Dec 032010

The past few days have been very educational for me.  I’ve seen firsthand how intuition and even consensus can be wrong and how the market can do anything and everything.

ES was trading in a multi-week balance area that we can see here:

In the ES Trade Ideas for Dec 2, I mentioned two external opinions which I was using to support my own:

  • Trade With The Odds did a study showing consolidation was more likely after the huge move up
  • James Dalton thought that the gap would be tested

And those thoughts are exactly what I was thinking.  It’s rare for the market to go from one end of a balance area to a breakout on the opposite side in one quick move, let alone 24 hours.  So i thought there would be profit taking and a probe lower to test the gap.  It’s also normal for the market to consolidate and digest such a big move, often even retracing half of the move to the delight of Fib fans.

Yet it wasn’t to be.  Yesterday someone asked on twitter “why are people buying here?”  That’s the kind of question I used to ask in disbelief.  As if I know better than them and they’re wrong for buying.  But the key is we don’t know why they’re buying.  Some possibilities:

  • They are pumping the market up to the recent highs where they’ll then sell at a profit and get short
  • They’re hedging
  • They have advanced research on the economy & fundamentals and are optimistic for the future
  • They’re running the market up to make everyone chase it
  • They’re following the herd
  • They’re in the “Buy the dip scheme”

That felt great to brainstorm on that but the truth is it doesn’t matter.  That’s all speculation and it’s best to stick to facts.  And the fact is the market is going up.  It may stop going up at any time, it may go to 1500.  We don’t know.

Now look at the huge HVN on the micro-composite at 1179.  There was a lot of trade there and that means a lot of sellers got short there as well as a lot of buyers got long.  Short-covering could have fueled some of this rally.  The longs from the bottom are in great position and are now “strong hands”.

At 1205 we see another HVN.  Part of that was on the way down and part of it was on the way up.  Those shorts are now underwater if they haven’t covered and those longs are now profitable.

1224.75 is key.  If all the buyers have bought then the market will test 24.75 and drop back down.  However if buyers are interested in 24.75 then there is potential for the market to go higher.  And until we get a group of buyers “stuck”, it’s not likely to reverse.  A poke above 24.75 would bring in new buyers, many “breakout traders”.  We’ll have to see if they get trapped.

The final point I wanted to make was yesterday there was a lot of discussion on Twitter about fading moves and trading counter-trend.  I must admit this is something I’ve been working on reducing over the past few weeks.  FuturesTrader71 had a little talk about it after the close.  Strong trend days are rare, FT71 says 12-18% of the time.  Huge monstrous 20 pt gap up and break out of multi-week balance areas are even more rare.  So in my opinion one shouldn’t draw a lot of conclusions and rewrite trading plans because of this.  If one faded yesterday they’d stop out, possibly several times and possibly hit their daily stop loss limit.  And then tomorrow is another day.  With proper risk management a few of these will have a minor impact at the end of the month.  Without risk management a few of these can blow up an account.

The next few days should be very interesting.  One possibility would be for us to “break out” above 24.75 today and then gap down Sunday night.

  3 Responses to “Thoughts on recent ES movements”

  1. Dalton says in Markets In Profile that often times breakouts do occur off a push from the lower half of a bracketed market, so don’t count that out. NFP is a big number, if it beats we are gonna see some stops hit, BIG TIME!

  2. I wonder if there are many stops above 24? This rally has probably been fueled partly by short covering. Now we’re at the top. Will be interesting.

  3. Hi Michael,

    You said: “So in my opinion one shouldn’t draw a lot of conclusions and rewrite trading plans because of this.”

    I totally agree. It’s about understanding what is normal and what is not. For example, my relationship with trend days has evolved over time. As a beginner, they used to be my dream, because they “looked” so nice and easy. Just get on board, “the trend is your friend!” That was before I understood that the easier something looks on a chart (read: after the fact), the easier something can be explained (and sold by system sellers or moving average gurus), the more difficult it could be to actually trade. So, I at one point I started to hate trend days. Of course, my hate was fuelled by too many attempts at stepping in front of train (should someone like to experience this deep hate, I recommend fading trend days using TICK or delta divergences for maximum effect.)

    Now I just accept trend days. They are there, they exist, they show up around 20% of the time, just like remote relatives which are not particularly close but not exactly strangers either. My approach towards them is generally defensive because I don’t have a particularly good way of handling them, but that’s fine. Often, I won’t trade them at all. The most important change in my thinking came through recognizing trend days for what the are: An exception rather than norm, a day type carrying huge RISK (and only therefore also potentially high reward), and thus something to be approached with caution and not chased after or taken as “normal”, like beginners do and gurus teach.

    And this is how I read and why I like what you said: “Don’t draw a lot of conclusions and rewrite trading plans”. It takes experience, and a lot of being wrong to arrive at this simple point.


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