The Dreaded Creeper Trend

By Corey Rosenbloom | January 27, 2012 | 9:31 AM |  0 CommentsTweet This

One of the main activities that trip up traders, especially new traders, is the concept of continual price movement in one direction without meaningful pullbacks – also known as “powerful trends,” “creeper trends,” or “positive feedback loops.”

Let’s take a look at the current situation and put it in the context of prior S&P 500 day-over-day one directional movement.

First, the hourly S&P 500 pure price chart:

 

 

Let’s first define a “Positive Feedback Loop” and see how that concept explains these situations.

A Positive Feedback Loop occurs when one action leads to continual (or more) of the same action, such as higher prices resulting in higher prices, with these new higher prices resulting in even higher prices, and so on.

A real-world example includes situations of alarm or panic in a crowd, where a small number of people initially exhibit panic behavior (perhaps screaming or rushing for the exits) which leads to more people exhibiting panic behavior, which in turn leads to even more people in the crowd exhibiting panic behavior until everyone in the crowd is sufficiently panicked or else has escaped the building or situation.

By contrast, a Negative Feedback Loop – in the above example – would be when there is initial activity of panic but yet an authoritative announcement is made where people respond to the announcement and cease panicking.

Thus negative feedback loops occur when an initial situation is cross-checked by an opposite force that results in stability (or a return to normal) instead of increased activity that develops from un-checked activities in positive feedback loops.

In price, positive feedback loops develop from an initial price movement – often on a breakaway from a range or period of consolidation/contraction (negative feedback) – and then are sustained due to both sides (buyers and sellers) taking the same action for different reasons (one to make money; the other to stop losing money.

In the case of price moving higher in a positive feedback loop, an initial price breakout…

• causes those who are short to cover, which is a buying activity, which…
• triggers buy signals for bulls who either add to existing positions or else put on new positions, which…
• triggers those ’stubborn’ short-sellers (with wider stops) to buy-back to cover, which…
• excites more buyers to step in, again adding to positions or putting on new ones…

all of which leads to a perpetual upside trend or impulsive rally that develops a Positive Feedback Loop.

The feedback loop tends to end in one of two ways:

• All bulls who wanted to buy have all been filled (and are long)
• All bears who needed to buy-back to cover have exited their positions.

That’s an oversimplification, but it’s a good starting place to think about feedback loops in price.

Here are three prior Daily Chart examples of persistent Feedback Loops in the S&P 500:

 

 

I’m showing three smaller Positive Feedback Loop (trend) periods from the recent action.

Keep in mind that Positive Feedback Loops develop to the downside as well – the panic example above is a good illustration how some buyers initially rush for the exits which emboldens short sellers, and as price falls lower, more buyers rush for the exits – this impulse took the S&P 500 from 1,350 to 1,100 in about 12 days – where all but one of those days were down days.

October 2011 and January 2012 show us classic examples of Positive Feedback Loops in impulsive, one-directional day-over-day rallies.

Two other periods show similar characteristics, though on a larger scale:

 

 

During the second round of Quantitative Easing (announcement and official implementation), price developed an initial impulse beginning in September that ended in November, and a second sustained trend move developed from December.

This was a similar situation to what occurred during the first round of Quantitative Easing in 2009:

 

 

From the March 2009 low, price developed a sustained Positive Feedback Loop that propelled price from 666 to 950.

We can see a slight Negative Feedback Loop (consolidation) that developed in the middle of 2009 which gave-way also in August to another Positive Feedback Loop on the break to new recovery highs above 950 then 1,000.

Those who were short above these levels were forced to buy-back to cover, which emboldened more bulls to put on new positions or else add to existing positions in the context of a sustained, upward march higher.

One of the basic principles of Technical Analysis is that trends, once established, tend to have greater odds of continuing than of sudden reversals, which builds on the concept of Positive Feedback Loops.

Keep in mind that Feedback Loops occur on all timeframes as different traders interact with various trading tactics and strategies.

In general, it tips the odds to make it easier for traders to trade in the direction of feedback loops instead of against them.

Continue to study this topic for additional insights of how you can apply it to your own trading.

Here’s a few prior blog posts for more information on this concept and how to trade it:

• Quick Lesson from Intraday Creeper Trend Moves
• A Lesson from Creeper Intraday Trend Moves with Divergences
• July 11, 2011 “Making Sense of Current Range Behavior”
• Textbook Triangle Trade Example in Crude Oil (tactics)
• Higher Timeframes Lessons from the Breakout in Silver (Aug. 7, 2011)
• Popped Stops and History Repeating (during January 2011)
• Sep. 20, 2011 “SPX Breakout Trading Tips – Is this Really it?” (yes)
• Lessons from Failed Sell Signals and Popped Stops
• Opportunities from Popped Stops Intraday

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Amazon (AMZN) Chart on Two Timeframes

By Corey Rosenbloom | January 25, 2012 | 6:36 AM |  0 CommentsTweet This

Amazon’s (AMZN) chart structure is creating an interesting breaking point of tension between the higher and lower timeframes.

While the daily chart argues for potential reversal higher, the weekly chart shows a barrier of overhead resistance that must be broken before a reversal higher can take place.

It’s a good example of how to incorporate two timeframes in real-time, so let’s take a look at AMZN:

 

 

Keeping the description focused on combining two timeframes, the Daily Chart shows the odds hinting at a possible upward bullish reversal.

This structure is due to a lengthy positive momentum divergence and the bullish reversal candle off $170 in late December.

Price then broke above both the falling 20 and 50 day EMAs accordingly (green arrows) yet fell shy of testing the 200d SMA and ’round number’ resistance at $200 per share.

In simple terms, Amazon would be seen as a buy for potential reversal on a firm breakthrough above $200 – initial targets would include $220 and higher in the context of “open air” above $200.

But not so fast!

Before we get excited from the bullish side, let’s look at a barrier overhead via the Weekly Chart:

 

 

The Weekly Chart suggests a different picture – or at least that we need to put the potential daily chart reversal in a larger context.

This is the type of discussion we’ll have in my upcoming live webinar on “Two-Timeframe Trading Tactics” with Mirus Futures on January 31st.

One of the topics will be how to put smaller timeframes in the context of larger timeframe levels or key points that you might otherwise miss on the lower frames.

Amazon gives us a good real-time example of this topic.

While the Daily Chart lays the foundation for a potential bullish reversal and break higher, the Weekly Chart makes the $195 to $200 level all the more important in terms of structure and trading expectations.

That’s because we see a breakdown in structure (trend) and both the 20 and 50 EMAs (indicator structure) on the Weekly Chart which gives us a confluence resistance barrier from $195 to $200.

Due to the confluence resistance – and seemingly bearish tone of the weekly chart – it makes any actual (real-time) break firmly above $200 all the more important in terms of a reversal of trend and structure to the bullish side.

Yet in the absence of any firm break above $200, we’ll be looking for the bigger picture’s bearish structure to weigh down (or invalidate) any lower timeframe early reversal signs we’re seeing.

Summing up as simple as possible, from an objective game-plan trading standpoint:

AMZN becomes very bullish structurally above $200; cautious to bearish under $200; and bearish for higher timeframe breakdown under the recent $170 swing low.

These can be used to develop short-term strategies as price trades around – or breaks through – these levels.

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Something's Gotta Give

By Corey Rosenbloom | January 19, 2012 | 9:01 AM |  0 CommentsTweet This

If you use Intermarket or Cross-Market Analysis in your trading or investment decisions, you’ve probably noticed something very strange over the last few months.

Let’s take a look at “What’s Going Wrong” from a classic Intermarket perspective which leads us to “What’s Gotta Give” in terms of a building reversal.

First, the closer perspective of five Cross-Market quick charts:

 

 

In terms of Cross-Market Analysis, it’s best to group the broad markets into four components:  Stocks/Equities, Bonds/Treasuries, Commodities, and Currencies.

This can be done in a number of ways using various Index symbols or popular ETFs.

From this, you can view various trends and then break each market down into individual components for clearer trading opportunities.

But for this post, I want to focus on the difference between “Risk-Off” Markets or defensive markets such as US Treasuries (Bonds) with the US Dollar Index and the “Risk-On” or offensive markets such as Commodities (Gold and Crude Oil above) and of course Stocks.

Risk-Off (defensive) and Risk-On (offensive) Markets tend to move opposite each other in terms of their trends… but that’s not what’s happening currently which warrants our attention.

In the line chart above, we see ALL markets (except for Gold) rising from the September or October lows to the current January highs.

In fact, these creeping uptrends leap off the charts at us, which brings us to the dilemma:

Why are all markets rising and what does it mean?

When will one or more of these markets reverse back to “normal?”

The answer is beyond the scope of this post but it merits further attention.

From a quick price perspective, here are the current resistance levels to watch:

• 1,300 for the S&P 500
• $103 for Crude Oil
• $1,700 for Gold
• 131 for 10-Year Notes
• 81.50 in the US Dollar Index

Would it be possible for all markets to break above their respective resistance levels?  Yes, anything could happen, but that would be the lower-probability (and some would say “very unlikely”) outcome.

The classical thinking would be that either the Risk-On markets fail to overcome resistance and reverse lower, boosting Risk-Off assets above their resistance, or vice versa (Risk-Off Markets boost higher, reversing Risk-On Markets).

Here’s a longer perspective Cross-Market Line Chart from 2011 to present:

 

 

Watch these markets, as well as larger perspectives/timeframes, in the context of classical “Risk-On” and “Risk-Off” parameters.

Mark Douglas in his popular book Trading in the Zone reminds us that “Anything Can Happen” in the markets, but given the critical resistance levels and creeper (divergent) rallies into respective resistance, one has to assume that “Something’s Gotta Give (reverse)” soon.

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Knees and Toes or Double-Top?

By Corey Rosenbloom | January 11, 2012 | 10:10 AM |  0 CommentsTweet This

With traders focused on the S&P 500 at the round-number reference level of 1,300, let’s take a quick look at two competing classic price patterns that have formed into this critical level.

Is the S&P 500 completing a short-term “Double Top” reversal pattern or an “Inverse Head and Shoulders” continuation pattern?

Let’s look at these developments and plot classic targets and expectations.

First, the bigger Daily Picture:

 

 

For distinction, I labeled the Double Top (“TT”) in black and the Inverse Head and Shoulders pattern in blue text.

It’s unusual to have two classic, textbook patterns competing for trader attention, and it’s even more interesting to have it happening at the critical “battle zone” of 1,300 which many traders agree to be a “Make or Break” for the market structure.

In other words, sellers draw the line at 1,300 and have placed stop-losses above 1,300 while buyers – if not already positioned – will likely enter new positions or else add to existing positions on a firm breakout above 1,300.

This is the same logic I described in my prior “January Market Structure” update last week.

Starting with the Double Top Reversal Pattern, we see two peaks into the 1,300 (technically 1,295) area and we note a clear negative divergence in both momentum and volume when compared to the October 28th peak (the origin of both these patterns).

To expect a Double Top pattern resolution, we would need to see continued FAILURE at 1,300, meaning an immediate move lower that targets 1,260, 1,240 and then moves towards the 1,160 level if not lower.  That’s the Bearish Pathway.

The Inverse Head and Shoulders Bullish Continuation Pattern triggers with a firm breakthrough above the “Neckline” at 1,295 (1,300 for easy math) which then projects a classical target to 1,430 (which is 130 plus 1,300 – the distance from the Neckline to the Head then added to the Neckline).

For reference, 1,430 gets us close to a longer-term upside target of the May 2008 (yes, that far back) high.

A pure-price pattern clarifies both of these competing patterns:

 

 

I’m keeping this post as simple as possible – feel free to add in your own analysis or interpretation of additional indicators and methods.

Sometimes it’s good to pull back the perspective to a “Price Purism” point of view, which is what I’m attempting to do here with a neutral bias, aware of either potential outcome.

Take a moment to look over these patterns, review classic targeting/expectations, and be ready to trade either outcome should we indeed see price confirm one of these patterns.

No matter how you define it, what happens at 1,300 will be very important to assessing future expectations.

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Charting Google (GOOG) to New Highs

By Corey Rosenbloom | January 03, 2012 | 11:23 AM |  0 CommentsTweet This

Will history repeat or will this time be different?

That’s the famous question we’re all asking right now as Google shares break to new multi-year recovery highs not seen since late 2007.

Let’s peek at the Weekly chart, note the key level to watch, and then compare that with what’s happening right now on the Daily Chart.

 

 

Cutting through all the clutter, the $630 to $640 price level served as formidable resistance after peaking there in early 2010.

Each time price reached the $630 region, sellers stepped up to prevent a breakout and further rally into new recovery high territory.

And each time a sell-off resulted, buyers stepped in at higher prices (higher swing lows) to establish $500 as the current floor of support.

That gives us two possibilities to watch for confirmation as we begin 2012:

Either “History Will Repeat” and we’ll see a similar movement back towards the $500 level as sellers step in,

OR “This Time Will Be Different” where we will see buyers push shares into breakout/impulse mode above $640, resulting in a potential feedback loop (shorts covering; buyers buying).

That’s stating it as simple as possible as you look to your other indicators for confirmation/non-confirmation or additional signals.

To throw two of them quickly into the mix – volume is negatively diverging with price as we see an ‘overextended’ movement into the upper Bollinger Band on both the Weekly and Daily Charts.

Speaking of the Daily Chart, let’s take a closer look at the recent action:

 

 

I highlighted the recent peaks and reversals into the $630 level.

Note that November gave us an initial collapse (on schedule) towards lower targets, but buyers reclaimed the balance to force a short-squeeze and thus Bear Trap as December began.

The short-squeeze/power rally (busted bear trap) brings us to the current push to new recovery highs, though again on negative volume and momentum divergences.

We can account the negative volume divergence in part to end-of-year holiday volume, but still watch volume to see if any spikes or unusual activity occurs early in 2012.

The simple structure gives you a binary game-plan to use as a foundation:

Bullish above $640 for impulsive breakout, or else cautious/Bearish on continued movement under $640 ( that declines beneath the daily EMAs at $626 and 606 respectively).

Watch the daily chart – in conjunction with the weekly ‘open air’ – closely as we turn the corner into 2012.

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