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Sunday, March 14, 2010

P2's Buy The Dips, Key Marker Days, and Gaps Explained

Some people are thinking I am proposing a trading system here. I am not and this was not meant to be such. I am merely pointing out some market behavior of the rally off the 666 lows.  Basically its a simple conclusion I come to: The rally keeps going because support is holding on the shallow pullbacks. This is TA at its most basic. Yes simple but I actually tried to break that simple statement down and make it "usable" and perhaps actionable and mappable. And yes you must throw all the other tools into the mix.  I am not trying to change anyone's trading system here by all means no thats not what this post is meant to be!

But this info can be useful and intenals are what matter. For instance 401K's have hold rules in buying funds. At least mine does. If I want to transfer from a "stable value" (LOL its a money market fund and you can see how they advertise it) to an indexed S&P500 fund, I might want to wait for market evidence (key marker up days) to give proof that it can actually gain something for 30 days or won't be a 30% loss in a month.  So doing a transfer after the 29:1 day would have been a very good bet or even after the 18:1 in November while also considering wave structure at the time and other sentiment and TA evidence. Thats just an example.

But a 13:1 day painted at the highest spot in the rally? I am not so sure. But if it follows up with an even better day, something about my conclusions may be indeed wrong. But until then lets suppose the market will revisit this 13:1 day first.

So all the other "tools" do matter but its the market internals that matter most.

In the same event, as some have mentioned, P1 had an awful lot of key marker 10:1 down days. I suspect if I back tested something to that effect, a review of P1 would yield similar results. Wave theory however is easier with the main trend as the true impulse waves come out and are easier to follow.  P2 has been hard because corrective rallies even massive ones,  can take many somewhat unexpected short-term moves as correctives are free to trace out in vastly more possible manners.

Also I see everyone is absolutely convinced that someone controls the market.  Indeed they must control every world-wide market because they are all painting similar tapes and rallies. Amazing.

Make no mistake, I think P2 is almost spent. These maps of the market SPX "tape" though will help identify and confirm it. I'll explain some more.

To randomly say "the market will go up to such and such" one would need proof that the market is capable.  To make these predictions one basically is making predictions of ever more key marker 10:1 up days.  For some to call this a "new bull" I am shocked that they can make this conclusion after reviewing the recent evidence of the "tape".  To say that we are in "three of three" up is extremely questionable because a close review of the tape history doesn't paint that kind of picture to me. In fact a close review of the tape paints the opposite conclusions that the uptrend is in danger of waning.

When July painted that big 29:1 up day, it produced proof that much more was to come. When the market painted an 18:1 up day in November, I did not however ignore that. That one I respected.  That day was recently retraced completely and the market spent a lot of energy recapturing 1071 as a result. These are the first signs that the larger P2 uptrend is beginning to "crack".

So lately the market painted a 13:1 day which was not as impressive.  And the gains since then have been uneven.  So one can easily conclude using this evidence alone that the "bull" is running out of bull juice.

This is not to discount any other TA method, by all means I am not suggesting that. I am merely pointing out how this market moved from a 666 low to where we are today in only presenting the "tape".  But MA crossovers and such do not move the tape. STRONG INTERNALS DO. I think there are extremely useful conclusions to be made going forward digging through the archaeological history of this P2.

For instance, what conclusions can we make with this analysis here? I'll list some more thoughts:

1. Again, the amount of up days over 10:1 since July is sparse compared to the beginning of the rally. Each marker day is less and less with the last being merely  13:1.  I think this helps prove a waning P2 rally.  This also leads me to believe that the market is more spongy than one could suppose if certain levels are breached. The first real super solid day is actually down at 910 SPX at the 29:1 up day.

2. For the market to paint another "key" 10:1 or more day from here would indeed be a surprise. I would rather think if the market could make it to (much) higher spots 1200+ as some are calling for, it must first revisit the last marker day which was painted at the gap from 1123-1125. Now since this key day was produced in proximity to another key area (the 1115 gap), we can make conclusions on how the market is behaving once this area is revisited.

Since each key marker day is less and less over the last 7-8 months, producing another from 1150 in an over-extended market will be near miraculous. Also one could easily conclude that revisiting the last key marker day at 1123-1125 will be unable to produce another day sufficient to make it power up another leg.  The 13:1 day was the power, so wherever the tape can be painted from here would be the "TOP" of P2.

3. A close beneath 1123 is not good. A close beneath 1115 is even worse. Why? Because the evidence is that these key marker days are not to be retraced in order for P2 to continue up. Retracing these days and then recapturing them could be hard. We'll watch closely going forward.

4.  If a key marker day was produced from 1150 and reversed that would indicate exhaustion of the larger trend.

5. In fact I think a close beneath 1115 would indicate exhaustion and further damage to come and would help indicate P3 in progress.

This post attempts to explain which spots of P2 constituted "dip buy" spots and why and where the next ones will come at, if indeed there are any left. The big caveat here is that P2 may soon be over so this information may be a day late in the game as far as buying a bull market. But the info is still useful by all means. Due diligence is required.

(As an aside this is one post that felt a bit like work (and they usually never do or I wouldn't do this blog in the first place) in that it took a lot of time to compile and think through. So if you like the info and feel its useful, feel free to hit the donate button, my wife is grumbling that my weekend is once again, shot LOL. I also understand that my squiggles have led astray (for my self included believe me) so in that respect I am trying to make up for it and expect nothing in return except critical feedback in a constructive manner.)

What does "buy the dip" actually mean? I have pondered that question a lot lately. Not having more than 2 years market experience and not having it actually laid out and and explained in any consistent or reliable manner, I set out to try and understand specifically how and where would be the logical "dip buy" spots and the mega-support spots on P2's bull rally for over a year. I suppose most people trading charts know the concept of basic support and resistance and how to roughly compute them. Pivot points also stand out. But what constitutes better support than not? Which pivots are more effective or important and why? What chart patterns have weight? Should I use MACD and such? How do the computers (algorithms) trade this P2 market?

I could go on and on but really there is so much technical stuff in what constitutes a successful trend trading system one can be easily overwhelmed. So I set out to weed out everything and make it as simple as possible. What I found is that trading P2 and determining the "dip buy" spots is rather simpler than we suppose if we weed out all the unnecessary elements. The market paints the support spots and it leaves key clues for all to see if we use logic and the power of observation. Its not a perfect analysis by any means and it won't tell you when to take profit, however it will tell you when it might be a good time to enter (and then logically where to place stops - mental or otherwise) which is more than half the battle.

In this post I look at essentially one thing: daily market up/down volume ratio and advance/decline ratio internals on a daily basis and how it produces a logical "map" for traders to navigate on where to buy the dips during this P2 rally. I used almost nothing else in this analysis except occasional simple RSI and chart patterns and reference to other supporting evidence (wave theory). In essence, I am trying to explain in technical terms how to execute the terms "buy the dip" and " trade the trend".
Do you ever hear analyst's say "if it closes below such-and-such level, that means "X"" (or the opposite - if it closes above). How do they determine that? Yes some points seem obvious but I set out to be able to identify for myself where those spots may exist. After all, if you buy the dips and let the "trend be your friend", you can make money. Too bad it may be near the end of P2 to realize bigger market truths. But better late than never.

Its not that I ever hated the terms of "buy the dip" or "let the trend be your friend" its just that the people were, ad nauseum, just repeating stuff without ever explaining why. And invariably the catchy "let the trend be your friend" always came out confidently after the breakouts occurred and usually near the top of a short term trend. Such is human nature. Bulls crow when the NASDAQ is up 13 days in a row (now). But if the NASDAQ drops 65 points, you won't hear the "trend friend" statement. You won't hear a peep on what spot to buy and why. You'll hear....silence...until the trend catches fire again and another breakout occurs. Then the trolls come back and repeat the same crap (and they likely maybe scalped only 5% of the move yet still crow - so who knows). Such is the life of retail message boards..

I admit I was guilty of ignoring some truly good advice along the way. But usually because that advice was packaged the wrong way or lacking information or explanation or guidance. But also my ignoring of technicals of how this market has been working on this bull run has cost me. Wave theory has certainly helped, but I didn't fully respect the market internals that made for a solid package. I didn't factor in how Skynet would likely trade the market.

None of this is to say that we cannot use wave theory, on the contrary, wave theory is going to help keep me honed in on the bigger picture and when a specific turn may be coming. I do however want to be able to identify good dip buys spots in an uptrend or short sell spots in a downtrend. Now since this post covers P2, the trend is up so I really haven't deconstructed P1 using the interpretive method I do here. But I imagine the reverse works on a downtrend.

In addition, support/resistance must always be considered not just within the context of what has occurred in P2, but what has come before often years before. This will be pointed out when necessary.

1. Big up days of more than 10:1 up volume ratio (using NYSE) show elevated buying interest. When one of these days occur, there is good reason to believe that the market has another "leg" of juice left in it. Respect it until it proves otherwise.

2. Usually more than a 10:1 up volume day constitutes a "key marker" day. Advance/decline factors in of course and usually matches volume ratio in some manner.

3. Any day more than 8:1 (but less than 10:1) cannot be easily overlooked. However less than 10:1 days can be reversed in short order if the wave structure or other factors calls for it.

4. Key marker days produced by 10:1 up volume ratio days or more usually produce a gap up that often remains unclosed.

5. These key marker gap up days produce a vast majority of the "dip buy" spots on a pullback to it.

6. Closing beneath a "key marker" day is rare for P2. (I will point out where and why and what it may mean). Closing prices matter when concerning key marker days in dip buys.

7. Closing prices matter in determining if key marker days have been truly reversed.

8. If a gap up is not considered a key marker day, then it will likely be closed soon enough. This is useful info in determining if you can get out of a losing position cheaply. This is not 100% true if a minor "lazy" gap happens to occur just prior to a "key marker" day. In that case your small lazy gap may stay open due to chart circumstances. A key marker day always trumps non-key marker gap days.

9. Understanding wave theory, sentiment factors, and other essential simple technical analysis, is essential for exploiting the dip buy spots and strengthening your overall market knowledge. After all, you need to know where to sell and what the overall trend is and why.

I present two charts here: The first chart shows the first few months of P2 and the second is the last months. On the charts are two indicators: The NYSE up/down volume ratio and the advance/decline ratio. Its four total as I show them in reverse). These are the market internals that truly matter. I marked numbered candles for reference in the discussion below. You can follow my discussion of each key candle spot and perhaps why things transpired the way they did.

Each number below corresponds to a candle or spot on the following chart:
1. Up day was explosive at 27:1 up and 13:1 advancers. That day confirmed the end of P1. 90% up day easily. Produced an unclosed gap.

2. The second massive up day left no doubt as almost back-to-back 90% up days (computed not just using up volume ratio ) should have alerted us to a true trend change (and thats when me and Kenny were mulling over the trend change and Kenny announced P2 in progress first well ahead of both EWI and me.) These first 2 days were the highest advancer days of P2 and they were never challenged or retraced into really at all.

3. Biggest up volume ratio day of P2 took the SPX over 800 and violated bearish wave counts. This was the first key marker day that would create a dip buy opportunity. This candle never was fully retraced as dip buyers entered at 880 SPX prior to the full retrace. This candle produced an unclosed gap. This powerful day never even allowed the market to challenge the gap produced by it although a 20:1 down day wanted to challenge. The 48:1 won over the 20:1 at the end of day.

4. This key marker 10:1 up volume day established a new high at the time. Sentiment was still shaky and people were wondering if this rally was real or just a blip. 3 days later the gap this day produced was challenged yet never breached.

5. Another huge 14:1 surge with 7.5:1 advancers produced a key gap up day. This too was challenged 6 days later at the 826.82 low but the gap never fully closed and that was intra-day only.

6. Big 19:1 up day that took the SPX finally over 875. Recall this was the area that stopped the SPX twice in the E of (4) of [1] wave a few months earlier. It was a key resistance area overcome with a big market day. This day was one of the most challenged key marker days and was challenged 8 times in May. Dip buy every time.

7. A dip buy spot turned out quite bullish in late May. This key marker 14:1 up day itself turned into a dip buy spot and enabled the SPX to move to 956. Eventually this is one of the rare 10:1+ up days that was managed to be closed under but even then that was a few months later in the great Head and Shoulders of 2009. The level of this day was close to the opening levels of spot number 7. This confluence of two key marker days (6 and 7) helped produce solid support spanning SPX 875-885 area.

8. This 8:1 up day was not a key marker day, but it did produce some short term strength. It was reversed.

9. This is not a candle day but a string of four closing days that marked the turn spot of summer 2009 and the great Head and Shoulders reversal. I suspected a reversal was coming. At the least, skeptical of the H&S following through. In fact I labeled the move that very day any event, these string of closing days failed to close under spot number 7. That was the ultimate dip buy spot.

10. Key marker day that moves the market toward the neckline of the H&S. The up volume day combined with the previous stubborn closing days above 878 should have clued us in on a bigger rally to come.

11. Second biggest up volume ratio day of P2. Signaled the beginning of a second massive surge in prices to come. This key day was never challenged.

12.  This is the one odd day of a 14:1 up day that was reversed and closed under not too many days later.  I suppose it was a circumstance of charts (negative RSI divergence) and sentiment conditions at the time (most thought including me it was the top of the rally). This was the first time really that people started to say , "wow, what a rally since March huh?".  In any event, prices didn't get too far below. This whole area still creates confusion amongst wavers (including me) on just what the hell was going on wave-wise and market-wise. It was one of the most uncertain times we had of P2. This is where Prechter first started to call for shorting.

13. A solid nearly 9:1 up day that turned out to be a dip buy spot for the subsequent low of November.

14. A bullish reversal 8:6:1 up day to a bearish down day.  This day occurred also at a trendline buy spot. This shows again how less than 10:1 or 9:1 days can then be reversed as this day then had a bearish day follow it up the next day.  Surprise to the downside and broke the trendline.

15. Ah, the 18:1 volume ratio up day that kicked off the November/December malaise.  This day was not challenged until the Feb 2010 pullback. And then it was breached.

16. This area is not a specific candle but rather an area that experienced reversals up and down seemingly every day. This is the area that established the 1100 mark as important. 1100 is very important since this was the "failure" spot of P1 and where a key breakaway gap occurred. This 1100 mark is a key psychological level that the market does not yet wish to leave. There has been some 28 days that have traded through 1100 during P2. It is a bloody battle zone.

17. Notice during the downdraft that the dip buy spot of the previous 18:1 up day in November spurred a bullish 2 day rally that had good 8:1 internals on 1 day and 5: 1 on the next. Yet these reversed downward.  unexpected somewhat.

The 1044 low was the post-2008 crash rally high bounce exactly.  The market chise this apot to bounce and it produced a "hammer" reversal candle.

18. Bullish up day that was not a huge up volume number at the end of day (but it was during most of the day) Then the market bought this gap 3 days in a row. Key marker gap for that reason. This was the "battle for SPX 1071" as 1071 was the spot of the previous huge up volume day of 18:1 in early November. This is an example of how once a key marker day was reversed (closed under 1070) it is hard for the market to re-take this spot.

The market did manage to reconquer the temporarily lost key marker 18:1 early November up day . But it goes to show you that if the market loses more key marker spots, they will be tough to re-take.

19. Very good up volume ratio day that is less than 10:1 yet produced a huge gap. This day is a potential "false key marker gap up day" because the a) the gap is huge  b) the up volume was not of a key 10:1 level.
This will be an  interesting spot. It is nearly a key marker day. We shall see.

20. Unclosed small gap up day that is reversible if the market gets close. This is one of those small gap up days that stay open due to some key marker days occurring just above it.

21. Area marked 21 is a 3 day small gap dip buy that allowed the market to setup for another run higher. This gap was above key major support/resistance at 1113. Its a key gap marker.

22. This 13:1 up day was the best day since early November and the best advance/decline ratio since July and is a key marker day.  This is the best day produced above the 1113 market level.  The gap it produced is likely to be a dip buy spot if there is any more dip buys to be had. This day is the key marker day for the upper support of the market.

This day in conjunction with the 1116 gap is equivalent to the double gap day that occured back at 875-885 as described in chart 1.  The confluence of the two produce a huge support area.  Basically if the market closes under 1115, that is very bearish as it would have reversed 2 key marker spots that occurred close to each other. 1113-1115 is major market support for the upper half of the market.

1. Basically Skynet (LOL) buys the dip at key marker spots. These spots are produced by the market during key aggressive up volume ratio days as it rallies.

2. Breaking a key market spot is tough to retake and can clue us in on an impending trend change.

3. Advance/Decliner pattern is getting worse as time goes on. This supports the theory of exhaustion setting in.

4. Up/down volume ratio is getting worse as time goes on. This supports the theory of exhaustion setting in.

5. There have been sparse up days over 10:1 since August. This supports the theory of exhaustion setting in. Each key day is less than the rest at least when it comes to volume ratio.

6. Still we must respect the market up until it takes oout these key marker days.

Simple stuff yes, but I wanted to spell it out in a more specific way and give it some meaning.

I'll add to this but I am tired and good night. Likely I'll clean up this post tomorrow and smooth it out some by adding dates and numbers such when talking about  specific market spots. 
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