October 5, 2014

The Return of Volatility and 2-way Trade, But for How Long?

bondpitSorry I’ve been away from writing any updates for several weeks. I’ve been ultra busy getting the Logical Signals Trade Room up and running. The members thus far are an outstanding group already contributing across the board from trading indicators, patterns and products, to computer software and hardware. We are ready to move on to phase two of membership. Now that a core group has been established we have a few additional spots for other traders that may have an interest. Phase two, though will be somewhat more involved in that prospective members will get a chance to talk in more detail on their trading goals, experiences and expectations with me and possibly other members before joining. At this early stage it is important to continue to steer the room in a direction that favors all of the members. Should you have an interest please check out the updated “Invitation to My Trade Room” under the Trade Room tab and get in contact with me? Presently we have 10 additional spots open before closing this room until next year.

The past two weeks in the markets have seen a return of volatility and strong 2-way trade. Just what the doctor ordered in terms of trading opportunities being plentiful. My last post was FED announcement day. The day that saw the DJIA and SPX run to new all time high on what can only be thought of as irrational exuberance. Why? Because if was directly off of those all time historic highs in the DJIA and SPX and a new 14 year high for the NDX that the long awaited corrections began; corrections that lasted longer than a day and a half and took the markets down by more than a percent or two. Corrections that brought the bears out of hibernation with hope for a productive decline and gave the exhausted bull a chance to step aside and get some well-deserved rest. Corrections that seemed to turn the tide of the markets from a buy the dip mentality to a sell the rally mentality or so it seemed.

As the broader indexes pulled into some of the strongest oversold reading on Wednesday and Thursday of last week it became apparent that some sort of a bounce higher was due. Dare I say a counter trend rally – well sort of I thought the possibility for a much larger decline was in the cards, and the reality is that might still be the case. But, it does seem like someone went into the barn and kicked that poor half dead bull to its feet and shocked some life back into it. The counter trend bounce picked up some serious steam on Friday after the Bureau of Labor Statistics released the latest employment numbers – its official the unemployment rate has finally dropped below 6% being reported at 5.9%. Ah, memories of 1999 to 2000 when the government proclaimed the country had reached for all intents and purposes 100% employment. We all know what happened shortly thereafter – if you don’t take a look at the monthly chart of the NASDAQ 100 below.


Granted we are staring down a much different set of circumstances than at the turn of the century. Nonetheless, the result will prove to be the same in intensity bringing once again the global economies to their collective knees. Don’t be fooled that “this time it is different” – because yes it is different very different – at the turn of the century the U.S. government had a large federal surplus. Fourteen years later we are confronting the largest and still growing federal deficit under the guise of “kicking the can down the road” for perpetuity. That whether we want to say it out loud or believe is not realistic or possible. But I digress and will save the bulk of this conversation for another time.

Back at the ranch –

The rallies off of Thursday’s lows have been stronger than I expected, which raises the potential that Thursday’s lows completed a small 3-wave decline and again setting the stage for a run back to previous highs with a stronger probability that additional new highs are on the way. The DJIA, SPX, and NDX have all rallied back 50% or more of their respective declines off of the post FED highs and as just pointed out all of the broader indexes have in place clean 3-wave declines. (Hourly charts included)

NASDAQ100_Hourly_1042014Although, at this juncture we need to leave open the possibility that the markets remain in the process of tracing out larger corrections with additional downside still yet to come the probabilities will weaken somewhat on a break with follow through above the following levels – all basis the respective December futures – 4045.75 in the NQ, 17, 015 in the YM, and 1977 in the ES. These levels represent Fibonacci .618% retracements off of the declines thus far and if broken with follow through would decrease the probability that an additional leg down was on the way prior to the markets retesting and breaking to new highs.DJIA_YM_Hourly_10042014






showmethemoneyThe US dollar continues to rally against the Euro, but in the process the Euro has reached extreme oversold levels suggesting a bounce higher is due to relieve some of the downside pressure. Should this occur look for gold to follow suit and also rally. Gold has now dropped to within $5 of the 1180 support level. A level that if broke with follow through would drop support (stronger) down to $1155 and a break there would likely lead to break below $1000 as next support would not be come in until $946.


For Monday direction traders may look to the US dollar where if the dollar begins to weaken with the Euro and Gold rallying along with treasuries, the equity markets are likely to rally as well. Quick turns in either direction are back on the forefront leaving day trading as my preferred vehicle. Again, breaks above resistance levels given above would likely provide stronger buying opportunities with pull backs being shallow and quick. If, though resistance holds and the US dollar continues to gain ground with gold and bonds heading lower, the equity markets should follow suit and provide greater opportunities to the downside versus rallies.


keyinsandTrading 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.


Steer 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.