The Canadian Dollar continues! We keep breaking through resistance (see the MOB on the chart) and have set up again for another Continuation trade. This time, it's an XTL continuation trade that has pulled back on top of the last MOB we just violated. This should be another good setup, as the overall trend from the Daily is still up.

 

nate mccartney

The Canadian Dollar continues to show bullish behavior. We have now hit the MOB from the small pivot on the 4th of November. It is currently acting as resistance, and giving a possible Continuation setup. So for those of you who missed the initial entry, you may get another chance if we get a full pullback.

 

Also, if this 60 minute triggers, it will give those of you who wish to trade this on the Daily a more favorable entry. We closed outside the regression trend channels with yesterday's bar, and today's bar has taken out yesterday's high. Thus, you SHOULD be long on a Daily chart. This pullback though will give you what I (jokingly) call "positive slippage", if there is such a thing. :)

While conducting the Mentoring Tuesday evening, a customer asked to see the Canadian Dollar. We checked out the 60-minute time frame, and found that it was in a Counter Trend Buy setup. After making sure we had proper support and good divergence, we took a look at the Daily chart of the same market. The Daily of CAD happens to be in a Stochastic Continuation BUY. So we have two separate time frames, two separate trading strategies, but both telling us to do the same thing!

 

The trigger long on the 60-minute chart was at 1.1525 with a stop down at 1.1450. We had a retest of the lows later that night, but never took out 1.1450. Thus, those who took it on the first breakout should still be long.

On the 60-minute, an aggressive Regression Trend Channel would get you in with only 75 pips of risk. If that sounds like a lot to you, consider that if you get in on the 60-minute chart, and manage the Daily chart trade, you have a roughly 24-to-1 Reward/Risk trade! That means that there are 1800 pips of potential reward to the top-side of that trade! I know of at least 3 people who took the trade in the class. Two of them used real money, and a third took it as a paper trade. I will not reveal who these people are. However, if they care to comment and keep us posted as to how they are managing this trade, that would be great!

The VIX ($VIX) has pulled back and is ready to trigger.  I am still finding cheap downside insurance.  We are in about the third inning of this downtrend.

In recent weeks, we have been looking at where the Dow is, and possible scenarios as to where it can go from here. Several weeks ago, I made the statement in the Mentoring that the range we established the week of 10/06/08 should remain until after the election. It is such a large range (2440.25 points), and it's high and low act as support and resistance until something comes along strong enough to push us through one way or the other. I also said that I didn't think it would matter WHO got elected, just that the election would be over, and that would "free" the market to go where it intends to go. Well, here we are on election day! It's finally here, and the market is on the Bullish side of that range, pointing to a possible up-swing after the results are known.

 

If we do wind up swinging to the top, this could form a Wave 4. Historically, Wave 4 pulls back between 38% - 62% the length of Wave 3. Cutting that range in half puts us at 50%, which brings us to around 10500. That would also mean that Wave 3 was over; stopping at our MOB (taken from the previous 4 on the weekly chart back in October of 2004) and near 1.618 extension of Wave 1 (just below 9000), which are both historical levels at which Wave 3 should terminate.

A Wave 4 at 10500 gives us some data for which we can project possible levels for a Wave 5. Wave 5 usually terminates between 62% and 100% extension of Wave 3. That puts us somewhere between 6600 and 4200 to the down-side. Corresponding with that range is another large MOB. This one was taken from the previous Wave 4 on the Monthly chart (from October of 2002). The MOB level correlates with the FIB level which correlates with the Elliott extension.

 

The Daily Dow chart is also preparing for a Wave 4. However, 62% retracement on the Daily is below 10500. If we violate 62% retracement on the Daily, then the Type One setup would be invalidated. However, remember that the weekly doesn't HAVE to pull back 50%. It can pull back only 38% to be a Wave 4 of historic proportions.  That level is around 9900, which is 50% on the Daily chart. It will be interesting to watch how these two time frames interact with one another. We could get some powerful setups if these two wind up working in concert. We'll just have to wait and see.

Be Prepared!

nate mccartney

So I go to sleep in Singapore and wake up to a good sized global equity market rally. The S&P 500 ($SPX) is once again making a move back towards 960. It closed a mere 20 points away (did you ever think we would say mere 20 S&P points!) Looking at the attached 60 minute chart you can see it ready to try and get there. This will be a big test. If we cannot stake a claim this time around there is a lot of space below us.

 

Good Trading

Craig

The S&P is once again toying with the 960 level ($SPX). Have a look at the intraday 5 min. chart. The more we can't get good rotation away from it to the upside the less and less likely it becomes. Still a good level to be bullish above and bearish below.

Good Trading

Craig

Here we go. Looks like we have begun an upward rotation away from the S&P ($SPX) 960 level. Below is a 5 minute chart. The key difference between here and Friday is the retest and hold leading to a higher low and higher high. This looks like good rotation for a bit of a bounce over the next couple days. Big level that 960.

Good Trading

Craig

Well the week ends with the 960 level on the S&P 500 ($SPX) clinging to our 960 levels like a dog with a bone. We might pull the bone away for a bit but it grabs right back on. The below chart shows a 60 minute chart of of the $SPX with the 960 level denoted by the middle of the weekly MOB (right where the blue and pink meet). This level is obviously important as the market keeps battling with it.

Good Trading

Craig

I recieved a question on my last two posts, See the bounce play with the levels and Know your levels (S&P bounce?). It was "I don't understand why you chose the pivots you did for the MOB. It seems arbitrary. Using earlier or later pivots give you different levels for the MOB. I wish you would clarify this issue."

If you take a look at the weekly chart below of the S&P ($SPX) you will see that I have turned on the Pivot Study in Advanced GET. This is labeling only the primary pivots. I marked the last primary low pivot as P1. That pivot generated the MOB I labled as P1. This has clearly been broken (full bar). Hence it is not doing me any good at the current price level. So all I did was move back to the next primary low pivot. I have labled this P2 and it's MOB P2.

It is this P2 MOB that I am using on the weekly chart. Not arbitrary in the least. I am using the most important (primary) pivots to generate my working levels for this analysis.

Good Trading

Craig Russell

I stumbled upon this article and thought it was worth sharing...

Article by Art Carden and Robert P. Murphy | Posted on 10/9/2008 |

The Securities and Exchange Commission took the very drastic step of outlawing the essential financial practice of short selling in an attempt to galvanize financial markets. (The SEC recently extended at least some portions of its initial ban through October 17.) But short selling provides essential information to market participants and helps us update our expectations accordingly. By outlawing short selling, the SEC has eliminated a crucial element of what makes markets work.

To understand why someone would "go short" on a stock, it's easiest to first consider the opposite case. When an investor thinks that a stock is an attractive buy, he "goes long" by buying the stock at its current (undervalued) price. If his hunch is correct and the price rises, the investor can sell the stock at the higher price, pocketing the difference.

But if an investor is pessimistic about a stock, and thinks that it is overvalued at its current price, then he can "short" the stock. Specifically what happens is that the investor instructs his broker to borrow shares from an existing owner and sell them at the current (overvalued) price. (With the practice of "naked" short selling, the sale is booked before the shares are actually located and borrowed from a current owner.) If the investor's hunch is correct and the stock price falls, then he can instruct his broker to "cover the short" by buying the same number of shares in the open market to return to the original owner. The successful short seller pockets the difference between the original (overvalued) price at which he shorted the stock, and the lower price at which he covered the short. (We are of course ignoring transaction costs.) Naturally there is risk involved: if the price of the asset rises, the short seller loses.

Short selling plays a crucial role in the market. If many investors are selling a stock short, it means that they think the asset is overvalued. The more people risk their wealth by shorting a stock, the more pressure is brought to bear on the stock price.

However, there are two sides to the contract. Every share that is sold short has to be bought long. At first, this seems like a zero-sum transaction, but it plays a crucial role by providing information. Profits tell entrepreneurs and speculators that they are realigning the structure of production more closely with the desires of consumers. Over time, those who speculate incorrectly (and who would misalign the structure of production) will be weeded out. On his blog, Arnold Kling notes that short selling cannot drive down an asset's price per se; the only way short selling could reduce the price would be if other market participants don't take up the other side of the contract and defend the value of the shares. In this case, the short selling itself doesn't reduce the price of the asset: it is the fact that the short sellers overwhelm those going long that reduces the price of the asset.

There is a role for psychology, to be sure, but this is unlikely to be significant at the margin. People earning nine-figure compensation packages to make ten-figure decisions every day have an incentive to avoid acting rashly. The SEC's ban eliminates important elements of the market's feedback mechanism and will compound these problems of psychology rather than solve them. In particular, if there is a "herd mentality" that is pushing up a certain stock's price, it takes disinterested short sellers to come in and restore sanity more quickly to the market. Without this "damper," such herds will stampede the price higher, and it will fall all the harder when the bubble finally bursts, which it always does.

Ironically, the ban on short selling only a particular group of stocks will make investors less likely to deal with those firms. There are at least two reasons for this. First, shorting is a way for firms to hedge themselves when they offer "credit-default swaps," which are basically insurance policies covering a bond default. For example, an insuring company might offer credit-default swaps to lenders who have bought bonds issued by Goldman Sachs. Now if the insuring company starts getting nervous about all of the Goldman coverage that it has sold, it can short shares of Goldman to hedge itself. This way, if bad news comes out and Goldman goes bankrupt, the insuring firm has to pay out on its credit-default swaps (because Goldman defaulted on some of its bonds) but at least the insuring firm makes money from the fall in Goldman's share price.

But now, because of the SEC ban, insuring firms can't hedge themselves against sudden collapses of financial firms. This makes it riskier for insuring firms to offer protection on the bonds issued by these same "protected" financial firms, meaning that they will charge more to insure their bonds. Ironically, the SEC's ban thus makes it more expensive for lenders to loan money to firms in the financial industry, and so these "protected" firms will be even further starved for injections of private capital. Note that this inability to raise private funds is the very problem the government is trying to cure.

Second, the SEC ban will make investors less willing to buy shares of the financial firms in question. Before, average investors knew that an army of speculators were circling the markets, looking for vulnerable firms loaded up with toxic mortgage-backed assets. Therefore, if a big bank wasn't getting hit by a wave of "attacks" from short sellers, this meant it was probably a relatively sound institution. The SEC ban has taken that source of information away from the average investor, who now may shun the financial sector altogether because there is no longer any money for expert analysts to make in digging up accounting irregularities or other troubles with particular firms.

Even though the practice of short selling has been made illegal, the potential gains from trade have not been eliminated. Speculators with billions of dollars on the line have incentives to find a way to short sell under a different name, and the unintended consequences of the new regulatory environment are undesirable. For example, pessimistic investors might buy put options, which are another way to profit from an expected price fall, or they might buy assets that typically move in the opposite direction from the stock they wanted to short. The SEC will have to invent ever more rules in a vain effort to prevent people from putting their money where their views are. But the market will continually adapt to the new rules of the game. Over the long run, the creation of a new regulatory infrastructure will create a new political constituency with a financial and ideological stake in the new institutions, and they will resist reversion to the preintervention status quo.

The second unintended consequence is the ideological and institutional legacies that interventions leave. In his book Crisis and Leviathan, economic historian Robert Higgs argues that one of the more subtle long-run effects of government intervention is that it lends ideological or institutional legitimacy to further intervention. As he has pointed out , some of the government's attempts to fix the current financial crisis have their roots in the institutional and ideological legacy of the New Deal.

Loosely speaking, the price of an asset reflects market participants' best estimate of the (market) value that can be created using that asset. If the price of a share of stock is $100, this means that the market's best guess as to the value that can be created with the underlying property is $100. People make mistakes in such estimations all the time. Most people might think that a share of the company can produce $100 worth of value, but someone else might think that the share can produce only $90 but that the rest of the market doesn't know it yet. If he is certain enough to act on his convictions, he can short sell the stock and earn a profit if the price falls. To short sell, an investor borrows shares from someone and agrees to return the shares sometime in the future. Suppose an investor writes a contract to sell 100 shares of stock at $100 each. He can borrow the shares from his broker or from someone else, but he will need to go into the spot market at some point in order to purchase the assets and cover his position. If he was correct, the price will be $90 and he will earn a profit of $10 per share. If he was incorrect and the price increases to $110, he will lose $10 per share.[1]

Short selling is risky because it is trading with borrowed money. If you are short selling, you are entering into contracts to borrow, sell, and restore someone else's assets. Short selling is not possible unless there are other investors who are willing to defend an asset — in other words, you cannot short sell based on your belief that an asset is overvalued unless someone else is willing to meet your price for the shares on the belief that the asset is either valued properly or undervalued.

Short selling is vital to a well-functioning market economy because it transmits valuable information about investors' beliefs about the quality of an asset. By outlawing short selling, the Securities and Exchange Commission outlawed a practice that produces information necessary for financial markets to function smoothly.

And who are the winners from the SEC's ban? It isn't everyday investors, who are denied crucial information about the quality of the assets in their portfolios. No, the winners are the managers of the protected (poorly performing) firms, who are able to keep the market capitalizations of their firms above water by denying the rest of us useful information. Ironically, the SEC's ban has lumped all financial firms into one big category with a "WARNING" stamped on it by the government. This is bad for the industry itself, but it actually dilutes the bad news for those financial firms most heavily loaded with dubious mortgage-backed assets.

Notes:
[1] Investopedia.com offers excellent write-ups of different types of financial transactions, including short sales, futures contracts, and others.

As I write this the stock markets in the U.S. are down once again. In the mentoring sessions lately the obvious question has been where are we? so we should just be short? The answer has been YES! However, as traders we need to know what and where the market has been and is currently. Levels of support and resistance are VERY important. On the indices I like to work from a weekly down. That let's me know where we are across the various timeframes. From this I can see how a level is being treated.

Let's look at the weekly.

As you can see we are squarly into a MOB level from the weekly timeframe.

Let's take the focus down to the daily timeframe with the same MOB still on the chart.

There is that same level. See how the daily bars are playing with this level and slowing down the sharp decent? (if not look closer and make sure to ask in your mentoring sessions)

Now how about the 60 minute timeframe.

We have already bounced once off this level in the 60 minute timeframe. This is shapping up to be a pretty important area given this kind of price action against our price level.

So what do I do with this knowledge? First I know this about markets, they do not go in straight lines. It may seem like we have been going straight down but there have been minor retracements that allowed the market to gather it's breath and build up strength for the next power move down. Now we have reached a MAJOR level (it is from the weekly timeframe making it very big and important) these levels rarely get broken on the first attempt. ( keep in mind though big crashes come from oversold conditions not overbought) Looking at the 60 minute a wave 4 bounce could take us to 1100 pretty easily. So now what? Given this situation I think that fresh short entries are a less than stellar idea down here. We should bounce off this level before breaking it.

So if I am not comfortable going long (which I am not particularly) What do I do? Manage any short position and wait for that bounce to come along so I can take fresh short positions for a rechallenge of this big MOB down here.

Good Trading

Craig

P.S. the 3 minute futures (ES Z) have just setup a type 2 counter trend and that timeframe has to turn before the bigger ones do.

I received an email last night from a customer who wanted to see some additional time frames that showed good GET trades. I'll start with a quick search conducted on a 15-minute time frame, which came up with SD. (SD) (Sandridge Energy Inc). It is set up as a Type Two Buy on the 15 minute chart. It has a 4-to-1 Reward/Risk, which is EXCELLENT. This means you are essentially betting a dollar to make 4 dollars. Not bad odds at all.

Add to this setup Joel's analysis of the Energy sector as a whole, and you've got a nice potential long position with very little risk! (http://www.agetblog.com/tradingtechniques/2008/09/price-rules-out.html)

Here is where SD stands as of this post. It hasn't quite reached profit yet, but we're only 9 bars into the swing. We expect 13 to 21, so we've got some time left to reach profitability.

We'll take a look at how this one turns out, and a look at another time frame, in my next post.

nate mccartney

Shortly after my last post, the YM 1-minute chart finally did reach 50% toward the profit objective. At this point in time, the 3-minute chart set up as a Stochastic Continuation buy.

Again, the aggressive entry would have to have been used, but profits were acheived VERY quickly in this one. One bar later, you should have been profitable.

nate mccartney

One of the most asked questions I receive when traveling around talking to traders is "will this software work on "X" time frame?" People ask this about their odd FOREX time frames (120 minute, 240 minute, 13 minute). They ask it about Swing Trading (30 minute, 60 minute), and they ask it about extremely short time frames (1 minute, tick charts, volume charts). I try to show examples of just about every type of market, on every type of time frame in my seminars to show just how versatile this software really is. I even ran into a gentleman in Omaha, Nebraska who trades this stuff on a 6 SECOND chart! While I don't recommend that, it makes my point that these strategies are completely dynamic, and Advanced GET is a great piece of software no matter what the market, no matter what the time frame.

Here is an example from today's YM on a 1-minute chart. It first set up as a Stochastic Continuation trade with a 3-to-1 Reward vs Risk.

6 bars later, this trade reached 50% toward the profit objective. This is the first place to take profits, and adjust the stop to break even.

It is important to note that, at this point, the trade is not "successful". By definition, a successful continuation trade must make a higher high (or lower low in a down trend). Thus, since we have not broken the high, this is not yet a successful trade. HOWEVER, more importantly, this is a PROFITABLE trade. Another highly asked question at our events is "what is the % of accuracy of the trading strategies." It is a valid question, but the more IMPORTANT question is "what is the % of profitability of how you MANAGE the trades?" This particular strategy is about 60% accurate. However, the 40% of the time it is wrong, we still wind up making money a certain percentage of the time. This is one of those times:

So this trade stopped out at break even after the initial profit objective was reached. Thus, it was a PROFITABLE trade, but not a SUCCESSFUL trade by strategy standards.

Once this retracement moved on, the market set up for a Type One Elliott trade.

You would have had to be aggressive on the entry with this trade. Aggressive entries are not for beginners, as getting stopped out happens more often the more aggressive you get over the long haul. However, in this case, it worked out quite nicely.

Depending on whether you are an aggressive trader or not, you either got stopped out of the Counter Trend trade that set up at the MOB, or you did not take it at all because of the Reward/Risk not being above 1.618 to 1.

Several bars later, the market topped out again. This time, it was up near 10800, which happens to be 50% of the range of yesterday's HUGE bar. Now, for those of you who have been to the 2 and 3-Day seminars we put on (see http://www.esignallearning.com/seminars/schedule/default.asp?categ=premium) you know the significance of being below 50% of a recent range. You know to expect weakness below this level. This knowledge of weakness here gives us some resistance off which to play another Counter Trend trade. The purple line on my chart is 50% of yesterday's range, while the slimmer blue line is the low we had from back in July of this year.

As I am writing this post, we have not yet reached 50% toward the MOB from the previous Wave 4. That is the initial target. In order to call this a SUCCESSFUL counter trend trade, we must reach this MOB. However, if we can get half way there, we will have a PROFITABLE counter trend trade. Which is more important to you? I'd rather be profitable than right! :)

Now, I did not take this counter trend trade, as it showed up while I was in the middle of this post. Taking another look at the TIME aspect of this swing down, the bottom of the swing (where the Wave 3 is marked) is exaclty 13 bars from the previous Wave 5. We know that most swings in the market last between 13 and 21 bars. We were in that range at that point, and had not yet made it even HALF way to our MOB. I would most likely have taken some profit in that area based on TIME, and been stopped out of the rest on the swing up shown as Wave 4 on the chart. Others would still be in this trade, looking for new lows. I tend to get myself to risk free as quickly as possible. Sometimes this is a benefit, and sometimes I leave additional profit on the table. These tendancies are part of another discussion for another time, and are based upon who we are as individuals and how that effects our behavior as traders.

Happy Trading and Be Prepared!

nate mccartney

The dollar has triggered lower on the weekly chart and shows a nice risk reward setup.

Joel Stahl