Tuesday, 24 April 2012

EP M12 & YM M12...Nagging doubts about the downside potential

I have before on several occasions alluded to the fundamental difference between the mindset of  both pro and retail traders trading equity markets versus other commodity or currency markets. This is both a professional and personal observation (because i have a close relative who has worked in equity sales for 25 + years) and my past experience was in futures/forex markets. The difference is the mentality of equity markets are essentially 'long' orientated. Yes of course i understand there are many methods a manager or John Doe stock picker may go short either a stock or index, ETF or asset class but a cursory glance at any of the US monthly/weekly equity charts will show that these markets spend a much longer proportion of time going up than going down in trends that almost defy all the rules. They are for me different to many commodity futures markets and yes, oil,gold, copper, grains and many other have seen dramatic rises in recent years but if you look at long term CRB charts going back to the early 70's and before these markets all display different behaviour that is only apparent in a much higher time frame..... take Soybean Meal which has seen major rallies followed by major declines every few years. Cocoa, sugar, Coffee have never surpassed highs seen over 20 years ago and many others: meats /livestock, Lumber etc despite recent trends are cyclical.
Now we turn to the Indices and look at long terms charts (and we could include Gold in this as well ) and we see extended trends lasting decades. So my point that I am making is never underestimate the power of a equity market trend and those long term trends are still firmly up. I wrote a brief article last autumn on this blog just after the so called crash and subsequent hysteria in the press entitled "Crisis? What crisis?" and posted several charts showing Andrews forks with centre lines untouched by price and the somewhat insignificant retracement made by North American Indices at that time. In addition I had thought what on earth would happen to all the cash sitting on fund managers/banks/institutions books? I know enough about the industry to know that portfolio diversification into fixed income, Sovereign bonds ,Gold, commodities and other asset classes would be limited and that the vast majority of funds were just waiting to flood back their cash into the equity markets. This is a simple fact of life and remains so.
What i am saying is what i have learnt ( with my own account equity over the years)...Never underestimate the power of the equity indices to keep on trending upwards (& screw a short).
Of course the above is over simplified but i am concerned that with all my recent bearish sentiment -(based on sound technical analysis and recently traded successfully on the back of the triple tops we saw in the Dow and the fork shown in chart 1 above at the top of the page).... that i may not remember my own hard learned lessons.
 I am now starting to see the same type of stubborn support underlying the equity markets that we saw last Autumn. Here below is a chart showing last Summer/Autumn price action in relation to Andrew fork A-B-C and it's Schiff variant in blue. Remember pivot B was out high at the time ...Then note the inability of price to make a touch on the blue Schiff CL and the resulting low pivot was D.
This chart shares striking similarities with Gold at that time.... but thats another story.
The current dashed red almost horizontal down-sloping reaction line is from fork C-A-D as is the previous reaction line. The sharp angled uplsoping RL is responsible for the recent sharp up trend is from the un-Schiffed normal Andrews Fork A-B-C but it's influence is now over.

Here is the current picture below ( viz a viz pitchforks) and yet again we have the same non touch on the blue Schiff fork from pivots P0-P1-P2 shown with a green arrow...Looks familair? However if we use the lower high P3 we have a touch on the schiff CL (P0-P3-P2).

Now lets keep it simple ( for the time being) and draw the obvious fork on a daily chart below and you realise that the objective is a long way down towards 1100...a long term move and perhaps too much to ask of the market? (I should mention that regardless of if the fork is 'in play' with price, the reaction lines and ML's will still influence future path of price if they converge or meet.
Now lets drop down to the 240min and we add the RL's plus a fork off the pivots 1-2-3 and its Schiff variant in thick blue...

THIS TIME the fork and its RL's work a treat, capturing the frequency of the entire recent weeks of price action. However the higher -high pivot is not used and of course you may think its a 'fudge' because we have not used the correct pivot ( see comment**) .This forks ML's and RL's work of course because all any three pivots do is express the interrelationship between themselves and price so this is what i call a slightly "unorthodox Fork" but it would not be the first or last time they show their value....
(Postscript.**  upon reflection it's not really a fudge because if i use the correct P3  the non Schiff Andrews ML /CL bisects both this high and the previous penultimate higher high  ie the prior high to the highest high shown at 1419.50.. Try them both for yourself.)
 Here's more current detail in the 60 min below:

Here's even more detail below with some local time frame forks added which show both the up and down sloping objectives...the latter having been reached (but not exceeded yesterday). If we reach the upper blue Schiff MLH again ( as its already done its work once at pivot Z) i think we may go higher and break through to test the horizontal resistance zone (ML) at about 1383.

Here below is a current lower time frame chart of another set of forks seen above in the 3rd chart down from the top.. it shows possible down sloping MLs where we may see resistance but often in  sideways patterns they are not fully reliable... but at least we can see possible UMLP's and they are all current and in play and should be viewed in a lower time frame to do these forks justice but their reaction lines are perfect and reveal last night & todays supporting reaction line.
NB: All RL's & ML's are drawn automatically by a custom indicator so cannot be moved unless the fork pivots are changed.

If ever there was a day for a punch though & down  the 1350-1355 area yesterday was it. We now have a bullish double bottom having failed to make a lower low. Depending on how you count the topping sideways formation we are currently seeing (on the emini S& P June 12 contract) our 3rd, 4th or even 5th peak since the 1352.50 low on 10th April and i repeat failed to make a LL yesterday. Price is showing a reluctance to go lower and this can be seen as a "tell" . Yesterday all the 'boxes were ticked' in respect of all 'local' down sloping forks seen in the 60 min chart and they all had the CL objectives met (and no light touches or 'kiss and reverse' behaviour) so the short scenario is still in play but price must make a LL soon in my opinion or head back up towards 1380 for an eventual  retest of 1400 where it failed to forfill its obligation to touch the the thick black up sloping fork CL (see above chart 3rd form top).
I am still just bearish perhaps also impatient but a break of 1350 will confirm (for me) the possibility of a new phase of a medium term trend down to 1280-1300 but I am not yet 100% convinced that this will happen and am extremely wary of being caught short in this market. In the daily chart this is still an insignificant matter and only if we break 1338 will this correction be certified and have some teeth to it. In the meantime i have a feeling that bargin hunters are out there in the equity markets picking up stock and it would not surprise me in the next few weeks if I then realise that we have already seen the bottom- conversely a news driven headline or story ( & there are plenty out there) or crappy data could provide the impetus to go lower through crucial support but the appetite is not apparent today.... SO at the moment I am prepared for both eventualities.

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