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Wednesday, January 31, 2018

Market Update 1/31/2018 - Advanced Trading Techniques

We're still looking for a major top, but Friday was not it. I could go deeply into it, and have several toppy looking charts I could share, and a lot of charting to get caught up on, but that wasn't my prediction last Friday, and my outlook has not changed. Maybe this is the beginning of a correction, but probably not.    

Reviewing the recent market action, and the technical charts: 

The pullback -

Being the contrarian I am, I suggested traders sell into strength on "Short Covering Friday", even though selling on a Friday is usually a bad idea, because money is typically put to work on Mutual Fund Monday. Countless times, I've seen traders get short on a Friday, only to see the market continue to rally higher on Monday, but this was one of those rare times where I didn't "see much upside risk" in selling into the weekend. All I can say is, "how do you like me now"?!!

There's a good chance I may have gotten this one wrong, and I can show you (on the chart) exactly why most traders did get it wrong, using the NASDAQ chart (below).

1. They believed the trend - in blue - was their friend.
The biggest reason most traders (who happen to be perma-bulls) got it wrong, is because they trusted the trend on a very short term chart. I'll explain more about this bellow.

2. Sentiment. These bulls weren't looking for a pullback. They were on a sugar high, and even if you had shown them the chart below, their judgment is hopelessly clouded.

3. Most traders don't know chart patterns. First we have to go back to the action on the 25th, to recognize the pattern developing, because that pullback doesn't look like a normal pullback into a wave 2. 

While most traders were watching a simple channel, the market breaking out to new highs, and expecting another breakout on Monday, I was watching what looked like a broadening triangle pattern develop, and what looked like a head-fake rally to a slightly higher highs, and unless you're familiar with certain patterns you're not going to see this coming.

So, after identifying the chart pattern, and selling into Friday's close, and remaining bearish into the predictable dead cat bounce we saw on Monday, the broader market plunged 400 DOW points (roughly 1.4%) on technical Tuesday. There's a reason they call is technical Tuesday, and some pro traders even came on CNBC, very early Tuesday morning, to brag about what they had done, after already taking futures down...   

This was a little bear-raid, build on the back of some (end of the month) profit taking. That's all.

The short term charts are a mess, and this is where the longer term (60 min) chart view comes into play. If you don't chart every timeline, as I do, then you're not going to have a clue, when the short term chart breaks. Too many traders are short sighted, and miss the big moves, because they're only focused on the very short term. Those people are still the dark.

In order to see the big picture you need big charts, and the more volatility increases, the more this comes into play. Back in '08 during the height of the crash, we had to turn to daily candlestick, and even weekly charts to find the trend, and missing a 10% point move,  or ending up on the wrong side of a 10 - 15% move in either direction, became the new normal. Once the $VIX got above 30, it was not uncommon to see 1200 point short squeezes, followed by 3000 point declines, the next day. This is the environment in which I learned to trade. Once volatility came down, the short term charts started working again, but it took some time before I become proficient in charting a bull market, on 15 min charts, let alone 3 min. charts. If you had told me years ago, that I'd be relying on 1 min chart views... I would've laughed in your face.      


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