Friday, April 16, 2010

Supply shock

Here is a 30 minute bar chart showing day session e-mini trading. News that the S.E.C. is suing Goldman Sachs for mortgage security fraud triggered a supply shock this morning (red arrows). Volume was higher than at any time during the past six weeks (red oval).

This sort of action typically kicks off a sustained move downward. In this case I estimate the downside potential to be 1163, the midpoint between the 2007 top at 1587 and the November 2008 low at 739. My best guess is that this move will take about a week to complete. The first rally is likely to begin from 1181 or so, the level at which the drop from 1210 would equal the biggest drop in the move up from the early February low (purple rectangle) - that drop took the market down 29 points and occurred in late February.

After this correction is complete I expect the ES to begin a move to the 1270 level.

23 comments:

PM said...

Hi Carl,

I have a sell signal in play right now when we traded below 1187.20. A close today below that price will confirm that signal.

Thanks.

Kindest regards,

PM

Kishore said...

Carl, ES made a low of 1182.75. That is close enough to your estimate of 1181. Being short from here on would be highly dangerous.

PM, your current signal is just as dangerous as your last buy signal and your sell signal before that.

straightshooter1000 said...

Is this coming Monday going to be like the other bullish Mondays these past few months? That's why I don't know if I want to be short over the weekend.

Bill said...

Agree, it's extremely dangerous to be short over the weekend.

But then again, Carl is not short and never recommended being short even when he saw the supply shock at its onset he did not sell the market short.

PM said...

Dear Kishore,

If there is no confirmation, then there is no signal taken and my model is still long.

PM

PortlockTrader said...

The ES move drop to the low 1180s and the rise to around 1195 has happened as Carl said, but who expected it to happen in a few hours? Well done, but seems to me that we have seen the panic selling for now.

Carl Futia said...

Dear PM:

Your last comment reminded me of Will Roger's method for making big money in the stock market. "Buy good stocks and hold them until they go up", he said. "If they don't go up, don't buy them!"

TAE said...

I know you rarely respond to questions and comments here, especially if all you have to do is dig around the site to find the answer. Having said and done that, question: do you ever quantify shocks, like this supply shock, in terms of magnitude? Do you ever compare one versus another, if it was retraced partially and to what degree, if they come serially (like in your link) to help formulate your expectations?

I must give you a thank you, while pondering all these things and if its better to have been into the market before or after a shock, how to trade with them in mind, it is firstly important to know what a supply or demand shock is. You are the only one I know who talks in this term, and it is extremely insightful, so thank you for the education.

PM said...

Hi Carl,

That's a funny line, Will Rogers was a great comedian, maybe he had more behind that great line than meets the eye at first glance.

Let me see if I can help you out so you wouldn't find it so confusing or amusing.

I think this is clear and very straightforward. Any confirmed signal means the market is highly likely to continue in that new direction. Without a confirmation, the signal was only a signal, a warning flag, and without a confirmation it becomes a nonevent. Clear now?

My model has been my bread and butter for many years, I know exactly what I'm doing.

Have a great weekend.

Kindest regards,

PM

Kishore said...

PM, we need to take a position very early in the move or sometimes even before the move. For example, today's down move was so large and quick that it was enough to cause a stop loss, if there was an exisiting long position. And, incidentally, even the retracement move from the low of 1182.75 was very quick and and fairly large, about 12 points.

Maybe your signals are too lagging or applicable only in much larger time frames. In general, most indicator based signals are lagging.

Are your signals good for intraday, weeks or months? My guess is that they are intended for time frames in weeks or longer, and that means that even the stops would be required to be very loose. In other words, your model, still long, would have busted your far out stop, thereby causing a big loss, if at all you use stops.

PM, please have the courtesy of specifying the targeted time frame for your trading signals. Otherwise, as I said earlier, your signals are useless for trading.

Incidentally, Carl blog is focussed on day and swing trading.

Yāvar said...

I thing this reaction will be more significant than just 30-40 points. Maybe it's not as big as the June-July and Jan-Feb drops (though it's quite probable), but it will be at least as significant as the reaction in the late October (at least 6% or 70 points). People have been waiting since mid-March for this correction.

PM said...

Dear Kishore,

The confirmation ONLY means the trend has changed direction, therefore there is more than enough time to enter a trade after the confirmation, this is absolutely not recommended for day traders.

Here's the question all traders and investors ask: In an up trending market is this pull back merely a correction or is it an actual change in trend direction? Wouldn't you like to know this in advance of most other traders? Of course, you would.

My model answers that question with better than 70% accuracy. So, it's okay if a sell signal is confirmed well away from the highs, it would be expected. There is only so far a pull back can go before it no longer remains a "pull back." At some point it becomes a legitimate change in trend. At that point, most people are buying that "dip" when the trend has changed downward, or people are selling that rally when the market has turned higher. My model tells me the time and price the market will changed direction, pending confirmation.

The above explanation is not a boast, it is the purpose of the model and it works remarkably well. Today we could have had a change in direction, but it didn't happen. It could happen on Monday, every day is new.

I hope I've been able to clarify some of the mystery behind my comments regarding my signals. I appreciate your interest.

Have a great weekend.

PM

P.S. Please let me know you've seen this post to you, I want to be sure you've read it.

buy1 said...

P.M and Keyshore need to e-mail each other somewhere else. Their analysis is useless as far as i'm concerned. This is Carl's blog and for his students who appreciate his efforts..........

Kishore said...

PM, yes, if the pull-back is greater than a certain amount, e.g. greater than Fibonacci ratio of .618, it is probably more than a retracement. It could be part of a complex consolidation pattern, or a genuine change of trend. Nevertheless, we cannot be sure of a genuine change of trend until much later. However, this "model" can hardly be claimed original, worthy of any secrecy, claim to fame or useful for short-term trading. Well, whatever works for you!

We could just as well be expecting a change of trend based on breakdown of a trend line in the timeframe of interest or estimation of completion of wave 3 or 5, which are relatively easier to identify, compared to waves in consolidation patterns.

Carl is constantly estimating the extent and completion of a motive move, and the beginning of a counter trend move through constant awareness of demand and supply shocks, on daily and 30 minute charts. Personally, I find Carl's methods to be much more accurate and useful for trading.

forex-cat said...

Good blog!!
Thank you.

Joe said...

We may have seen the correction already. I consider two alternatives here: Carl's hypothesis of an ABC correction follwoing the supply shock or that the 29 points correction already was the whole correction. In this bull market we've always been surprised to the upside and Carl originally expected a 30 point drop which we got. We'll know early next week.
Joe

PM said...

Dear Kishore,

My model is completely original, it is three dimensional and far beyond Fibonacci (which most people claim to use but do not understand), it has absolutely nothing to do with Fibonacci's primitive two dimensional projections. You make a presumption about my model and then say it's hardly original based on your inaccurate presumption. What kind of logic is that?

Anyhow, have a great weekend.

PM

fiona said...

I agree wholeheartedly with buy1.

Perhaps Carl could put an end to PM's prognostications, and Kishore and he can communicate on PM's blog.

We go to this site because we are interested in what Carl has to say.

Kishore said...

It is interesting to see some traffic in the comments section. Complainers like buy1 and fiona, who I don't recall ever having seen here, are suddenly coming out of the woodworks!

We can learn more about Carl's methods by discussing how he differs from other approaches.

I doubt if Carl likes blind followers. In fact, he has warned against anyone duplicating his trades.

PM, goodbye!

E said...

One of the best books I have read on Psychology is called Sway. The major premise is that the more we "invest" in an idea, the more we feel we need to defend it.

Maintaining flexibility in our thinking is a valuable asset as a trader.

"Reacting" is part of the game, just as it is in athletics.

I will try not to defend that idea too vigorously.

Carl, I appreciate your willingness to share your timing and targets.

Thanks again.

Redwinger said...

Very funny stuff.

We all have our methods, quirks, strengths and weaknesses.

Whenever someone talks about how great his method is, he is still trying to convince himself. Whenever someone (else) criticizes another's method, he is trying to hide his small pee-pee.

Try to appreciate other's opinions. There is a monstrous amount of information that each of us still LACKS. Whenevr someone is flapping his lips about how good he is (on someone ELSE's blog!) he sucks.

So does the guy who absolutely HAS to argue with him.

Tom said...

Dudes, it doesn't really matter much what model one is using, for if it is successful to you, that's all that counts. There is no holy grail, no ultimate system. Arguing over the minutiae is fruitless. To what purpose does it serve? If you have something that works, God bless you and keep chugging along. We're not here to prove who is the brightest star among us. At the very least, we need to show deference to Carl as it is his site. You don't go to someone's home and complain about the furniture to the host.

MC said...

well done Redwinger ! couldn't agree more on that and warmly encourage constructive thinking !Also, PM and Kishore should better have their ego under control than try to control the market. Cheers.MC.