ES is currently testing the former top at 1207.50. As I’m writing this, it’s at 1204.00. I want to come up with a few hypothesis:
- ES tests 1207.50 and goes into a correction. I think the 1150 area would be a good target. That would make a 60+ pt correction. A 10 pt stop would give a 6:1 reward:risk ratio. Even if the correction was only half of my estimate, meaning 30 pts instead of 60, that would still give a 3:1 ratio.
- ES tests 1207.50, pulls back a bit (optional), and then pokes above. This could be a climatic move (a “flush” pattern) to bring in the laggard bulls and force any current shorts to cover. In this scenario ES would go to around 1216.50. Then ES goes into the 60 pt correction. Entering at 1207.50 with 10 pt stop would still give a 6:1 ratio.
- ES doesn’t stop and continues to 1230 and then pulls back to 1207.50. The idea here would probably involve a failed short at 1207.50 and then another short at 1230. The stop would have to be tight because 1207.50 would surely act as support.
Here’s a look at the daily chart:
You can see that I’ve removed the sine waves. Good riddance! I still have my pro paintbar, better momentum on panel 2, and better volume on panel 3. I’m still undecided on better momentum. My backtesting shows that divergences have no predictive ability and we can see that clearly in the chart here as the market has went up for over 6 weeks with bearish divergences. However there are two things I look for with better momentum: exhaustion signals and flush signals.
The exhaustion simply comes as the momentum makes a new high. This often occurs at the beginning & end of a move. In this case we almost get one at the beginning. This is the problem with indicators, they need a frame of reference and that frame of reference usually consists of a lookback. A human brain can automatically adjust our frame of reference to detect data that is slightly outside the average. An indicator can’t do that so well. Which is one reason I prefer to use raw data rather than indicators. But sometimes an indicator with limitations is better than nothing.
So we have yet to have exhaustion buying which would be one way to start the topping process. And that concerns me because we’re 3.5 pts away from the top and momentum is at a 2 month low. So what does this mean? It could mean that we will see a correction before we see the buying exhaustion. That would be hypothesis #1 and that’s my best guess as to what I think will happen. This hypothesis (along with hypothesis #2) is further strengthened by my interpretation of the COT report.
Whenever I can get a Reward:Risk ratio greater than 3:1 I’m interested. So I’ll be looking for any sign of weakness to get short. If I see an increase in buying interest I’ll be quick to cover and look for a better short entry. So just because there is a 10 pt stop doesn’t mean I’ll let it get hit. And that makes the R:R even more favorable.
Let’s take a look at the previous top to see how it played out:
We can see there was a move to 1201 (the bar with the “St” (Stopping Volume) above it). Then the market dropped 30 pts and then came back up to take out the top by 6 pts (the bar with “NoD” (No Demand) above it). And then quickly dropped more than 30 pts. Studying what happened last time can help us to prepare for this time.
I’ll be covering this special opportunity as it develops.