Jan. 8, 2007 — In the Jan. 1 update, I wrote:
Friday’s selloff could be a perfect B wave or second wave pullback into a .618 retracement. Of course, for traders using a 2- or 5-min chart, it must have looked like sailing over the end of the world. Too many times, this type of selloff is a typical shakeout prior to a market rocketing away from you the next day, a move you obviously do not want to be short against.
And boy was that the truth! The SPX vaulted from that perfect bear trap and screamed up 13 points after the long weekend, the first day of the trading year. Of course, nothing had changed over the weekend – we just identified what target the market was selling into on the previous Friday and caught the falling knife. Shorts scrambled to cover all the way up on Wednesday morning since they had no idea where the rally would stop.
For a while, even I thought it might have been going to ring the bell up at a higher high, but then, as the market started executing those sell orders, the Federal Reserve meeting minutes came out and simple selling turned into a melt down. The morning’s rally now became a bull trap. As I had been predicting for several weeks, the first trading day of 2007 became a flood of red.
Feeling that the selling was a bit overdone, particularly since the underlying situation had not really changed, I posted at 9:40 AM on Thursday that I was looking to buy a double bottom. The S&P immediately stopped at the previous day’s lows and rocketed up 13 points. Amidst the advance, the chart below was posted to the forums, showing my target area for the move. The ES futures ultimately stopped at 1431.50, right in the zone.
On Thursday night, I posted a review of the week’s action on several indices and backed up my ideas for Friday with the following chart, showing two SPX possibilities to watch going into the jobs report. There was also a low risk setup to go long the Russell 2000 into Friday’s lows, but it had to be closed out with a few point loss, due to it trading under our limit of the pattern.
The primary black count seems to have taken control and down she went, proving that we are already seeing what I said last week would be a multi-swing year. With volatility like this week’s, you could say traders will be very happy.
As such, I expect TTC members to be very active over the next twelve months. Active, that is, playing the reversals and making money, not just always looking for THE top. Yes, I am looking for the top myself, and yes, maybe the market is ahead of itself, but that does not change the markets’ internal clock. It will get there when it gets there, just do not make the same mistake most made in the summer of 2006 and stay on the sidelines for a huge rally (or worse, get short). The market will tell you what it is doing and if you are able to see it, and go with it even if against the crowd, you are a winner. Otherwise, it will always take money from you. Our theme this year is to capture all the great swings the markets will be giving us for 2007.
But, of course, you still want to know whether we topped this week. Let me simply continue to say that there is no confirmation of a top yet at this time. Are we close to one? Probably closer than many believe but there might be one more candle to blow out. Sure, we sold off and the markets were heavy, but take a real good look at where we are. First, there was no damage to the uptrend. Second, after a 200+ rally, being just 20 points off the high is not anything to get excited about. Third, the NDX is now outperforming.
The chart above shows that the concern I had last week has resolved. The divergence between the SPX and NDX has turned dramatically this week. As the rest of the markets kept looking heavy and selling off, the NDX acted as if rejuvenated, and is now ready to lead once again. On Friday, the NDX would not give in to a selloff. That is not necessarily a sign of weakness, but, in fact, probably more of a bear trap. Of course, we will monitor this developing situation very carefully early next week as from this point; it can cause damage to the uptrend.
Last week’s line in the sand was SPX 1404 and this week’s low was, 1405.75. I am going to adjust that number for next week as we have a pattern in play, which, I think, is completing, not beginning. I may not be able to pin it down to the exact tick, but we will aim to keep the SPX above 1398/1402 to justify additional gains.
If it loses this area and remains under, we will focus on the 1377/1400 range.
I’m hoping to see a bit more selling next week, but wouldn’t be surprised if the market starts advancing from Sunday nights Globex, hinting that a short term low is already in. Any advance must take out the 1416 area in the SPX or sellers will come in. For the exciting intra-day developments, join us on the forums and in the chatroom for one ES point a month ($50)!
Of course, many markets often get dramatic moves during the first week of a new year and this one was no different. The following are just a few of the other issues covered at TTC.
Dominick Mazza
Dominick@tradingthecharts.com
TradingtheCharts
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