» The ES at the Crossroads II Blog for Trading Success: Ray Barros

Before tonight’s blog, a couple of short notes:

Firstly to my Greenfaucet readers.

I appreciate that many times, my terms are unique. My problem is this: if I stopped to explain every time I wrote an uncommon word, my blogs would be longer than Ben Hur; and, my usual blog is long enough!

There are a couple of solutions:

I’ll create an index of the most commonly used words under “Free Stuff”. I’ll have the index done no later than Friday. So, my techie should have it in ‘Free Stuff’ by Monday.
In the meantime, you can enter the blog and enter the term you want in the ’search’ box.
You can read Nature of Trends, all explanations are in there (G).

Hope this helps

Secondly I promised to explain ‘acceptance’. But this blog is long enough. I’ll do that tomorrow.

The question readers posed was: “Given that Friday’s bar had been below normal range and above normal volume, was it a buy setup?”

Let’s place the question in context. The question for me has always been:

“Will the US Stock Market repeat the pattern of 1966 to 1982? Or, will it accept below the lower boundary of the 12-month (yearly trend) congestion and signal we are in a 12-month bear market?”

Figure 1 shows an earlier snapshot of the DJIA 1966 to 1982. If we are rhyming with the 1966 pattern, we are probably at the 1974 lows. I say ‘rhyme’ because markets never ‘repeat identically’; they tend to form a loose visual connection.

The alternative is seen in Figure 2. This shows my long-term target for the DJIA in the event we accept below 7197.

Figure 3 shows February’s price action for the 12-month S&P (Figure 4 shows the DJIA). It’s a bearish directional bar. I say that because:

It opened around the top third of the range, providing a strong rejection extreme.
It closed right on its lows.

I do have this important reservation: while the range was below normal i.e. it was below average minus 1/2 a standard deviation, it’s volume was greater than normal (above average plus 1 standard deviation). In an uptrend, this would be a buy setup. In this situation, it would be a warning of a possible rally. And, if the rally can close above the top of the Primary Buy Zone, 882, we have a 12-month buy trigger for a move to at least the 1034 to 1159.

Figure 5 shows the S&P daily cash chart. We have exactly the same setup on the daily as we do in the monthly. The breakdown on Friday was below normal range but greater than normal volume. If the S&P is to rally, we need to see a buying conviction bar (close no lower than 1/3 of range; open higher than 1/3 of range) close above the Primary Buy Zone (see Nature of Trends), 778. In the indices, I use the cash chart for everything except entry.

To confirm the breakdown on a daily chart, we need to a selling conviction bar close below the Maximum Extension (see Nature of Trends) at 680.

Since I was faced with this issue on Friday, how did I trade it? One tenet of technical analysis is ‘the trend is in place, until there is evidence of a change in trend’. The 18-day (monthly trend and my trader’s time frame) is down. Evidence of a change in trend would be the close above 778 mentioned above. So, I took shorts at 740.0 and 752 with stops above 781.