Thursday, November 10, 2011

Overnight breakout moves

Let me introduce you to symmetrical triangles first. Go to Bulkowski's site and read the entire page. We will apply the "trading tips" area of the page to my chart below. Link


The chart is /ES hourly with RSI(14) indicator below. Price has been trading in the triangle for the last 2 days. I was scared of the breakout in an opposite direction to my trade, hence I had to get out today. Let us now apply Bulkowski's ideas to this chart. 

Using the measure rule, our trading target (base of the triangle ~ 1245 - 1218 = 27) from 1240 should be 1267 on the /ES, which ~ converts to 1270 on SPX i.e., 200 DMA. Breakout volume is light, obviously this being a nightly move. Throwback rate (failed move) is 37% and pullback (to the point of breakout) is 59%. Beware of these things. I used the RSI(14) EMA for confirmation. Usually RSI is not my buy or sell signal, my system signal is a different one and most of the times it results in a terminal move. I haven't gotten a signal yet but mine is late but with high probability, keep in mind. I reckon RSI(14) is good enough in this context. If you read at the apex of the triangle, it is converging at 3 AM ET which is the opening time of European markets. Humdinger, isn't it?

Respect the channel


Respect the channel, only as long as AAPL is within the channel. Sell outside the channel with a stop. The 200 DMA is at 362$, keep that in mind.

Intermarket correlations


The soaring eagle in the chart is the Italian 10 year bonds that is the talk of the town today. Let it cool down, wait few days and then buy the US market - that is the strategy for the Intermediate term. Meanwhile, you can play ping pong between ranges in the market. I reckon the low for the market in the short term is not in. You should be selling strength, as in today morning, on rallies. The lower line is the German 10 year Bonds. The closer line to SPY is JNK, short for Junk bonds.

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