Weak Retracement

by Faces in Cabs, Zentrader

This low volume Monday appeared to end on a whimper, as the major indices ended at their lows of the day. Combined with the large fade in the afternoon, that’s a clue to me that the equities may be going down as early as Tuesday, so I wanted to put up a quick post to quickly warn Zentraders.

It is OpEx week, and that certainly adds another dynamic to a pull back. Often, OpEx is characterized by some type of max pain event – where price moves against the great number of participants (e.g., the crowd). I am not sure if that is occurring here, but I mention it for newer traders and in case anyone starts wondering (by Thursday) why the markets have pulled back after such an explosive Friday. Let’s look again at the INDU and its two day market volume.

Dow Retracement (the last 2 days are lower than average volume)

I am watching the market futures closely this evening. For the /ES (the S&P e-mini), I see 1927, 1916, and 1900 as inflection price points below to keep an eye on (I have already note resistance levels above in my weekend post). Any move downward will require larger volume, so I am also concurrently looking for that type of downside confirmation. Here are some brief market notes:

• Low volume days continue to be associated with up days (we are retracing up)
• Higher volume continues to be associated with selling days (no distribution since Thursday)
• Watch out for a higher volume (above average) down day to begin as early as Tuesday
• Watch out for a gap down in bond yields Tuesday morning (a bad start for bulls, imo)
• A fade in the Nikkei (tonight) may impact US market futures (down) to start this process

I am already short the IWM from 114.18 today. It is my only position, but a rather large one (lots and lots of front month 113 puts). It closed up nearly 60% today. Why did I enter this trade? Well, the small cap’s had an extreme price move upward (1.7%) on Monday when most areas in the market were merely up 0.5%. That was a signal to me that the IWM had moved too far too fast. I basically shorted the first fib line on the chart below. I will probably cover Tuesday (because I am admittedly trading a volatile front month contract during OpEx week).

IWM Short Trade (over exuberance and then a fade into the Monday close)

My weekend take on the bond markets (see my Sunday post on ZenTrader) and their mentioned deflationary effect upon the equities is why I am taking this trade. Equities will certainly feel some pressure if the bond yields gap down Tuesday morning (which it looks like they can do). I will probably cover Tuesday morning (unless things really get going). And I certainly could be wrong, but I am very comfortable as my trade is already going as expected. I originally intended scalp this trade, but it keep working better and better through the day so I am holding overnight.

I would emphasize that this post is a warning (not a prediction). I am NOT here to have other traders believe anything about the markets or for me to prove something to someone. I simply share my own trading, as I can. And like anyone I trade what I see, and I am quickly seeing some signs (under the surface) that the fast reversal from Friday is being quickly challenged.

Trade them, as you see them. I wish you “Good Luck” with your own trading (Luck = Preparation + Opportunity + a little Risk).