Technical Picture - U.S. Markets Rebound from Japan Meltdown

The U.S. markets gapped aggressively lower on the Japanese meltdown overnight following nuclear power plant fires. Buyers stepped in as the S&P came close to 1260 support, a key level I noted in my last post. This level corresponds to the 2010 highs, an area we based at for the last seven sessions of 2010. Volatility spiked as depicted below.

Swing Trades

Buying support on the open isn't easy, so I decided to to take some of the nail biting out of my support strategy by trading from my swing account rather than my day-trading account.

HCPG gave us POT $51.00 and I also liked POT $50.00, so I wanted to buy somewhere in between.

In the end, I hesitated and decided to go long weekly S1 which is much closer to $51.00. I took a partial midday.

I was looking to hold my partial swings overnight if we made a higher high than yesterday on decent volume, otherwise we're just on a path of lower lows and there's no point in taking the extra risk of a swing. So POT took out yesterday's high intraday, and we'll see what happens tomorrow.

I'm three for three with SU, but still not holding overnight because we keep printing lower highs and/or lack of volume.

TCK breached my initial, narrow support target on the open, so I decided to put this name aside and wait to see how things develop.

I took TCK long on a NRB, low risk, entry as depicted below. I took a partial at resistance, but it just kept on going on accelerating volume, which was perfect for my swing strategy.

Dummy Day Trades

For daytrades, I've been trading the old standby - low risk, dummy trades over the last two days. I look for stocks that gap with volume. Not too hard to find these days.

SHAW is a contractor with several nuclear power plant contracts set to begin in the U.S. and China. Following news of the Japanese nuclear disaster is gapped down wide on Monday. Two really nice trades yesterday and one today as depicted below.

I take all the high volume pre-market gappers and first hour pt. gainers/losers that catch my attention and create a symbol list in my Trade-Ideas scanner which I run the 15 min. NR7 scan. NR7 signifies price/volume contraction (narrowest price bar over last 7 bars) and foreshadows expansion. For longs I want price, to close above 5 EMA (pink line) and for shorts, below 5 EMA.

MCP printed a few NR7s and carved out a NRIB (narrow range inside bar). Took it long on break of small handle or base. My target was a retest of the intraday high. Not very fond of MCP as it can get really erratic at times, so just take the money and run.

Also traded PEP ( not pictured) NR7 plus hammer, but it went nowhere for a scratch.

Technical Picture - $USDX Strength Weighs on Precious Metals and Commodities

Markets gapped up on strength overseas, but sellers quickly took control and the opening gap was faded. Not satisfied to simply fill the gap, the bears persisted, and helped along by a stronger $USD, sent prices all the way down to yesterday's gap support for tech and almost a full PD gap fill for the S&P. Small caps were hit even harder still. The only bright spot was the DOW, which managed to end the day on the plus side. Prices started to stabilize and bounce midday, and got a further boost from the FOMC minutes. However, late day price action became much more volatile and after hours, the bears are hard at work.

On the SPX chart above we note that open interest CPC is still too bullish and needs to correct. Today's stick not likely a hammer, more likely a hanging man, but that needs to be confirmed.

Note that the VIX, which has gone virtually ignored for months, is forming a bottoming pattern which looks like a mini inverse H&S.

Yesterday, the dollar held support and today it bounced, holding most of its gains into the close.

Dollar strength meant pressure on commodities and precious metals. Crude carved out a bearish evening star reversal pattern over the last three sessions.

Distribution in gold and silver. Look for more downside if the $USD strengthens. On the SLV chart we see multiple waves of RSI divergence to higher prices. This time I think we will see a deeper correction.

I still have a core swing short position in SLW which I was very tempted to cover at $36.00, but I believe it's going lower, so I'm holding on.

Coal technicals are still strong, but we have a bearish island reversal waiting to happen. Watch the futures in pre-market.

Semis are holding up well, but a correction would be healthy here given the steepness of the trendline.
MOO has already corrected, so I'm expecting a retest of the base. World food shortages are still problematic, and I expect Ags to be one of the leading sectors in 2011.

Commodity Rotation Cycle - In a commodity bull market, precious metals are the first to rally, followed by other metals, agriculture is third and oil is usually the last rally in the cycle. That said, it stands to reason, that precious metals will be the first to correct. Just a thought from a non-expert.

Technical Picture - Election Rally - Overbought

Yesterday's NRIB led to expansion - election rally. We are now in a resistance zone and very overbought. The VIX has retraced 62% into support.


The USD and gold are on track as discussed in previous posts. Gold coming into a resistance zone.

Mailbag - How to Use the Volatility Index in Day Trading

The VIX and VXN measure market volatility for the S&P and NASDAQ respectfully. Volatility increases with fear or market declines. It is very rare to see extremely high volatility during periods of market euphoria. Last week's extreme readings tested highs previously recorded during the TECH bubble meltdown in 2002.

It's probably a good idea to review these charts regularly along with other key market indicators in order to have a good feel for the market and have an expectation for the short-term.


The next two charts are the intraday 15 min. charts for the E-mini Nasdaq futures versus the VXN. As you can see, we have inverse relationships. On Friday when the market gapped up and faded (pts. A-B), the VXN did the inverse, gapped down and faded. EOD today, the market sold off (pts. C-D) and the VXN, broke out of its narrow trading range and rallied.

The intraday action on the market can be confirmed by looking for an inverse action on the VIX/VXN.

Technical Picture - Historic Week ( Ban on Shorting Goes Global)

The above chart, courtesy of Marketwatch, illustrates all of the major market phenomena at play last week. For a complete run down of the last week's historic market events click here.

Despite last week's capitulation, the underlying credit crisis remains and will take years correct. With that in mind, I suspect that near term, we'll rally back up to the trend line, but pressure will come back in when the shorting ban is lifted.

A close examination of the COMPQ tells us that bearish momentum is reversing as depicted by price/volume and the ADX. However, the gap up stalled at the 50 DMA and a quick fade ensued. The black candle signals that we opened higher than we closed, but we still have an unfilled gap EOD as highlighted in green. I'd like to see that gap filled sooner than later.

The SEC's sudden ban on shorts in financials imposed a monstrous move in the cboe put/call ratio.
The McClellan oscillator also made a gigantic move from extreme oversold back to neutral in the space of two days.

The VIX carved out back to back WRBs, first a shooting star, and next a hanging man (to be confirmed). The ban on shorts will remove some liquidity from the markets and will likely result in a decrease in volatility short-term.

Ban on Short Selling - The Saga Continues

The ban on short selling financials is going global. Canada and Germany jumped in late Friday and now Australia has taken it one step beyond, by banning the shorting of all stocks on its exchange. Taiwan will ban short selling of 150 of the index's heavyweights when they trade below the previous session's closing levels for two weeks starting Monday. The FSA in the UK is being urged to extend its ban to other volatile sectors. And in the US, major companies with large financial services businesses, such as GE and American Express are begging to be added to list of 799 companies. The French will monitor shorting activity closely, but have yet to announce a ban.

I fear that the ban will be extended beyond the 2 week range and that day-trading will become increasingly constrained.