's low before reversing back UP.

Potential Scenarios for Monday

On a daily chart, the trend is UP.

The Opening Price in relation to the prior day close would be key as to the direction of the morning trend. Since Monday is often a bullish day, should it opens above the Floor Trader's Pivot, I would be looking for price to stay above the pivot, with Morning Trend = UP.

However, another equally likely scenario, should price violates the Floor Trader's Pivot area, would be for the morning trend to be down, forming a bigger C-Wave down to the ADR area before resuming the uptrend.

NQ 5-Minute Chart for Thursday

On a daily chart, the trend is still UP.

Looking at the 5-min NQ chart from Monday's Swing Low to Wednesday's Swing High, I can see a very nice and clear 5-wave structure UP.

Once Wave 5 up is complete, I will be looking for a 3-Wave ABC Pattern down to FT Pivot and or .382-.50 retracement Level before resuming the uptrend  Thursday's intraday morning trade will depends on The Opening Price in relation to the Closing Price.

I will present 2 mutually likely scenarios as my trading guideline for the morning trend (as morning prep) prior to the Open.

Scenario No. 1: Assuming NQ opens with a gap-UP. 

• Short below the Open, Targeting the FT Pivot / .382 / .50 Fibonacci Retracement Level.
• Long Above the Open, targeting ADR from FT Pivot.

 Scenario No. 2: Assuming NQ opens with a gap-DOWN. 

• Long above open, Targeting Gap-Close.
• Short at Gap-Close Targeting FT Pivot / .382 / .50 Fibonacci Retracement Level.

Trade Guideline for 5-Jan-2011

Daily Trend is UP, with a neutral close on Tuesday. Where it opens on Wednesday is key as to the direction of the morning trend.

Opening below FT Pivot implies morning trend would likely down to below Tuesday's low before reversing back up, and opening above FT Pivot would imply morning trend likely be up to above Tuesday's high before reversing.

NQ Daily Chart - Update

NQ daily chart is showing that it is in Wave v of 5 up from the July 2010 low. A break below trendline support implies that Wave 5 has ended. If so, I will be looking for a larger correction that may pullback down to test the breakout level, hence will start looking for short.

But until then, I will remain bullish and staying mostly on the buy side on an intraday basis.

Very Large Gap-Up Open Above Prior Day High

Implies an Imbalance Market Condition

Large Gap-Up Open above Prior Day High, and Staying Above the Open implies an imbalance opening and imbalance market condition offering a high probability large-range up-trending morning with a morning range of between 25 to 35 points on the NQ before the start of lunch consolidation.

If followed by a small lunch consolidation pattern, usually in the form of an abc-wave pattern of less .382 of the morning range, I would then be looking for the market to close at or near the day high, implying a trending-up, one way trend day.

For Monday

A New Year and a New Day. While not expecting a trending day for Monday, the Open in relation to Prior Day Trading Range and Prior Day Value Area would be key, as anything can happen. I will remain bullish above FT Pivot.