S&P in the twlight zone

I recently realized that the S&P is a better market to analysis for my current interests so look at where it is at currently.  I will say this, it will be an interesting few weeks ahead.

Volume:
It is worth noting that volume on the past 3 day rally has not been above average.  Some inferences can be made about this.  The "big boys" - fund managers etc, have not jumped on the bandwagon just yet.  One interest point is if you look at the up days, around 3pm there is a surge of bullish activity driving up prices.  On one occasion this price action has saved day for the bulls and today it has greatly increased the days gains.  In my non-expert opinion the volume isn't there to support that much of an upside move.   To save room volume isn't on the graph.

Bollinger Bands:

S&P recently bounced nicely off the lower bollinger band and is trading at the middle-low range.  This indicates that the index can go up or down without bollinger band resistance.

Moving averages:
On the 23rd of June, we crossed the 20 day moving average.  All other averages are resistance at this point which means the trend is still quite bearish.  50 day and 200 day are about to cross, DEATH CROSS.  Based on the current slopes July 18-19th could be the cross which is again very bearish.  However, if the market picks up there may be a chance it will be a glancing blow.

Resistance:
Big purple is a strong resistance area, as you can see it has been resistance and support many times recently.  Any break above this line will reduce my ability to continue to be a bear in the short term.  It is entirely possible that S&P 500 rises after breaking that line, and might continue up for a few days/weeks.

Falling Wedge pattern:
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:falling_wedge

This is considered a bullish pattern.  As you can see we are possibly in this wedge pattern,  Since i just drew this today, but i am expecting a pull back tomorrow since I don't think we will break that purple line (3 days of gains, it would be hard to justify)  Assuming this wedge pattern holds and we drop a bit down, well, You could short this index and set your stop loss above it.  If you did this it is very low risk trade since you would be out if the breakout of the purple resistance occurs. 
Either way this index breaks it provides an opportunity to get in and setup a decent stop loss position.

Divergence:
This is something i haven't talked about.  When the MACD and / or the RSI diverge from the price trend, that is a possible sign of a reversal.  The fact that we are in a wedge pattern and the MACD is diverging (see green line)  makes me very unsure about what will happen.  However, the RSI isn't diverging (see red line).  If anyone knows which is the more reliable measure it would be helpful, at this point I would say the market is pretty confused about the future.


RSI / Slow Stoch:
These are both measures of overbought and oversold conditions.  Both of these are now neural after being oversold due to the recent break low.   The Stoch has indicated an upward momentum since it came out of the oversold condition.

MACD:

Still bearish but.... the "buy signal" is about to occur. This would again indicate a beginning of an uptrend. 



Plan:

Wait.
If there is a breakout of that wedge either direction that could be the start of a couple week trend, so wait for that to occur to be conservative. 
The reason I am a cautiously bearish right now is because what has changed?  The governments are all in debt to the point where it boggles my mind why other nations continue to purchase their bond issues.  One reason could simply be that they have no choice.  If they pull the plug on bond purchases for Europe/US, the world economy collapses, in addition to that, most countries that are purchasing these bonds have huge cash reserves that will devalue very quickly if their is another sovereign debt crisis. 
There has not been any news recently that has been positive that would confirm growth.  We did today get better than terrible news on job loss claims.  They were better than expectations by a minimal amount but still not very good for a recovering economy.
I will update this post when something significant happens. (could be a break to the upside tomorrow) 

The Bounce

In a previous post I was expecting some form of bounce.  Today we got it.
A pretty good case for why it will continue to the downside is here:



So I am going to be waiting before I make any trades for now.  Since the top of this bounce might not have been reached.   Also looking back at the S&P this situation has happened.  I will post a chart sometime this weekend.

Nat Gas background and Tempting Nat Gas Trade

This will be my first trading possibility posted here.
Nat Gas in interesting, One of my colleagues from school exposed me to the world of nat gas and ETF trading.

Current Fundamentals that can be considered:
Nat gas is a cyclical so depending on season nat gas is either more expensive or less expensive.  In winter they burn a lot inventory for heating so over the spring and summer the US stores more nat gas for the upcoming winter.  Looking back, usually end of spring / beginning of summer nat gas begins to climb.  However, in the summer time, nat gas is used for peak energy demand which usually occurs when heat waves have occurred.  Currently last week and this week we have had pretty hot weather in the major east coast cities in the states.

On Thursdays at 10:30am, there is a report that provides inventory data for nat gas in the states.  This report sometimes has a dramatic impact on the price.  Two Thursday's ago the inventory data was on the low end of the expected values.  Last Thursday, the report came in below expectations.  This week has been quite hot as well.  Therefore from the stand point of saying that they have to fill inventories by winter, there is therefore more demand for the commodity so the price should be trending higher.

One thing to note as well, is with the development of more shale gas deposited, there is or will be increasing supply in the medium to long term so that might downside pressure on the commodity.

Now lets see how the fundamentals line up with the technicals

A bit of background, the ETF that is shown is 2x leverage of the underlying nat gas futures.  There is some strange things with ETFs, that I will not go into now, but just note that over time this ETF lose value due to a reshuffling between HNU and HND (the inverse 2x leverage of nat gas futures).  So the ETF is designed to reflect the intra-day price fluctuations in the future contract of nat gas. 

Anyways, this ETF has been trading between 4.86 to 6.43 since late March.   It has recent broke out and retested that 6.43 support twice and on the third time broke through it, but quickly bounced above the 6.43 mark.  From the Dow video you can notice this was a head and shoulders pattern that broke its neckline but then the past couple of days closed above the next line.  This is a Failed Head and Shoulders pattern.  And it is the reason why you need to set your stop loss a couple of cents above the neck line.  In this case if you were shorting this ETF (which you wouldn't since there is HND which would go up if the nat gas future went down) you would have made a decent trade but if you ignored the fundamentals of weather which you probably shouldn't do for a commodity.

a) Elliott wave Theory
I am 100% new to Elliott wave theory so I will not pretend to know what I am talking about.  I labeled this as a 1-5 wave with a ABC correction.  This could make sense but again I don't know enough to say this has any bearing on if the trend that 1-5 wave was in (bullish) will continue after the ABC pattern.

b) Trading Channel
Since Nat Gas traded in a channel for a few months, breaking out of that channel to the upside is considered bullish.  The 6.43 level is very strong support now.  This is why your stop loss should be at this level, because if this is broken you are out of position and it is better to exit and re-evaluate.  The best part about this is that the current price is relatively close to the stop loss price making this a less risky trade.  This level is also around the neckline area, but since the H&S pattern was broken it no longer has any bearing on the outcome.

c) Volume
The volume is quite bearish, there has been a lot of downward pressure, and the most recent volume is lower than the previous days by a large percentage.

d) MACD
This indicator is saying that the momentum is bearish, but if you look at the light blue line the slope has flattened out completely.  While the trigger line is continuing its decline.  This means they may be crossing in the short term which would indicate a BUY signal.

c) Slow Stoch

There has been a cross over and possibility a change in momentum of the stock.  Notice that it was over sold a few days ago but has come out of that now.  Since it isn't over sold it could continue to sell off but it will be over sold and a bounce could be expected.  I would consider this a neutral to bullish indicator.

d) Moving averages
As mentioned above ETFs lose value over time, so MA might not be perfect but still shorter term MA still hold weight.  An example of this is the 50 day MA.  It has been strong resistance in the past and solid support for the last retest which helped propel this ETF over the neckline.  Also notice that the 50 day MA is starting to increase (positive slope).  This would be considered bullish since we have the 50 as good support below the current price.  The 20 day MA is overhead resistance, and therefore part of the risk of this trade.  It could be argued that it was resistance recently. 

e) Fibs
They match up pretty well as they are drawn, so i only see the 61.8% being potential resistances. 

The Trade

Entry:
Waiting for a pull back to entry a long position.  It is foreseeable that there will be a pull back from the recent climb possibly to retest that 6.43 level.  If it bounces  the price should be on its way up.


Exit:
Stop loss: below that 6.43 level, day 6.45-6.48.  I don't have a good method to pick precise stop loss target.

Target: 7.41 I have labeled at a target.  This is aggressive but not out of reach.  The problems I see are the 20 day MA overhead need to be broken and the 61.8% retractment.  The 7.41 level was the resistance on the left shoulder and support on the head so it could be a good level to see a bounce so better exit the position and re-evaluate.


Caveat:
I am very reluctant to enter this trade.  The main reason is not that some indicators are bearish, i think there is a very strong argument technically and fundamentally that the price should go higher but it is the overall market sediment. As mentioned in the DOW posting early, the markets are at a pivot point where a large crash is likely until we fail the H&S pattern.  As Nat Gas is in the energy sector, and the energy sector usually takes a hit during a downturn since there is less demand for energy, if this down turn happens this week say Thursday, this could be an external factor that would drag Nat Gas down even though it is poised to start to climb.  So I am still undecided about this trade.  But it is relatively low risk since the stop loss is quite close to the current price.  Ideally, I would like to see Tuesday be a pull back in nat gas, and a 3-4 day consolidation for the markets (there is a bounce expected relatively soon).  This would give me an entry point into nat gas at a good price, and Thursday exit from the position before any major market moves occur.


Update 1 - June 6th
I did not take this trade today, I am happy I was busy for the second half of the day because I might have reconsidered entry the trade late in the day when the Nat Gas market dropped like a rock.  The close however was below my target for stop loss.  Therefore if I was long this position I would have already gave up and pulled out of this trade.  This is a significant trading close, since it places HNU (the nat gas derivative) back into the trading channel it as been stuck in for over 3-4 months.  Therefore the resistance that was broke was very strong.  There is still a strong case to be made that the weather has been so hot that the nat gas inventories numbers will be well under the expected values.  However, I am not confident that this will happen and therefore will not be taking a nat gas trade.  Another reasoning is that the ETF is not oversold and still has the ability to break down further and the MACD is still bearish.  The Volume on todays drop was also relatively high vs the previous 7-8 closes.   I will update this on Friday after the nat gas closes after Thursday's announcement.

Update 2:

Nat gas.....  My reasoning for my apprehension was confirmed today.   Even though the fundamentals pointed to a possible spike in costs due to the weather what happened in the charts?

On June 7th we had a continued breakdown of Nat Gas prices which would have confirmed the breaking of that support line.  This now means that nat gas is now back into the trading channel it was for almost 2-3 months earlier this year.  Until it gets above the purple line it it wouldn't make sense to be going long (unless you are trading inter-day).

Today, June 8th, big announcement and nat gas prices dropped.  Slicing through that 50 day moving average without any resistance.  The numbers were better than expectations!  This could have been a coincidence but this is a case where technical analysis predicted fundamentals.

Lets look at where HNU stands now.  The trading channel is approx $4.86 to $6.43 and the price stands at $5.65 at close.

First, HNU is in an oversold condition which usually indicates a bounce or sideways action so i would be surprised to see a continued all out drop to test the $4.86 support.  However!  researching more into slow stochastics there is some people that talk about embedded conditions.  Where if the condition remains below 20 (both the lines) then they are embedded and should be looked at as a lock in of a trend.   I need to do more research on this but as of now, i would say it isn't looking good.   Another thing to notice is the above average volume.  Over the past couple of months this has rarely occurred.

MACD line and its signal line are diverging so that would again be bearish for this ETF. 

The breaking of the 50 day moving average is also very bearish.  My position on this changed as soon as HNU closed  below that strong $6.43 support.   If I was more confident with this analysis i would have went short and made a bundle but the weather and other factors such as increasing energy prices and a pop in the economy remained at odds with the technical analysis.  Therefore, I didn't touch this trade with a 50' pole.

To be a Bear or not to be a Bear

I was a bear from the start I will admit it, but after listening to some technical traders on YouTube I realized a personal bias on market direction can really hinder your chances of making a successful trade.  So like I mentioned in my previous post I will walk you through some of my reasoning on why I am expecting this downtrend to be much worst.  Counter arguments are welcome

Start with A major index such as Dow.  (Note: Only reason I am showing the Dow is because I previous setup this chart.  The S&P and Nasdaq follow very similar analysis if you draw out the Head and Shoulders pattern).

This chart is the Weekly Dow Jones industrial average from 2007 to present.  It shows 4 Head and Shoulders patterns.  These can be debated but as i see it the theory of Head and Shoulders patterns fit well within the observations.  What is a Head and Shoulders? In short, it is a peak, and larger peak, then a smaller peak, followed by a break down (this is for a bearish uptrend reversal, the bullish downtrend reversal is the opposite of this demonstrated by the Cyan lines above). 

Are they common?  In every market and time frame you will be able to notice Head and Shoulder patterns.  In the Dow, i looked back and the last Head and Shoulders pattern I could see on this weekly target was in 2002 which was a breakdown drop almost double its projected target.  Arguably you could say there was failure of this prediction in 2006, but compare them to the ones charted out and you can see it isn't well defined.  

 This breakdown occurs when the pattern is completed by a close below the neckline which is traced out for all four head and shoulders patterns in the above picture.  Why I think this pattern holds value? The right shoulder that is created fails to make a new high, which indicates that the Bulls were not strong enough on that last attempt to make new highs.  The pattern is stronger when volume for right shoulder is declining with respect to the volume during the head.  I will discuss that below when i talk about other indicators on the graph.

The neckline is drawn from the lows after the left shoulder to the lows of the head.  The rational for the breakage of the neckline triggering a drop to the target value i will leave up to others sites that can explain it better that I can.  So talking about target values.....

Looking at the Purple lines for each year, I follow it with a yellow line that is the same length of the respective vertical purple line.  The target for a head and shoulders pattern once broken down is the distance from the top of the head to the neckline in the breakdown (or up) direction.  As you can see, in two of the three completed Head and Shoulders pattern in the chart, this projection was relatively accurate.  I will explain my reasoning on why i think the first H&S pattern in 2007 was not as strong and didn't meet the predicted target.

So what is the target for the DOW?!  On the graph i market it as 8414.  But there is reason to believe that 38.2% retractment of the last major move could be the first significant bounce.  That would bring the dow to 8327.  Notice how close the prediction is to the fib retractment. What is Fib retractment?  Again, better explanations are out but simply they are likely values that a stock might correct towards.  Remember stock markets always go up and down, never always up so even if you are in an uptrend, corrections that might bring you much lower are likely and necessary to maintain a strong uptrend.  

So To answer the question to be a Bear or not to be a Bear?

It does not make sense right now to be a Bull, until we close above the 9780 mark.  This is because in the current H&S pattern, the neckline last week was broken.  The neckline was at 9779 and the market closed at 9695 (approx). which is 80 below the neckline.  

If you go against this trend you might be right, but the odds are not in your favor, and it would be safer to just wait until this significant technical analysis pattern is broken (getting up above the neckline and closing) to continue to go long. 

Other Indicators:

I am going to quickly go through this since i have already wrote a lot than i thought i would.  Mainly because this will be the basis of my trading strategy until this pattern is proven incorrect.  

Good sight to explain these is at: 

Stockcharts.com

Volume:

A stronger H&S pattern is when the right shoulder's volume is weaker than the head's volume.  This doesn't always hold and isn't always a necessity for the breakdown to occur.  In our current case it is definitely the case.  There is higher volume on this right shoulder which means this pattern is more likely to be a good prediction.

MACD:

The cross overs of the lines indicate sell and buy signals.  If the blue crosses below the white that is a sell signal and if it crosses above it is a buy signal.  In this case we had a cross over and the lines are not looking like they are going to cross over any time soon; they are diverging from each other.  MACD also shows momentum, so currently the momentum is down.

Slow Stochastics:

This can be used to determine if a stock is overbought or oversold.  Anything above 80 is overbought and anything below 20 is oversold.  This will indicate that there is a likely bounce in the reverse direction of the trend that is currently being followed.  This also is a momentum indicator, and notice the sharp change from upward momentum to  downward momentum. 

NOTE: In the weekly we are not oversold, but in the daily we are.  This indicates that there will be a bounce relatively soon.  If this bounce takes us above the neckline the H&S pattern would be broken.  I am currently waiting on a bounce to enter some short positions.  This week or next week will be the bounce and possibly a big move down.  If you were playing the index you could wait for the bounce and go short with a stop loss of a few points above that neckline.  If it breaks it you are out with minimal loss.

Bollinger Bands:

Very interesting indicator.  They are the gream boundaries around the index on the first chart.  They are designed to keep the index within the bands, 2 STD = 95% of the time.  So if you are above or under the bands you have a 2.5% chance of continue in that direction.  This is one example of why technical analysis  allows a trader to stack the odds in his/her favor.  Why enter into a long position if the stock/index has broke below the Bollinger band?  There will be a bounce most likely, so when it occurs enter into your trade.

Moving averages:

I use 20, 50, 200 period moving averages.  In many many charts you will see these averages provide strong resistance or support.  When your break a support level it becomes resistance.  Lets look at the first chart.  Strictly looking at the current H&S, you can see that the head found resistance at the 200 week moving average (faint yellow line) and the right shoulder found resistance at the 20 week MA, and with our breaking of the neckline we also broke the 50 week MA which is very bearish because we are now below all moving averages.  As an aside, on a daily chart the 50 day MA is about to break the 200 day MA.  This is called the "DEATH CROSS" and is very bearish again.  Also note that the death cross doesn't happen often. 

Wow.... That was a long post but I think it was necessary to set the stage for what potentially could be a significant move in many major stock markets around the world.  I am calling this down turn quite early as we have JUST manage to break the neckline but many of the indicators point  bearish sediment in the markets.   However, there will be a bounce and it is expected.  I wish I believed in my speculations as much as i do now, since I would have shorted the last shoulder but that would be been relatively more risky than to wait until the neckline is broken.  Another week close below this neckline would be decent confirmation of this pattern.

Attempted logical arguments.

As mentioned in my in my first post, it would be great to find fallacies in my original logic by analyzing these posts at a later date.  This way if there is a common error in my reasoning why a certain trade should work, I can then adjust future trading plans to have a better probability of being correct or more precise.  Common mistakes could be: misinterpreting an indicator or strength of a particular indicator.  Another reoccurring mistake that can be refined would be the positioning of your stop-loss. A precise Stop-loss is required to limit losses when a trade goes the wrong way.


The reason i bring this up now is that if am alerted early to a fallacy in my logic for a trade I will have enough time to halt my trading plan or continue with adjusted entry and exit points.  So please please please rip my trading plans to shreds, I actively want criticism because it would yield important information before I execute a trade.
I thank you in advance.


I will not go into depth about specific technical indicators or chart patterns that i might use. There are a lot of information on the web about how and why these techniques word and in what contexts they are best used. If there is any questions about the usage of an indicator then i will elaborate more. I will not go into depth about the fundamentals versus technical analysis debate, since both sides have valid arrangements (Yet I find fundamentalites are more resistance to understanding why and how tech analysis has interesting insight).  My reasoning for trying to research both is that many people use either (or a mix) of these approach with success and failure.  So i would rather not be ignorant to a way approaching a trade.  What i have mentioned to some friends is that technical analysis is interesting because if many indicators confirm a trade it is like stacking the odds in your favor.  The same with fundamentals, if car sales are positive one month and turn negative for a few months i could reasonably assume that the chances of a downtrend beginning or continuing are now higher.

First Blog - Disclaimer!

I wanted to just make it clear, I just began trading recently.  I am currently learning as much as I can about fundamentals as well as technical analysis.  Most of what i am going to be posting is strictly an amateur's opinion / predictions and should not be used as a source for trading.  Ideally I will be posting my potential trade plans, some maybe executed and others maybe just for argument sake.  Also, I hope to provide updates on if these trade plans did yield a return.  With hindsight being 20/20, i hope that the evaluation of the plans (some short term others long term) may reveal any fallacies, assumptions, or facts that were not taken into consideration.  With the end goal of learning more about markets, and hopefully yield profit down the road.