“Few people are capable of expressing with equanimity options which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.”
“That which is not yet, but ought to be, is more real than that which merely is.”
In the book Market Wizards, money managers and traders like Paul Tudor Jones and Ed Seykota share one common secret:
They are trend followers.
Trend following has been a profitable strategy in up and down markets for many legendary traders.
However, once a persistently smooth trend is disrupted, the subsequent reversion to the mean and accelerated volatility can result in a breakdown of trend following strategies.
Lately, a more and more systematic, mechanical, Algomatic market has created intense swings of historic velocity.
The last few weeks exemplifies the problem with trend trading.
Going into year-end, the SPX had six moves of more than 1% in two weeks, three of which were more than 2%.
On December 24, the market was only open for half a day and the Dow dropped 653 points or 2.9% for the worst Christmas Eve performance ever. That set a new low for the move from an all-time high just 3 months ago.
Then on December 26, the Dow soared more than 1050 points, scoring its biggest one day point gain in history.
It was the largest daily percentage gain for markets since March 2009.
On January 3, the Dow sank 660 points.
On January 4, the Dow surged 747 points.
One day it's down on the Fed, the next it's up on the Fed.
One day it’s down on China, the next it's up on China.
Yada yada yada.
This violent market offers great opportunities for the agile trader who leaves their opinions at home.
But clearly, you’re going to need technical strategies and timing tools to opportunistically capitalize on these moves.
Trend trading can create large gains that help you remain in the game, but with it, the illusion that the market is an easy game — often just at the wrong time.
Consequently, when the trend bends, a substantial amount of gains are given back and further money is lost trying to trade the new trend — volatility — either without realizing the nature of the new trendlessness, or not having the proper tools to swing trade.
So the big challenge with trend following involves identifying when the trend bends — the beginning of a trend and the end of a trend.
The benefits of anticipating when a trend is likely to change are huge.
As legendary trader Jesse Livermore said, “The thing to do is to determine the line of least resistance at the moment of trading; and what he (the speculator) should wait for is the right moment when the line defines itself, because that is the signal to get busy. Tape reading was an important part of the game, so was beginning at the right time.”
So the question is how to determine the right TIME and the beginning.
The Daily Market Report anticipates and highlights when trends on all time frames, the short, intermediate and long term, are likely to see a turning point in advance.
As legendary trader Bernard Baruch said, “Successful speculation is about anticipating the anticipators.”
Many traders use trendlines and Fibonacci retracements and an array of indicators to try to anticipate turning points.
But how do you know which level is going to hold?
How often have you stayed in too long only to see profits wiped out?
How long have you been waiting for a certain price level only to miss out on a boat load of profit?
If you know what cycles are in play and how to combine time with price, you are more likely to know when what levels in the market are important.
Time & Price are the Lennon & McCartney of swing trading.
In order to determine the trend, I developed the 3 Day Chart Method and the 3 Week Chart Method which combine Time & Price.
Let’s take a look at a daily SPX from October to see what I mean.
The 3 Day Chart turns down on 3 consecutive lower daily lows.
It is the behavior following a turn in the 3 Day Chart that presents the short-term trend. The SPX 3 Day Chart turned down on October 8th (A) immediately following a test of the Sept 21 high. The immediate plunge below the 50 day m.a. on October 10th was a blaring siren of a change in trend.
Interestingly, October 10 ties to the bull market high in 2007 and the bear market low in 2002.
These anniversary dates are important to keep track of to reveal the nature of the cycle at hand.
From the action of the 3 Day Chart, I developed my Plus One/Minus Two and Minus One/Plus Two Method to reveal the line of least resistance.
When the 3 Day Chart is pointing down, the first two consecutive daily highs puts an item in Minus One (the 3 Day Chart is pointing down)/Minus Two (two consecutive higher daily highs) position.
After the SPX 3 Day Chart turned down on October 10, two consecutive higher daily highs were traced out on October 17. (B)
The market waterfalled from the setup.
From the late October low, the SPX turned its 3 Day Chart back up on November 2. (C)
When the trend is down a turn back up in the 3 Day Chart defines a high soon in terms of both time and price.
The SPX found an important high 3 days later on November 7 coincident with a test of the October 17 high.
Then the SPX immediately turned its 3 Day Chart back down with 3 consecutive lower lows confirming the line of least resistance was down. (D)
A test of the late October lows elicited another turn up of the 3 Day Chart on November 28. (E) Once again, the SPX found a high 3 days later.
Here’s where the art of tape reading comes into play. Notice that on December 10, the 3 Day Chart turned down once again. (F)
Not because the index had carved out 3 consecutive lower daily lows but because the prior 3 Day Chart ‘circled’ low from late October had been violated.
Then the SPX left two consecutive higher daily highs. Consequently, the index went into the Minus One/Plus Two Sell position again. (G) This is because the 3 Day Chart is pointing down followed by two consecutive higher daily highs.
That left the SPX vulnerable for a break of the key 2600 region that had acted as support throughout 2018.
When 2600 snapped, the Christmas Crash unfolded.
Following the SPX’s December 26 Key Reversal Day, the 3 Day Chart turned up.
The index went into the daily Plus One/Minus Two buy position on Thursday as it showed two consecutive daily lower lows (H) with the 3 Day Chart pointing up. (I)
There was no sign that the market would explode on Friday — EXCEPT this pattern.
Let’s take a look at a weekly chart from January 2016 to present to see what messages it delivered.
The 3 Week Chart was pointing down going into the week of January 18, 2016. (A)
The 3 Week Chart turned up on the week of February 9, 2016 (B) and bullishly stayed up. The price action remained constructive.
Now look what happened the first time the 3 Week Chart turned back down on the week of June 27, 2016. (C)
The turndown was met with a strong reversal which saw the 3 Week Chart turn back up 3 weeks later. (D)
From there, the 3 Week Chart turned back down on the week of August 29 (E) which perpetuated a downtrend into the election.
Following the election the 3 Week Chart immediately turned back up. (F)
From there the 3 Week Chart remained pointing up for 10 months when it turned down on the week of August 21, 2017. (G)
This was the first turn down of the 3 Week Chart in 10 months.
The first time the market does something it hasn’t done in a low time, it’s talking.
That low defined the catapult that launched a blow-out move into late January 2018.
Notice that every turndown of the Weekly Swing Chart (H) from late August 2017 into late January 2018 defined a low underpinning the idea that a runaway move was in progress.
Remarkably, despite the volatility breakout last February, the 3 Week Chart remained pointing up implying a possible trip back to the highs.
The 3 Week Chart turned down for the first time in 2018 on the week of December 17. (I)
This led to the Christmas Crash.
Again, the first time the market does something it hasn’t done in a long time bears watching.
The price where the 3 Week Chart turned down was 2583.22.
That level will likely be critical going forward — the market has a memory.
Interestingly, 2583 ties to the weekly closing low throughout most all of 2018 at 2588 — until that level was breached in December.
So, last week the Weekly SPX Swing Chart turned back up.
Since the index closed near the highs of the week, the presumption is a second weekly higher high will play out this week—probably on Monday.
If so, this will put the SPX in the WEEKLY Minus One/Plus Two sell position.
This is occurring at our key 2520-2530 level which ties to last February’s waterfall low.
So a sell pattern based on my method is on the table but it will be the BEHAVIOR if we trade above last weeks highs that will tell the tale of the tape.
There is reason to suspect that the behavior will be constructive based on the number of Selling Climaxes flagged last week and Friday’s Follow Through Day.
One reason we anticipated a Red October was because early October was 180 days/degrees from the important early April low.
Likewise, we have been pointing to a turning point for January 3 for months because it is 90 days/degrees from the October 3 high and 270 days/degrees from the early April low.
Despite what looked like pivot to new lows on January 2, the market exploded on January 3.
Likewise,the large range SPX Key Reversal Day on December 26 followed a test of a 50% retrace of the 2016 to 2018 advance. This occurred in sync with the index being 180 days/degrees from the late June higher low which perpetuated the advance to new all-time highs in late June.
So here again, you had a low in late December that was roughly 90 degrees from high and 180 degrees from a major pivot in late June.
These natural geometric divisions of the circle of the year underpin W.D. Gann’s methodology revolving around time being more important than price.
That puts the January 29 primary top into the knife down into February 9 on the cycle radar.
If the behavior from this 2530 level is constructive, it may put the SPX on a trajectory to be magnetized higher into late January/early February.
As you can see, combining the daily Plus One/Minus Two buy pattern on Thursday with the timing sequence due near January 3 created a super trading opportunity.
Unlock your own technical analysis with the benefit of the timing and price patterns I have used successfully for over 30 years.
It’s an active traders market. The Daily Market Report will give you the significant edge you need to profit in this new reign of volatility.
Don’t believe the tripe you here that the market can’t be timed.
On Friday subscribers sold the balance of their LULU swing position initiated on Wednesday for a 5.26 gain.
Note that LULU went into the daily Plus One/Minus Two buy position on Wednesday.
Friday morning’s report flagged the buy setups in TWLO and MDB noting the Plus One/Minus Two buy setups in each.
Below see the 10 min charts from both showing the explosive continuation moves following Opening Range Breakouts on Friday.