Last night in Mentoring, we had a pretty in-depth time of discussion concerning the current setups in the major market indexes. The fact that there is a Type One Sell set up on the Weekly, but a Type One Buy on the Daily has a lot of people in a quandary about what to do with this scenario. It's actually not an uncommon occurrence, but doesn't show itself that often on a MAJOR scale like this in such a widely followed market. The fact that this setup is showing on both the ES and the YM means that MANY people have noticed what is going on.
So what do we do about it? How do we handle the fact that there are seemingly conflicting setups on these two time frames? To answer this, I'll tell you what I have done about it, and we'll discuss other possibilities as well.
For starters, I got out of my long positions in the S&P on Monday of this week. I did this because the Short setup on the Weekly chart triggered by taking out last week's low - a bar which closed outside of the Weekly Regression Trend Channel. That triggered a Sell setup on the Weekly chart.
However, I did not go ahead and get short yet. There is still a possibility of another leg UP on the Daily chart, based on the Type One Buy setup that is forming. I got out of the long position because there is a possibility of the Daily setup failing, but the Weekly did NOT fail. Thus, I'm done being long...at least for now. If the Daily holds to the rules of the trade, and has a smooth trigger, I'll get long again. Here is a shot of how the Daily looks today.
No trigger yet, but today looks like a pretty good up day.
Now, most people have a problem with this thinking, because at first glance, it looks like we'd be going AGAINST the Weekly chart if we buy long on the Daily. "How can you ignore that setup on the HIGHER time frame" I've been asked?
The answer lies in looking ahead at the "what ifs". What if the Daily triggers? What if we go long and form a Wave 5 on the Daily chart to new highs of somewhere between 975 and 1000? What type of setup will be showing then on the Daily chart?!! That's right...we'll have a Type Two - say it with me... - SELL!!
So, the Daily would then be telling us to sell. What then would be showing on the Weekly chart? That's right! The weekly Type One setup is most likely NOT going to be violated by a price move up near 1000. We'd still have that Type One sell on the Weekly, and in ADDITION, we'd have a Type Two sell on the Daily!
My, how the picture will have changed. I can hear the collective "A-haaaaa" coming from all the readers, and the even bigger one coming down the road from everyone who was confused at this point, but becomes enlightened if and when this scenario plays out. :)
Now, we need to be prepared for other scenarios, and this is why I have not gone ahead and committed to one direction or the other yet. I just know that at this point, I'm sitting out, keeping my money out of harm's way. There is a possibility that the Daily chart will FAIL. If we pull back more than 140% in the oscillator, or the PTI drops below 35, or we violate the Red Wave 4 Channel, the Daily will be busted. Then, I'll look to get SHORT in this market on down to 600 or so in the S&P. (The MOB off the Weekly Wave 3 low).
So, at this point, the Daily is in control. If it plays by the rules, we might be long for an as of yet undetermined amount of time. Perhaps we'll be long until we reach 90 days off the Wave 3 low of the Daily chart. (see Craig's post the other day on the S&P timing) That happens to be exactly where the 2nd time hash mark in the current MOB off the Wave 3 high on the Daily chart sits, 14 trading days from today. We know that most swings of the market last 13-21 bars, and yesterday looks like a good low, holding just above the Green W4 Channel. Is this it? Time will tell. But at least we are all prepared!
nate mccartney
Thank You very Much Nate for your Analysis and showing us Common Sense way of Trading.
However, I wish to inform you that on Weekly there is another Sell trade set-up (False Bar) which can Trigger any time in a week or 2, which also gives Target for New Low near 600 on S&P 500.
On one side USA Markets will be making new low but there are strong chnages that Indian Market would be making new high for the remaining of 2009.
NIFTY & Sensex are in wave 3 (Both on Daily & Weekly)at present & in process of making Wave 4. IF TYPE 1 Triggers then new high is possible.
I need your help.
HOW will you handle this?
What will be your trading style IF you trade NIFTY / Sensex under this enviornment.
BYE
Nilesh B
Posted by: Nilesh B | June 24, 2009 at 08:15 PM
Wow. Just found this and am blown away Nate. I have been struggling with and researching the same issue. Hope you don't mind me posting a link.
http://www.bostonwealth.net/2009/06/25/sp-500-update/
All of my research was made possible by you guys!
Thnx.
Posted by: katzo7 | June 25, 2009 at 02:54 AM
Very balanced analysis Nate. Thanks.
Posted by: John | June 25, 2009 at 04:02 PM
Thanks, Nate. On weekly cash indexes we are not triggered yet, we have only one bar outside.
Posted by: Skirmantas | June 25, 2009 at 10:22 PM