After a 100 point rip on the no-Greek default bottom $SPX finally seeing some fatigue in the market. That being said the market held the gap today which is very impressive in itself considering how much it has already run. Our general rule is to always sell the gap up after a large run.
We are looking for a consolidation phase now and a fill of the gap (blue rectangle). This would aid in setting up new longs and be bullish going forward.
If you were watching for a bounce on the 2009 trend-line you would have had two very different conclusions if your chart was set to linear (as ours are) or log. Here’s the linear version that we always use:
$SPY sat on the 200SMA long enough for trend-line to catch up and bounced.
Log version shows complete break (interestingly enough we’re testing the underside of trend-line now). Bears were very excited about this break.
What’s the difference? In a linear chart there is no adjustment for a percent move. A chart moves up 2 points if its a move from $20-$22 or $100-$102. Of course a 2 point move in a $20 stock is worth a lot more percentage wise than a 2 point move on a $100 stock. A log chart adjusts for that by moving same amount on chart based on percentage, not points in price. For us, this is meddling we don’t want in our graphs. We want pure price and time, not adjusting for percentage. However, there is no “right or wrong” in this argument, more a preference. E-signal uses linear as default for example while other charting platforms often use log as default (including stockcharts).
The 2009 trend-line for us is the big kahuna — it was THE focus for us in June as you can see in these four posts March 2009 Trend-Line Sirens calling, A visit to the Nasdaq Trend-line, Buy the first test not the second, and The only chart that counts (hint, it’s the 2009 trend-line chart
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In benign momentum markets such as the one we have enjoyed for the last week a lot of break-out moves start before the alert. Two of our day-trade strategies, base and break, and The Indy, were created to take advantage of this phenomenon. A quick glance at two triggers from last night’s newsletter in $OPEN and $YOKU.
We wrote in yesterday’s newsletter “OPEN 85 not bad for a squeeze — type of stock that sets up before on base and break/Indy” and indeed the set-up before the alert today — on the lift-off from the 9EMA near the open 1 point under. Best way to catch a move like this is if you were stalking it — yet another reason why we like small watch-lists.
Second entry if you missed 84 was after it had based on 85/R2 for second lift-off from actual alert at 85.
YOKU 37.5-37.7 we wrote yesterday to look for set-up which was a good spot to enter for a quick 1 point run. Another entry was off the 3rd/1 minute bar off the open gap. You will see this pattern quite often in benign momentum markets — gap up, 2 x1 minute bars that are fairly tight, and 3rd bar lift-off. The highs and the lows of the first 2 bars were within 25 cents which is great risk/reward. When you see a tight stop like that buy the 3rd bar that takes out the high with stop on any reversal into new low.
As extended as the market is right now there are some very good momo moves for day-traders. We’ve had two extremes since the beginning of the summer — complete bear sentiment where every rip was faded and now the complete opposite in a true momentum tape. It should be an interesting summer.