July 30, 2014

Anatomy of Trading the NASDAQ – Part 3 – The Triangle Pattern

There are two ways to be fooled.  One is to believe what isn’t true; the other is to refuse to believe what is true.” – Soren Kierkegaard (1813 -1855)

 This quote from Kierkegaard truly fit trading action in the NDX on Wednesday.   I would like to continue the discussion on the anatomy of trading the NASDAQ.  This week I have been breaking down the ongoing Elliott Wave pattern forming in the NDX and the NQ.  2014-07-29-TOS_CHARTS.png_NDX_HOURLY_Take a look at the chart to the right to see how the count was left after Tuesday.  It was apparent after Monday’s trade that the NDX had completed 5-wave down off of last Thursday’s high signaling the likely beginning of a correction.  The initial decline remains best labeled as wave A of a developing A-B-C corrective pattern, where waves A and C are declines and wave B an intervening rally.  After Tuesday’s trade it appeared that the B-wave intervening rally was also complete with the C-wave decline beginning.  This however, was not the case as Wednesday’s early trade took the index to a high at 3989.  Now before you declare Elliott Wave useless a closer look at what the possibilities should be noted.

expandingtriangleElliotticians understand that there are several possible outcomes a corrective pattern can take.  A common pattern found within corrections is a triangle.  While most often the pattern itself will form the entire correction it is not uncommon to find it forming wave “B” within the larger A-B-C structure.  This appears to be the case within the NDX.  The triangle pattern will ultimately form a group of 3-wave patterns that would be labeled a-b-c-d-e and basically form either a contracting or expanding wedge, hence the triangle shape.  There are Fibonacci relationships between the individual waves, but that is better saved for a more in depth discussion on Elliott Wave.  More importantly to keep in mind is that upon the completion of the triangle pattern the market will thrust out of the pattern in the opposite direction.  In the current example that would be down since wave “B” is an intervening rally and once complete a “C” wave decline would be expected.  The updated chart now shows what I believe is the most probable course the NDX will take over the next few trading sessions.


deceptionOn Monday I also discussed briefly the nature of “B” waves as being deceptive and erratic.  That continues to fit the current trading within the NDX.  Wednesday’s action saw an increase in volume as well as buyers after TWTR reported what some analysts are now calling skewed numbers.  Nonetheless the algorithmic traders took it too heart and jumped in buying not only TWTR, but most other social media stocks such as LNKD and FB.  LNKD reports tomorrow after the close and I would expect there would be a more pronounced reaction based on current reactions thus far.  The biotech sector continues to get a boost from the titans within such as AMGN and BIIB.

speedoflightIt also appeared that a larger HFT player improved their connection speed swooping in to capture greater volume before other computers could cancel standing orders.  Rather amusing to watch until the FED announcement when all hell broke loose and it appeared that the algorithmic computers had gone mad.

Here’s what I said via SKYPE to another trading buddy: “If you want to see what will happen when algorithms go crazy and the markets melt up and down — check out today’s reaction to the FED announcement — it is ludicrous and almost scary to see how HFT traders are allowed to route orders — it’s insane — the coders of these algorithms have no clue or have no concept of reality — there has to be massive amounts of money being lost left and right in the last 20 minutes.  When the shit hits the fan for real — when there is a concrete reason to get out of the market — there will be no way out — the systems will collapse under the flood of algorithms hitting bids with market orders.  I’m almost sure of this — from what I’m witnessing it will be hell — now that the shorts have covered in a mad dash scramble — let’s see what the real market will do — I think they will move back in and crush the kids — I mean crush them — but who am I — just a gnat on the elephants ass — trying to hang on during the stampede — what a ride.”

tradersAll of this is very typical “B” wave trading action – however it is getting amplified due to the increased number of algorithms being employed to capture everything imaginable.  As a trader that also uses algorithms to generate trading signals, I came a stark realization today that it could get very messy out there very quickly and when that happens there will be no way out.  I’m not saying this is what is coming in the next week or month or six months, but it will come and when it does most will be caught off guard most likely due to their total lack of experience or as Kierkegaard so aptly put it over 150 years ago, “There are two ways to be fooled.  One is to believe what isn’t true, the other is to refuse to believe what is true.”

Ok, so what are the possibilities moving forward this week in the NDX?  If the pattern underway were forming a triangle expectations would be for wave “d” to drop the index back toward 3960 to 3965 before rallying again to form wave “e”.  A point to remember is that often either wave “d” or “e” can jump the channel line and the NDX is famous for over shooting targets before turning on its heels and moving in the opposite direction.  Most common is for the “e” wave to extend beyond the channel line and in this case the direction would be up.  Remember, what is more important is that upon the completion of a triangle pattern the resulting move is a thrust out of the triangle in the direction of the larger pattern and in the NDX that would be down.

Three-keysSteer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.