Blog for Trading Success

I hope you all have kept safe. Tonight I write on two topics. I touch on the trauma of wipeout and I look at the S&P’s roadmap for the coming week.

TRAUMA OF LOSS:

Many sent me this link: http://www.youtube.com/watch?v=2qlPW4wSzM8 (you may need to copy and paste)

It also appeared in a number of blogs: e.g. Dr. Brett Steenbarger’s “Traderfeed”: http://traderfeed.blogspot.com/

Watching it re-ignited some deep-set memories, memories of the many failures and of repeated lessons unlearned. I am full of admiration for the traders who learned from one dramatic failure; my journey took 7 years of losses and rehashing the same mistakes before I turned things around. Watching the video brought up the thought that ‘but for the grace of God and the patience and support of Chrisy (my wife) go I today’.

The video is a stark reminder that success in this game rests on the trinity: ‘Plan x Risk Management x Psychology’. Note that multiplication signs: a zero in any factor results in failure.

S&P ROADMAP

Speaking of plan let’s have a look at a roadmap for the S&P for the week and possibly next week:

Figure 1 shows the S&P basis cash with an 18-day Swing (the monthly trend), a completed Ray Wave Count and a Market Profile Structure. The first question is: what is the trend of the 18-day?

FIGURE 1 S&P 18-day

To answer that, let’s turn to the 12-M (the yearly trend). The 12-Month has triggered a possible Upthrust change in trend from up to down (See Figure 2). To complete the signal I need a monthly bearish bar close below 1455. Right now that looks the case but only an end of month bearish close will confirm. In the meantime, if we assume the start of a bear market, how should the 18-d unfold?

FIGURE 2 12-M S&P

Normal technical analysis theory suggests that breakouts are retested. I have found that the retest zone is generally (in a downtrend) between the upper boundary of the Primary Buy Zone (1406 basis cash) to the Maximum Extension (1360) (see Nature of Trends for definitions). There is also 13-w resistance (13-w breakdown point at 1370/1371). This is a pretty wide zone but does serve as a starting point (See Figure 3).

FIGURE 3 18d Breakdown Points

Figure 4 shows a projection of a likely termination zone for the first wave down assuming a 3-wave structure. I consider the old wave-5 as the new wave-(2). A 69% retracement is equivocal on whether we see a 5-wave or 3-wave 1st move. We do know that a 3-wave move will not exceed 1.618 wave-(1). This provides a target to 1238 basis cash. I’ll assume the more conservative 3-wave target until the market says different.

FIGURE 4 Wave-(3) Target

Figure 5 shows the 80-min Ray Wave Count. For this count to be correct, the market needs to hold below 1334.20. Wave-2 was simple; Wave-4 will be complex and the structure as at the close on Tuesday 01-22-2008 has qualified as a complex wave-4. If so, wave-5 ought to begin tonight.

FIGURE 5 80-Min S&P

Wave-5 will be either the longest or the shortest wave. If the shortest wave, we’ll probably see it end at 1276 to 1248 with the most likely level to be 1258 to 1276. 1258 is the maximum extension of wave-4; 1276 is the minimum projection for wave-5.

This is the preferred scenario. If correct, I expect to see a rally of 1.97% to 2.22% (with a lesser probability of 2.66% to 2.83%) off yesterday’s close. This figure ties in with a wave-(4) around 1324 to 1350. I’ll consider the alternate count (wave 5 is the longest if the need arises).

To summarise: if we do get a wave-5 terminating around 1258 to 1276, we can expect a rally to 1324 to 1350 with the preferred target being 1335 to 1345. This is an area where I’d look to go short IF VOLATILITY has returned to normal. For the moment, I’ll abstain from trading the US stock indices.

[The 1.97% to 2.83% was taken off a study done by the Quantifiable Edges site:

http://quantifiableedges.blogspot.com/2008/01/time-cbi-indicate-bounce-could-be-near.html

(Thanks Brett Steenbarger [http://traderfeed.blogspot.com/)] for the heads up to the excellent Quantifiable Edges site)]

That’s the roadmap for the coming week in the S&P. It’s only a roadmap and I am sure that there will be detours as reality pans out. But by having a roadmap, each detour will provide information to make a more accurate picture against which to take a low risk trade when the current rally ends.

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