Tuesday, May 04, 2010

Breakout or Shakeout ??

Here are two charts I find interesting. The lower one is a 30 minute bar chart showing day session e-mini trading. The upper one is a five point box, one box reversal point and figure chart showing 24 hour e-mini trading.

On the lower chart you cans see that today the market has broken below its two April low points (red dash line) on high volume. This sort of action coming as it does after an extensive trading range had formed has a great deal of bearish potential. How much?

Looking at the point and figure chart you can see that this breakout could easily to carry the market as low as the 1080 level according to the point and figure count I have illustrated. Even if you are not a believer in point and figure counts, the size of upper trading area on this chart is itself cause for concern. It is the biggest congestion area on the way up from the February low and is almost as wide as what I take to be the base that formed at the February low. This means that it could well indicate the reversal of the uptrend from the February low.

But does it? I don't think it does and here is why.

First of all, I think the move up from the February low will be comparable in length to the two previous up trends in this bull market. These each carried the ES up about 270-80 points. A move of that size from the February low would continue to 1320. Secondly, the 10 day moving average of the daily count of advancing issues on the New York Stock Exchange reached a peak in mid-March. In a bull market this means that a end to the advance from the February low should be expected sometime between mid-May and mid-July. Third, the drop from the 1216 top of April 26 has only carried the market down about 50 points. This is quite a normal drop within a bull market swing and indeed is the first break of more than 30 points within the rally from the February low at 1041. Based on historical behaviors the move up from the February low is likely to experience several 50 point corrections before it is complete.

So I am going to bet that this break below the 1177 trading range low will prove to be a high volume shakeout. The market is close to the lower channel line I have drawn. The 1163 level is the midpoint between the 1587 bull market top of 2007 and the November 2008 low at 739. I think the market will drop a bit lower into the green oval target zone and within a few days begin a move to 1270. The January top is at 1148 and I think this will also serve as support should the 1163 midpoint be broken.


extrader said...

Gap at 65.50 closed on ES, we go up from here!

nuff said

q said...

Your S&P emini shakeout conclusion may be decided by the bond market! If you have time, see what you think about the 3.60% pivot on the 10y. -MK

Bill said...

All very good points Carl.

The question I have for you is how inter-related are world markets? You are right so far it just looks like a 50 point drop on the S&P 500. But what about Europe? It's already down more than 10% from its April high. I believe North America will inevitably follow. Stock markets and world economies are inter-related. The correction we've seen in european stock markets has further to go. North America will catch up with Europe.

I don't believe people realize the seriousness of this european debt issue. At worst like Roubini points out, it'll make Bear Stearns look like a drop in the bucket in comparison. At best it will force governments to cut spending and reduce deficits, which in turn will slow up the recovery. Either way this is not a good time to be in stocks. North American stock markets have priced a V shaped recovery that ain't gonna happen.

Unknown said...


I would also like to hear your opinion about the bond market (more specific the 30 year bond's two days rally).

Thank you

raven said...

Carl, I cross check my work with technical indicators and it points to much of what you are saying here.

Where I disagree perhaps long term is the Bull Market Analogy. From my perspective this has been a bear market rally headed to a blow off top around Aug 7. We are headed to Dow 14,000 + from wherever we land.

TraderPA said...

Hi Carl,
Just curious if you saw the H&S breakdown there on the chart, too?
Thank you...

Edwin said...

your lower boundary happens to approximate the 50 days moving average so it is very meaningful and perhaps the line in the sand.

janet said...

Thanks chief for the great analysis, will be watching support levels.

rodders said...

I think if spx does not hold the 50 day MVG, the next support is at 1150. The bollinger bands are opening not a good sign, could head lower to 1150.
The 38.2% fibo is at 1152.76.

FH said...

Instead of a high in mid March my data shows a NY high for advancing issues of 2742 on March 5, not mid March. That moves the earliest part of your range from mid May to early May. That's right where we are now.

spycharter said...

There is a gap on SPY to fill at 108. That agrees with your 1080 ES low estimate. However I think if SPY can hold 117.1 for the next few days then we will reverse to the upside. If SPY closes below and spends signifcant time below 117.1 then I'll see you at 108

Dave Narby said...

Carl, have you been following Zerohedge's analysis on the EU crisis?

I wonder if the 10-20% correction that is needed to suck in the rest of the public and drive the market to marginal new highs is finally here.

After that, I expect the final crash to SP 450, gold to hit $5k or so, and an entirely new worldwide monetary system to be created.

This will take 12-18 months to play out.

The correction might take a month or so.

I could be wrong. TPTB have proven very resourceful at fluffing this POS market.

What is interesting is that PMs are selling off with other risk assets, indicating strong deflationary forces... But gold is holding up better than equities. I expect silver might get to 13.50 or so, but gold will probably hold $900.

I could be wrong. There are many, many moving parts here.

Urban Carmel said...


You're the best.

I have a similar comment on global markets: not just Europe, but China, Brazil, Australia are all in medium term corrections. The growth story is being questioned in these markets and the US bond market would seem to be in agreement. The odd man out is US equities. Is the US the leader or the laggard?


Wags94101 said...

Interestingly enough, 1165.77 is the SPX low from March 31st which was the end of the previous sub-wave (iv) from Wave 3 up out of the late February low.

I believe that we are about to complete a Wave 4 here tomorrow that has appeared as an "ABC-Flat" with the B having made new highs, then an X wave back up to 1209.36 on April 29th before embarking upon an (a)(b)(c) zig-zag which is coming back down into that 1165-1167 SPX area.

Tomorrow will hold the key as to whether this count is the CORRECT count and lead to NEW HIGHS!

Remember, Wave 1 off the Feb. lows was 68 points. Add this to the 1165 area and you get the infamous 1233 handle.

John Kruse said...

What could possibly drive you to think GOOG is headed for 700? Am I the only one that has any grip on reality left? All of this inflationary fed policy has destroyed the system and we are now at the nexus of the crisis. It boggles my mind that people think the market should go up because it is supposed to. Anyone who thinks this is a bull market needs to have there head examined or at least to get some more experience in the markets, before they are parted with all of their cash. Good luck everyone and don't always believe everything you read. Buy side traders are salesman and the walking lobotomized creations of the media and the lap dogs of the FED used to transfer wealth. Short any and every rally till trading resumes at 6500. Remember......Price sans volume = wrong price. It is that simple people. Point and figure...LOL Follow the cash people, the flow of the currency, creation and destruction, that is ll you need to know and you will amass more currency than you can spend. I cannot guarantee said currency will be exchangeable when the time comes, but it is your best shot. C of I is your window, learn how to use it

q said...

Dear nomorenicknames,

How can anyone possibly take you seriously when you rant like that?
Additionally, your comment "price sans volume = wrong price" is a classic - a classic amateur comment. FYG, Price changes create pnl, not volumes. I have made good profits over the years on markets that have levitated on thin air - sans volume as you say. And here is a clue, observe the blocks hitting the tape at the start and end of a trend, not the middle. Here is one of my posts on volumes that you may find of interest:



Anonymous said...

Based on personal experience, it is best to trade according to one's own system. If one does not have a system, one should not trade. Depending on others for "signals" just does not work, for me at least. For example, my trading performance has been much better when I don't visit any blogs, as I am forced to think on my own. It also gives me a lot more free time.

Win said...

Awesome post, Carl. I will hold on to the link and read it over and over.