Pivotal percentage pullback retracements
to date have ranged from 50 to 62-66 percent as seen this week. In the case of INDU and RUT 100%
'round-turn' retracements developed that also touched key lower moving average envelopes
"you had some bullish trade recs ahead of this week that could have gotten me into some positions but iam generally scared to try to pick bottoms. how do you see this?
I know that we're taught in 'trading 101' so to speak to not try to anticipate a bottom. You know the foolishness of trying to 'catch' a falling knife! Wait for others to 'confirm' that selling pressure has let up. Of course that's also to WAIT for call premiums to shoot up like gangbusters!
Having been in touch with a number of professional traders in my New York/Wall Street days (especially my mentor Mark Weinstein) I noticed that many successful trading pros found that a good time to bet against the crowd was buying from panicked sellers near what turned out to be the lows for a move.
However, there's a big catch here! You need to have trading parameters that are EXCELLENT at suggesting where the high AND low extremes might come in. Areas where a close by exiting 'stop' point will liquidate the trade with a small loss. The trade concepts and indicators that have worked for me (and mostly learned from 'trading wizard' Mark Weinstein) include:
1.) A close look at bullish index (or stock) positions in buying Index retracements of 50% in strong Markets, and retracements of 62-66% in moderately weaker indexes and to a full 'round-turn' 100% retracement in weak indices (e.g., the Dow 30 and the Russell 2000 currently).
2.) Especially related to the idea of buying 100% retracements back to prior key lows (i.e., a double bottom) is that the idea of a 'lower-risk' trade also is seen if the retracement also takes prices back to where the index has bottomed before in terms of a lower moving average envelope value. A 21-day moving average envelope that's 'contained' prior bottoms.
If the aforementioned #1 and/or #2 conditions are met, the idea of hoping to buy into a low is given greater credence IF:
3.) The 13-day Relative Strength Index is at or near an oversold extreme.
4.) The idea of possible trend reversal is ALSO helped by bullish/bearish trader sentiment that suggests overly optimistic bullishness, overly pessimistic bearishness.
I quote the various trade suggestions taken from my Saturday 7/25/43 Index Wrap and followed by the chart in question as of the 7/30/15 Close today. The chart highlights will show the aforementioned trading concepts in action.
OEX: "I'm bullish on OEX in the 915 area, but that area should be the low unless the Index is going to retest 900." LOW (to date, this week): 914.6
The idea of buying in the 915 area made the most sense to me of any of my other trade suggestions. I reasoned that 915 would be strong technical support at the 2/3rds or 66% retracement. 915 was where repeated resistance was seen prior to the most recent OEX rally to the 945 area and my upper (resistance) trading band aka moving average envelope line. What was resistance, once exceeded, 'becoming' new support. 915 looked like low risk trade entry where a stop could be placed not far below entry; e.g., at 914/913.5.
INDU: "A 100% retracement in the Dow would take INDU back to the area of prior lows in the 17500 area and if reached, this area down to 17430 has favorable risk to reward on bullish strategies. Controlling risk is the key by setting an exit point at just under 17400." LOW (this week): 17399
Well, I didn't mean by 'just under' seventeen thousand four hundred, to make your exit at any INDU print that occurred at 17399. ONE Dow point is not even a 'rounding' error. 30 points on the Dow maybe!
INDU touched 17400 at the lows to date this week and thereby reached a deeply oversold level that was 2 percent UNDER the Dow's 21-day moving average. Moreover, trade 'confirmation' was helped by the 13-day Relative Strength Index dipping into its oversold zone. From this we could anticipate a good-sized trading rebound at a minimum; e.g., back up to its 21-day moving avg.
COMP: "A bullish buy into dips into the 62-66 percent retracement zone at 5027-5011, with an exit below 5000, offers a trade look." LOW (to date, this week): 5025.6
A dip to the Fibonacci 61.8% (rounded: 62%), extending to the 66% retracement level often talked about historically by legendary trader/theorist W.D. Gann, makes for a good bet for a turnaround in the trend. We can't forget that the Market remains in a long-term bull trend and the strongest indexes will rarely see a retracement (of the last upswing) more than 50%; sometimes in the Composite, into the 62-66% zone.
Bullish sentiment dipped considerably ahead of the lows of this week and helped 'confirm' a possible upside reversal suggested by expectations of its percent retracement. My 'CPRATIO' indicator seen below, as is true of most if not all 'sentiment' indicators, is a LEADING indicator; i.e., bullishness is often LOW ahead of upside trend reversals by 1 to 5 trading days.
NDX: "I favor looking at bullish plays on pullbacks to the 4500 area knowing a sell off in that area could extend to at or near 4450. I wouldn't stay in with Closes below 4400." LOW (to date, this week): 4506.19 (and AT support implied by NDX's 21-day moving average).
I can't of course say that NDX fell TO or under 4500 support but the Index did get into this area, so I include my above statement from what I was suggesting trade wise ahead of this week.
The key factor is that NDX was the strongest of the strong in terms of the various major indices. And as is the case with such indexes (and stocks), it's common for retracements of not more than half/50% of the prior upswing.
The dip to a retracement of around half was also accompanied by support/buying interest being found at or in the area of the 21-day moving average. Trade above/below the 21-day moving average in the major INDICES helps define the near-term trend as up or down. This average isn't the 'one size fits all' for individual stocks, unlike the use of the 50-day average to guage stock trends.
I also anticipated a low in QQQ in the 110 area for the same reasons as suggested for the underlying NDX.
RUT: "In the 1220-1215 area, if reached, RUT seems like a 'low-risk' buy adhering to a 1205 exit anticipating a potential rebound to near 1260."
LOW (to date, this week): 1205.19
IF adhering to an exit point at exactly 1205 even, anyone buying RUT calls or selling RUT puts, etc. in the 1220-1215 zone 'squeaked' through such a trade without exiting on the dip to below the stated risk point.
How much upside there is for RUT in the near to intermediate-term, is another question. RUT has rebounded to the 1230 area only at this point. Still, some further upside potential remains, such as to the 1245-1247 area. Adding to a favorable rating on the trade is the past tendency for substantial rebounds when RUT gets 'fully' oversold in terms of its 13-day Relative Strength Index (RSI).
GOOD TRADING SUCCESS!