Signs That A Break Is Upon Us

Yesterday morning's action was once again muted. The chart pattern clearly showed the market, while moving in a direction (up), was very difficult, if not impossible, to play from an HVT standpoint.

As we all know, we are looking to trade in the direction of the trend. So yesterday would have had us looking to be mostly on the buy side. However, what we did not get was fluid price action with which to establish a long. Every pullback kept pulling back, never pausing at the 20-period EMA (red line). Rather, the action meandered from the upper to the lower Bollinger Band. Look at the chart below. Each green line shows a healthy 3+ point move in the S&Ps. However, I know from experience that the 20 EMA is typically a stalling point, or more importantly, a place to establish a long or short. 

That did not happen yesterday. Rather, the price action simply traded through the 20 EMA, then repeated the process. There were very few times where it pulled back to the 20 EMA, paused, then resumed the immediate trend. That is what constitutes HVT. Secondly, the trades that did conform, rarely had more than a 2 point thrust higher in the S&Ps.

So, without repeating myself, we are in a range, period. Until we break, be patient. It is not the end of the world. This is the reality of being a professional trader. There are, however, as mentioned in Tuesday's column, signs that a break is upon us. As I have said, I believe it will be to the downside, bur regardless of direction, it will loosen things up for HVT.

1. Implied Volatility continues to contract. The year low is around 15, although the recent reading coincides with the November low. The volatility could continue to contract, but with some stiff resistance in the S&Ps, I suspect IV will perk up in the days to come.

    2.    Technically, the S&Ps are at a critical juncture. For the sake of repeating what has already been stated clearly by Derrik Hobbs in his Tuesday column, it is make or break time.

    3.    Fibonacci Time Window. The chart below shows two potential reasons for a decent move out of this price congestion:

•          Technically you could argue that the S&Ps are forming a wedge/triangle that will break.
•         The 1.38 extension from the Dec. 2 high to the March low gives us a Fib time reading of April 16-17. I have also read others who put this out to the 21st. A Fib time reading only indicates a potential trend change.  If this date plays out, the trend change, although a subjective conclusion, would be lower.

So, we are setting the stage for some good trading.  Kick back, be patient and go for the throat when the market tips its hand.

Update:

As of Wednesday morning the futures are bid up pretty nice, although a couple of points off the Globex highs. The 905 level will prove critical. If broken to the upside, look for 916 as a target in coming sessions. However, now that the "news" is out on INTC and MSFT, I would not be surprised to see the market fade this opening. Naturally, you will want to be on the lookout for opening gap trades (HVT), although follow through to the downside vs. a resumption of the trend is possible.

* indicates a level that is more significant

As always, feel free to send me your comments and questions.