Why “Respect Until Broken” Should Be Your Mantra

Like an athlete sidelined to the press box while recuperating from injury, one
of the things the time off has done for me as I’ve phased back into monitoring
the market is a renewed focus of market pace. While I believe that active
traders can often “feel” market pace better by swimming in the current rather
than watching it from the shore, a periodic move to the sidelines can indeed
renew perspective and focus, especially when it comes to leveraging off the
larger time frames, even when trading intraday.

So what have the last few weeks told us? First, the market pace which we
discussed before our break, in terms of the larger hourly and daily time frames
ruling the roost, have clearly continued throughout recent days. In particular,
the hourly downtrend support has been a picture perfect guide. Second, the
action on the hourly ES chart as noted below has further confirmed the critical
importance that trend supports (uptrend or downtrend) always overrule
overbought or oversold momentum indicators, such as our stochastic indicators.

It amazes me that many folks continue to subscribe to ridiculous “buy (or not
sell) sub-20 band/sell (or not buy) above-80 band” theories, which has merely
served to keep traders out of profitable trades in the direction of the
prevailing trend or have them place premature reversal entries. Sure, the
reward/risk ratio diminishes the further a trend is in place, and stochastics do
serve a critical role as we discussed ad infinitum during the live trading
session of the

E-Mini video. Yet our “respect until broken” mantra over the past few years
will remains the ticket in terms of avoiding the unprofitable or sideline
application of momentum indicators.

With respect to current action, the daily charts on both major indices are
working on bearish cup formations with their respective 15-MA downtrend supports
as the premise for the current short trends. The morning downdraft has reflected
some initial follow through to the bearish formations, with ES momentarily
probing south of the critical 870 level, which has held on multiple tests since
the December lows, and NQ stopping short of a test of 1000. Given the daily and
hourly charts and their recent pace, the logical higher-probability setups would
appear to be downtrend continuation triggers should they set up on pullbacks,
with stops on any reversal to the north.