Stock, Option and Futures Trading

Stock, Option and Futures Trading

Top or Not?

June 15, 2011

So is this the top or not? Everyone is saying it is but if we look at the 60 minute chart on the TF you can see this move down is still contained in what we call “normal market structure”. It does not matter how big waves are as long as they are contained within structure meaning; if you look at the chart this is the 2nd major wave down from the top and even though it might seem big the 2nd wave is always relative to the 1st wave and since the 1st wave was big it is no suprise the 2nd wave would be big as well. In fact, the 2nd wave is on average more than 150% of wave 1.

We noted on this blog how this leg could be faster than normal due to the Fib timing and it has been fast without any type of correction along the way. Tomorrow if we break the 796.2 low we would label the wave extended and waves can be extended especailly since the daily and weekly charts are extended to the high side before this correction.

As a rule we always count the waves from a trend high corrective until they turn impulsive and so far we are still in corrective type structure. This can change but the value in doing this is it will force us to stay on the right side of the market until proven wrong. Highs are easy to spot after the fact but if you are trading real money there has to be rules in place or you will always be trading on emotion.

Counting them corrective does not mean you cannot trade in the correction but you must know it is a correction when trading inside of the correction and this is true on day trading time frames as well. Our rule is that we can only take counter trend trades on the 60 minute chart using the 10 minute for our entry. We do NOT trade counter trend on a 3 minute chart, why? Because there is not enough time or price to make it worth it. The risk will always be higher than the reward trading counter trend on small charts. These are the trades that you have 1 to 2 points of profit quickly and then the market reverses fast and the end result is you get stopped PLUS you miss the trend trade where the money is really made.

The bigger picture is still up even though not many people will still say that. Sure, this could be a major top but it is still too soon to say technically the market is broken. Our rule is that it is the last bullish pattern that FAILS it what starts the trend change and so far we are only 3/4 into the bullish pattern that could ultimately fail.

I know that people like to pick tops and bottoms it is a real ego booster but in reality even the people who pick the tops and bottoms do not necessarily make money from the prediction. Since there are multiple waves inside the “Turn Pattern” it is easy to get faked out on what you think is so obvious. This is why we trade it wave to wave always looking at what all the waves are equaling for the bigger pattern.

We could have a 4 month correction from here and still be technically bullish. This is why when people ask “What direction is the trend” it is only half of the real question. The real question is asking what is the trend on WHAT time frame. Look at a Monthly and Weekly chart and you can see the fall we have had so far is not even equal to the last correction. This correction so far is smaller. Yes, it could turn into something bigger to the downside but we need a move up from around here that fails to really say that will occur with confidence.

Going into the last part of this week know that the shorts might get harder to hold and we could be getting ready for a short squeeze. This would be normal and there is always a chance the market gets outside of normal trading and we fall off a cliff into the weekend but following the rules we would say if the TF breaks the 796.20 the odds of finding bigger support are higher. This does not mean you cannot trade short but we would do it with less contracts and only take the major wave trades.

PS. Some stocks got to far extended to the upside the last few months so it is normal for those stocks to fall further in this correction. Knowing this can slow down the emotion of “Everything is tanking and this IS the top”. The best thing to do is retrace the last wave up on the weekly and daily charts and look for yourself if we are really destroying the structure of each stock that you hold.

PSS. I am not a bull or a bear I am a trader so I am following the rules of the chart. TF could pull up to 810 and drop to 746 and still be in a position to make a new high. Most traders will have more success trading wave to wave rather than forcing a big bet on big direction for no real reason.

800 is weekly resistance and if 768.7 holds we could see it by Friday.

Happy Trading,


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