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Saturday, March 6, 2010

Gap Story and Skynet

[EDIT: I am continuing to update the weekend charts post below this one.]

Skynet controls our financial markets. Gaps and certain key market internals are likely used to program the array of computers that now do most of the trading in our stock markets.

Most of this discussion is either innate in most traders or understood to some degree. But sometimes I truly lose sight of how simple this market has become to trade [edit: that was sarcasm].  So I must get it out of my head so I can re-read it once in a while to remember things. Allow me to explain.

I went short the market by buying TZA at Friday's end because I do play my squiggle charts sometimes if they follow to what I had projected.   I also figure sooner or later the bullish Mondays (like 23 of 26 or something) will eventually stop working. And what better spot in the wave pattern than after a 13:1 up day that potentially fulfills a wave pattern from a low of 1044?  Well its actually probably an exact wrong spot but what the heck ...LOL.

But what of Friday's market internals?

These next thoughts are important to every trader or investor in my opinion:

Regardless, there is a simple way of looking at a strong internal day (strong up volume ratio and advancers) such as occurred Friday after a gap up: The gap up in prices cannot close for the bull case! So yes Friday was a "marked spot".

Technically speaking, market internals is what matters. This is why everyone is so bullish and confident at least for the near term. Why?

Well, simply put, I'll repeat: Friday's gap up cannot close for the near term bull case.  That makes trading this "easy". Simply go long and set your stop below the gap.  Every trader  both big and small has now, yet again, marked the same spot for the same reasons. And likely the computers are set the same. If the gap up breaks, sell any gap backtest. 

Why would they all have the same spot marked as a stop or a buying or selling point? Because internal numbers such as what posted Friday are never to be retraced 100% in the near term. Like I said, its cornered itself as a "kickoff" move for the "next leg up".  Every trader and investor (and programmed trading computer) is thinking the same thing. The trade has now again become one-sided in a moment of time. This one-sided trading is what can keep P2's bull going of course. The big kickoffs in the past on P2 have always continued onward toward a decent sized leg up. And any retraces backwards into the price ranges of these big up days have resulted in buying a spot on the retrace. Its worked every time. This marked spot is no different and the approach to this week will also not be any different.

Why cannot the gap close, don't they get faded and closed all the time? Well, reversing the price of a 13:1 up day (indeed the advancers were so strong the market may have produced a "90% up day") that if prices moved lower it would indicate exhaustion of the up move and portends a bigger correction is coming.  In other words if you think we can go back to say 1108 and then reverse up again to new market highs, your viewing this the wrong way. A move below Friday's gap is a big sell signal to every algo machine out there. There is extremely good odds that the whole market will accelerate to the downside if the MM's can reverse Friday's move in short order. 

Can we have a double reversal (push down and then back up again)?  Thats asking for a LOT of this market. Its possible but unlikely at this point in the wave structure.

So again, this is nothing new and I wish I had realized this simple trading logic at the beginning of P2.  But sometimes you learn as you go.  I suspect my newfound logic has occurred near the top of a major wave such as P2.  I apologize for not pointing this out sooner.

But this is the reason EWI (and I and even Kenny) think that if Friday can be reversed, you can be assured with a good risk/reward that the market will fall very hard from a break of Friday's gap. The algorithms running this thing are programmed for days like these. These kind of days are key markers. And god knows what the sell parameters have been set to. But close the gap and you can guarantee they will sell it hard.

So go long here and play the "next leg up". Indeed I am thinking I will do the same (but only to the next key marker - 1148 SPX) But remember, if Friday reverses in short order, you would be fighting the big downtrend that is sure to come. 

Eventually this is how P2 or any wave 2 within P3 is going to end. A big up day that gets reversed in short order marking a spot in the wave structure that the programmed algo's sell relentlessly. This will mark exhaustion in my opinion. I think we seen a glimpse of this on the recent 1044 low. The big 9th of November 18:1 "kickoff" up day had a gap up from previous closing high of 1071.48 to 1072.31. After the market topped in January it declined in a big way. Eventually on the 3rd of February after a gap down that the algos couldn't regain, the market started selling. Then the next day on the 4th,. the 1071.48 gap was broken and you saw the market accelerate to the downside in breadth. This was where the algo machines were programmed to sell.  

We (EWI and I and others) naturally took this acceleration as a likely wave [iii] down starting. But as the key marker of 1071 broke after a long downtrend, bearishness had been too high too soon and sellers were exhausted for the moment. The 1044 low was very short-lived regardless as the bounce produced a bullish hammer candle that also may be programmed into the algo's; to buy at.  But thats why it took a whole bunch of choppy days to re-take 1071, or the line that Kenny call "my precious".  You had algo's selling the line and buying the line. Also  the choppiness produced gap ups (one being marked by again great internal numbers), the other side of the algo's were buying those gaps spots. 

So for days you had battling algo's and eventually the bulltards won.  The big up day of the 9th of February marked yet another big gap up and likely caused some algo conflict. So the algo's bought that gap and eventually that gap buying override the 1071 spot. The market kept going up and hey "the trend is your friend".  That market has produced 5 gap ups now and the algos's (and traders) are mindlessly buying each one. (This also happened in December and January on low volume crappy market internal up days.

The open gaps are all trade spots and stop spots no doubt, but certain ones mean more than others. And the gap days that produce internal numbers that stand out are key markers obviously.

So yes this is elementary in a way and known by any daytraders in some form or fashion I suspect but its always good to relearn particularly  in the day of Skynet. But actually I think its mind-blowingly stupefying simple (buy support and trendlines) and thats why the "big boys" and their penny hacking computers are making a small fortune each and every day.

And looking at this chart there are a lot of gaps. When Friday's gap get closed its pretty much game over. This market should sell hard at least to the 1058 spot.

Above us sits the ultimate gap marker at 1148-1150. This is the next battle spot in the battle of the algos'.  We may not even get there as the market is getting overbought on many times scales.  

Its actually come down to a battle royal of the space between the 1125 gap and the 1148 gap.   I suspect a test of 1148 is coming unless Monday is gap down huge to under 1120.  Also the extreme opens is the best spots to stage reversals such as the ones we seen recently on the 23rd and 25th of February.

The market has a bit of room to consolidate between here and 1125. And if it goes toward high 1120's, you buy that spot as you can bet the computers probably will. Thats the best spot, in my opinion, to catch the final "next leg up" if there is to be one. Sell spot would be 1148 (or 1146 if you  don;t want to be greedy) and then watch the battling algo's determine the next moves.

Alas I want to make money here and so do you. I will provide more gap/support resistance info in my charts to help supply good entry and sell spots.

The problem with all this is the wave structure calls for a breaking of Friday's gap early this week.  But like many of you I have my doubts that could happen after such a market up day.

But sooner or later that 1125 gap will close.  And the bulls will keep buying all the others not realizing its a losing battle and exhaustion has set in and bullish sentiment way too high again (its getting there).

Also the problem with expecting 1150 to break to the upside is that the rally is quite extended already. The entire market is indeed resistance.  So yeah, we could see a new nominal high, but sooner rather than later, market exhaustion is going to set in. And a break of a key gap marker will be the clue.

This is why they will sell 1148-1150 (or lower) all day long. Its the logical spot especially in an overbought market. And this is also why the saying "the trend is your friend" will see a market that sells relentlessly.

Also the "big market marker" of P1 was...1100 gap area. Thats why the algo's have battled that spot and the market has crossed it on 28 differing days..
Here is another chart outlining some markers.

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