NASDAQ Indicator - Oct 17th 2012

TUESDAY, OCTOBER 16, 2012

"Railroad Tracks" are a very strong signal for bears and bulls alike. To learn in depth about how to read market signals and create balanced and risk managed trades based on reality (rather than magic indicators and imprecise forward looking analyst statements), check out Scott Pluschau's subscriber service and blog.

In Japanese Candle stick analysis, Railroad tracks are a pair of horizontal green and red long bodied candles next to each other (see the left hand of the chart below) with similar opening and closing prices.

The color of the second candle determines the nature of the pattern. If the second candle is red, it's bearish. If the second candle is green, it's bullish.

Today's Nasdaq 100 is revealing an especially bullish pattern, as the railroad tracks come in the larger context of a trend-line being broken to the upside.

(Click on chart to expand)



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Holiday special: equities update on the S&P/Nasdaq 100

By Scott Pluschau
www.scottpluschau.blogspot.com

But let's start with a question.  What causes price to go higher in an auction?  Is it A)  The laws of supply and demand.  B)  Economic news.  Or C)  Corporate earnings/ratios/balance sheets etc.

My answer is A. 

If you think the answer is B.  Just take a look at the dismal ISM Manufacturing data this week and the ensuing rally in equities.  

Scott, doesn't corporate earnings/ratios/balance sheets etc. have an impact on price?  What about monetary policy, fiscal policy, and economic developments?  Don't they have an impact on price?  My answer is... "I don't care".  You see when these developments make an impact, it will be reflected in the pricing patterns, auction profile, open interest, COT reports, and volume.  My answer is unwavering.  So what is the point in doing research on those things when it doesn't matter?  Good question.  I believe it would be a waste of my time and money.  But with all due respect if whatever you do helps you make money, that is ultimately all that matters. 

Ok let's go to the charts.  Interesting developments in the Emini Nasdaq 100 and the Emini S&P 500 futures.  The S&P 500 futures are rallying on the daily chart on decreasing volume. This is a caution flag.  Is this a signal to start selling?  If I was "long" I might, but certainly trailing a stop would be in the cards for me in this scenario.  The problem with liquidating randomly without a pre-determined profit taking target being reached, the trade being invalidated, or a reversal signal being generated, is that price could rally through the upper trendline resistance I have drawn on the daily chart, (see right hand side below), and really begin to take off on an increase in volume.  Getting back in is more difficult than adding to a winning trade.

However it is definitely not a signal in my book to sell short at this time.  If the S&P does rollover and give me a reliable trading signal to sell short, it will increase my probabilities of success due to the structure of the daily chart.  An example of what I might be looking for is a breakdown of a "Symmetrical Triangle" pattern such as the one I highlighted on the 30 minute chart (there was a breakout to the upside in this case), see left hand side chart below.  That is a trade I would have taken with zero worry about being wrong or losing money provided that things continue this way in the bigger picture. 

Side note on taking losses:  Taking losses are to be expected.  We must risk capital in order to profit.  Profits must exceed losses in order to survive.  Proper risk management, position sizing, trade management, and money management keep you in business.  The correct way to look at losses for me is as overhead or a cost of doing business.  I can't think of any business where there is no risk in order to profit. 

In trading there is good risk and there is bad risk.  Bad risk is where a trader doesn't have an edge, and the market is in control of the trader.  Good risk is risk where the trader has an edge, and the trader is in control of himself. 

(Click on chart to expand)

In the Nasdaq 100, the picture is the same.  A noticeable decrease in volume on the rally along the upper trendline which I prefer to call a "Return Line" on both charts.

So if prices are determined in an auction and the laws of supply and demand, what is volume telling us lately?  There is demand, but the demand is weak.  It is a caution flag.  Basically price discovery is showing enthusiasm, but the volume is not showing intensity. 

But as long as the buyers continue taking out the current asking price, and the sellers keep raising their offers, price will continue higher until it has either reached an "unfair high", which means price does not attract any new demand, or demand begins to be met with an equal amount of supply, aka a "Stopping Price". 

Should the sellers come in at that point and start cleaning out the bids, and buyers start to lower their bids, then this "supply" will send price back down in the near term toward a prior value area in order to attract demand once again.  This is a dual auction market process that the futures markets trade in.

When it comes to trading which do you believe is nonsensical?  Those last few paragraphs on this blog, or another blog that discusses technical indicators based on various ratios and formulas such as 2+1, and/or lays down drawings on the chart such as a "pitchfork" to predict a change in price direction?

I often get questions in email about books I can recommend on auction market theory.  My answer is always, I don't recommend any books on this subject because while there may be certain things I like or agree with, there can be things I don't agree with, or the author leaves out, that I believe do great damage to traders.

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Source: Holiday special: equities update on the S&P/Nasdaq 100:

Pattern of the Day (Nasdaq 100)

By Scott Pluschau
source: http://scottpluschau.blogspot.com:

It is impossible to point these patterns out before hand on the blog.  I have been getting away from this type of posting.  Since I posted an intraday pattern on gold today I thought I should mention yesterday's pattern on the Nasdaq 100 futures.

There was a textbook "Bear Flag" on the 30 minute chart (see left hand side below) with the "Measured Rule" target nailed for $600+ per contract.  The saying is the "flag flies at half mast".  Notice the flag pole or mast was on strong volume, with diminishing volume in the flag, and a pickup in volume on the breakdown, which increases the probabilities of continuing supply toward the initial profit taking target in my experience. 

The flag portion of the pattern forms due to over anxious buyers, either looking for a discount and a bounce too early, or with losing traders averaging down.  This is a pattern of distribution. 

I know I wouldn't ignore this pattern, and it doesn't matter to me what "wave", "level of Fibonacci retracement", "regression channel", "moving average crossover", "standard deviation band" or some "oscillator" is reading.

(click on chart to expand)

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Weekend update - Nasdaq 100

Monday, May 7, 2012

By Scott Pluschau

My most recent post on the Nasdaq 100 and the Bearish Dark Cloud Cover pattern can be found here:  http://scottpluschau.blogspot.com/2012/05/dark-cloud-cover-in-nasdaq-100.html

There was a nice gap down in the Nasdaq 100 on Sunday night. A potential "Breakaway Gap", which would bring some pain to those with a large losing long position trapped above the gap.  

The legacy Commitments of Traders report is what I look at first and foremost. But when it comes to equities, I also review the "Traders in Financial Futures" report. There is something very interesting about Nasdaq 100 report lately and I will take some time to expand on it and ask some thought-provoking questions for you readers.  Feel free to comment publicly or email me afterward.

Let me begin with some details of the "TFF" report which can be found on the Commodity Futures Trading Commission website.   Rather than the "Reportable" or "Large Trader" category of the legacy COT report being broken down into "Non-Commercial" and "Commercial", the "TFF" report breaks down the large traders into "Dealer Intermediary", "Asset Manager/Institutional", "Leveraged Funds", and "Other Reportables". Both reports have an identical "Non-Reportable" category.  I cover the legacy COT report in more detail in the tab at the top of the blog.

What do these categories in the TFF report mean?  According to the CFTC website:

The dealer intermediary represents "Sell Side" participants.  These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives.  Typically, these are dealers and intermediaries that earn commissions on selling financial products, capturing bid/offer spreads and otherwise accommodating clients.

The remaining three categories (asset manager/institutional, leveraged funds, and other reportables) represent buy-side participants.  These are essentially clients of the sell side participants who use the markets to invest, hedge, manage risk, speculate or change the term structure of duration of their assets. 

The asset manager/institutional are classified as institutional investors, including pension funds, endowments, insurance companies, mutual funds and those portfolio/managers whose clients are predominantly institutional. 

Leveraged funds are typically hedge funds and various types of money managers,  including registered commodity trading advisors; registered commodity pool operators or unregistered funds identified by the CFTC.  The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients. 

The other reportables are mostly traders using markets to hedge business risk.  They include corporate treasuries, central banks, smaller banks, mortgage originators, credit unions and any other reportable trader not assigned to the other three categories.

With that being said, let's dig in shall we? The most recent Nasdaq 100 consolidated TFF report shows the dealer intermediaries are long 6,021 contracts and short 50,670 contracts which is an 8-1 NET short position.   The consolidated report is 100X the index, which means each contract is a $260,000 position if the index is priced at 2,600. 

Do you think this "eye-opening" collective NET short position got built primarily from "capturing bid/offer spreads"?  It is my understanding that "sell side" in the financial industry includes "advisory functions" and "research".  Are they sharing the information of extreme risk of bearish price action to the Nasdaq 100 to their clients?  If so, what are these clients on the "Buy Side" paying them for if they don't listen to the advice?  Do those on the "Buy Side" even look at the TFF report? Is the sell side analysis built upon the Fed putting a floor under the market with another round of "QE"? 

I believe Goldman Sachs and Morgan Stanley would be considered "sell side" firms.  Who does the Fed work for?  Do you think it is possible for a "downgrade" to happen to this sector from the "sell side" in the near future?  Could the sell side be heavily betting against their clients before the markets moves lower in order to bang the register for a nice yearend bonus on top of the already hard earned "fees and commissions"?  That large collective NET position from the dealer intermediaries brings me a whole new appreciation for the word "sell" in "sell side" when I do the math of that short position.  Just some food for thought.

On a quick side note, if you are a small speculator in financial futures, besides the good idea of knowing yourself, I believe it would be a very good idea to know your competition.

The bottom line is I do not care about conspiracies, or manipulators, I care about objectively analyzing the futures market, which includes a complete picture of the auction.

Lastly, if the markets start to pick up a head of steam to the downside and the Fed does "bail" out the markets, it will be reflected in the study of the auction.  If I am caught on the short side of a trade suddenly, proper risk management will be there.

One quick look at the chart this morning shows the bulls attempting to fill the gap.  So far this resembles a bullish "Hammer" reversal candlestick on the daily chart, but it is before the big volume will be coming in today.  A failure to fill the gap by 10AM EST will have me looking to sell.  A new low after 10AM EST without a gap fill might have me looking to sell.  The bottom return line, around 2,555, may become a secondary target for any trailers left on pricing patterns that developed in the smaller degree timeframes.

I will be here at my desk all week entirely focused on the auction of the futures markets, but I may take some time off from writing on the blog this week.  Updates via email will go out to those on my list.
 
(Click on chart to expand)

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Source: http://scottpluschau.blogspot.ca/2012/05/weekend-update-nasdaq-100.html

Dark Cloud Cover in the Nasdaq 100

Tuesday, May 1, 201

A note to Tech Investor Readers - this post is coming to you late, as life dictated that I step away from the blogs this week. When life speaks, I tend to listen. 

By Scott Pluschau
http://scottpluschau.blogspot.com

Last weekend's review in the Nasdaq 100 covered the COT report and can be found here:  http://scottpluschau.blogspot.com/2012/04/weekend-update-nasdaq-100_29.html

(The April 30th) daily candlestick is known in Japanese Candlestick analysis as a Bearish "Dark Cloud Cover".  See right hand side chart below.  A dark cloud cover is a potential reversal pattern when a market gaps up at the open and closes below the halfway point of the previous candle.  This price action makes the bulls think twice about their prospects for a continuing trend.  Keep in mind I believe Japanese Candlestick analysis is useless without confirmation.  I point it out because I want to be early in recognizing a potential change in trend.  Being early in recognition prepares a game plan.  Reacting early ruins one.

What makes this more interesting than normal is the fact that it took place at the highs of this rally and closed beneath a prior major multipoint resistance trendline.  Volume was weak than the prior day which was weak enough as it was.  Nonetheless this is a classic setup.

(Click on chart to expand)

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Weekend update - Nasdaq 100

April 22, 2012
By Scott Pluchau
http://scottpluschau.blogspot.com

Sorry if I have been pounding away at the Nasdaq 100 primarily lately, but I have barely even looked at another contract the past week.  I have a passion for the precious metals, but there is not much going on there in the big picture, and the last thing in the world I want to do is "force" trades or the analysis.  I believe the trading opportunities will continue this week in the Nasdaq 100, and it may be another week of relentless Nasdaq 100 coverage.   But the important thing is the principles of my methodology remain the same for all futures contracts. 

Things may not turn out the way I expect as well, but in the meantime, I am focused on correctly identifying the current phase of development the market is in, and then identifying favorable trade locations from a perspective or "probabilities" and "reward to risk", utilizing proper position sizing/money management.  Keep in mind the greatest trading system in the world is probably useless in the hands of a trader who lacks "discipline", "consistency", and "objectivity".

Before I touch on this week's Commitments of Traders Report, the details of my interpretation of the COT report can be found in the tab at the top of the blog.

The market breadth and volume in the Nasdaq 100 was not bullish in the latter stages of this recent ascent, but it was also the net bearish position that the commercial traders were building upon that had me eager to trade on the short side once a reliable reversal pattern developed.  The commercial traders are historically "trend enders".  I have discussed on the blog how frustrating it was to wave goodbye to each new daily high without being in a trade to the long side at all, but I also strongly believe in my rules.  And there are no rules for "Gambling".  NOT speculating IS speculating.   This has nothing to do with a psychological disorder known as "Loss Aversion".  Loss aversion is devastating for traders.  More on psychology another time. 

There are many posts on the blog about the Nasdaq 100 that include COT coverage, market breadth, the "Double Top" reversal pattern on the daily chart, and intraday pricing patterns in the smaller degree timeframes.  Patience is still warranted, as we are still above minor support on the daily timeframe, but the intermediate term trend is down in my view.

This week's consolidated legacy COT report in the Nasdaq 100 shows a decrease in the open interest of 1,172 contracts with the commercial traders increasing their NET short position by 3,985 contracts.  Each contract in the consolidated report is 100 X the Index.  Assuming the index at 2,674 (closing price for the week), and if my math is correct that is an increase of their NET short position of $1,065,589,000.  Should we small traders soak up a billion dollars in supply?  After you is what I say.  The commercial traders are hedgers and they are transferring the risk, but they won't be transferring it to me.  I am all about accepting risk, but I want to accept the risk the commercial traders don't want.  And that risk is pointing down in price action for the Nasdaq 100. 

The total NET short position of the commercial traders as of the cutoff for this report is $7,230,496,000. 

Until the intermediate term trend changes to the upside, I am either going to short, or I will do nothing.  Should the intermediate term trend change to the upside, I may be back on the sidelines looking for opportunities elsewhere.  Sure money can be made trading to the long side in the Nasdaq 100, but using my methodology, those trades will have "negative expectancy", which means even the trades I make money on, in reality, I am actually losing money.  Over time it is a clear path to ruin.   

This weekend's chart includes the weekly timeframe on the right hand side.  Major support is a long way away, and that "High Volume Node" might become a tractor beam should the Nasdaq 100 continue to slide. 

I couldn't even tell you what Apple is trading for, and I do not look at the chart of Apple ever, but they are reporting earnings this week I believe.  Equity traders believe it is wise to keep an eye on the S&P mini futures, but these days it seems like the traders in Nasdaq 100 mini futures are keeping an eye on Apple.  Perhaps there is something the commercial traders know that we don't?

I may touch on the "Traders in Financial Futures" COT report later, as it is quite interesting in the Nasdaq 100 as well.

(Click on chart to expand)

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Source: http://scottpluschau.blogspot.com/2012/04/weekend-update-nasdaq-100_22.html

Nasdaq 100 patterns of the day

Friday, April 20, 2012

By Scott Pluschau, http://scottpluschau.blogspot.com


I have been all over the Nasdaq 100 mini futures on the blog lately, and some of these posts are worth a review.  The titles are on the right hand side of the blog.

Well the theme lately has been the Nasdaq 100 getting pushed to new highs with a classic reversal signal showing up and being all she wrote for the bulls. 

First chart on the left hand side is a 30 minute showing the well defined intermediate downward trend.  Until there is a solid breakout to the upside, the lower return trendline is a legitimate target in my opinion.  There is only one side of the trade I am going to be on for the near term.  If there are no bearish patterns there are no trades, it's that simple.  Bullish patterns will be ignored, or will be watched closely for failure.  Failed patterns are the strongest signals.  The prior support on the daily chart is likely to offer less support next time than previously, and a breakdown from there will be very bearish in my opinion with the next legitimate target the "High Volume Node" at 2,316.

(Click on chart to expand)

For those who have been following the blog this week we had a near identical reversal pattern on the 5 minute chart at the new highs again.  Right hand side blue oval below shows a "Bearish Engulfing" pattern or "Railroad Tracks".    

More importantly, on the 30 minute intraday chart left hand side blue oval below shows a "Shooting Star" reversal pattern after the highs as well.  The larger the degree timeframe the more reliable the pattern.  Both of these had confirmation and down we went into the close.

Source: http://scottpluschau.blogspot.ca/2012/04/nasdaq-100-patterns-of-day.html
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Textbook Pattern today in the Nasdaq 100

April 19th 2012

By Scott Pluschau,  

http://scottpluschau.blogspot.com

I have been all over the developing and continuing weakness in the Nasdaq 100 mini futures recently.  The right hand side of the blog has the titles for articles of which many are worth reviewing in the Nasdaq 100. 

Well, as long as the Nasdaq 100 is in the downward sloping "Channel" there is only one side of the trade I will be on.  Today is a great day to review.  The Nasdaq 100 had a breakout to the upside of the "Channel", and there was nothing behind it afterward (See left hand 1 hour chart below).   What are the strongest signals?  Failed moves or patterns.  Today's volume was the single highest total so far in the year 2012.  This is a confirming bearish signal of weakness and distribution.

Next a classic "Head and Shoulders" pattern developed on the 5 minute intraday chart  (See right hand side chart below).  The head and shoulders pattern is a five point bearish reversal pattern.  The proper entry point is on the breakdown of the neckline which especially in this situation of the larger degree time frame offered good enough probabilities in relation to the multiple of "reward to risk".  I use the "Measured Rule" as a profit taking target, which is taking the distance from the top of the head to the neckline and adding it onto the breakdown point.  I have this marked on the chart with blue dashed trendlines. 

The proper risk management in this situation calls for a stop loss placed above the right shoulder where I marked a grey X.  This is the location where the trade idea would have been invalidated.

I believe there are only two things to do once a trade has been executed with an OCO bracket.  Add to it on a continuation pattern that develops, or ignore random market behavior.  "Tickeritis" is a disaster for traders who have a good trade on.  Losses are a part of the business and to be expected.  In this situation a loss would have been gladly accepted for the opportunity at a profit.

There is risk that should be embraced and there is risk that should be avoided.  I believe the main reason why traders get anxiety when placing trades or anxiety once in a trade, is because they are either trading "randomly" or because they have no "edge", which basically means they are guessing/betting and not speculating.

On a side note, check out the subscription section of Scott's blog. 

(Click on chart to expand)

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Source: http://scottpluschau.blogspot.com/2012/04/textbook-pattern-today-in-nasdaq-100.html

April 19th - Nasdaq 100 Bounces Off Support

by Scott Pluschau

http://www.scottpluschau.blogspot.com

In the daily time frame, the Nasdaq 100 mini futures had a nice bounce off support while forming three consecutive "Bull Flag" type patterns on the 5 minute chart with very strong market breadth internals yesterday.

(Click on chart to expand)

A different look at the chart below shows the daily chart in a "Bull Flag" type pattern as well.  A look at the 1 hour chart left hand side below shows this close up.  What I think is important to note, is the increasing volume in the flag on the daily chart.  What I would rather see if I was currently long in a swing or position trade would be a decrease in volume in the flag in order to give me confidence of holding on and adding to the trade on a breakout.  That would be the most bullish scenario from a perspective of "probabilities".  I think we are intermediate term in a downward trend until the bulls can at minimum get a breakout off the flag with a significant increase in volume. 

Any bearish market internals today with the proper bearish pricing pattern will have me ready to execute on the short side.  Perhaps a winning trade into the close will be left to ride toward the lower return line target of approximately 2,640.

 
I have included the "Volume Profile" on the daily chart.  The volume profile shows the market volume by price and not by time.  Should the bull flag fail or breakdown then the "High Volume Node" at 2,316 might be a legitimate target in my opinion with the proper risk management, trade management, and position sizing/money management. 

Keep in mind 2,316 target is not a "prediction".  It is too early to target that now in my opinion.  What I am doing is looking ahead and preparing a possible trade plan, based on what I see "today".  Any and all of my views can change without notice. 


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Source: www.scottpluschau.blogspot.com/2012/04/nasdaq-100-bounces-off-support.html