Luna $ Ticks

August 27, 2008

Cloning

Filed under: Trading SPX SPY — moontrader @ 3:31 pm

Because of its fractal structure, the market is constantly cloning itself on different levels: the same patterns you see on intraday charts are valid for broader time frames like daily or weekly charts. Most of charting techniques are based on these patterns: Elliott Waves, Candlesticks, Figures (Head and Shoulders, Rising Wedges, Flags, Channels, etc…). However, most of these techniques take into consideration mainly the price element – even if, for instance, a well formed Head and Shoulders implies symmetry in time. I’ve mentioned before how difficult is to find a study based on time, so one of this blog’s main objectives is to delve into the field of time.

The departure point – and main source – of my research is Chistopher Carolan’s Spiral Calendar. He made a great discovery – no doubt about that – but he presented in the book what I deem to be a quite faulty technique deriving from his findings. In any case, I do recommend reading his book (which is out-of-print, but the link above points to used books on Amazon, where you can get it as cheap as $10).

Going back to the main point of this post, the market is constantly cloning itself – especially around trend reversal points – and, if you find out the originating element, sometimes you can predict what is about to happen in the near future. Once you find this important element, you have to check if that pattern fits inside the current context, in order to create an edge for a trade.

In a previous post entitled New Date Proportions, I talked about September 2nd, 2008 and a possible top on this date. We’re approaching that date and, considering today’s action, it seems that yesterday we had a short term bottom. If September 2nd will be a top corresponding to the top of May 19th, then there’s a chance that yesterday’s bottom corresponds to that of May 9th. Here’s what I’m talking about:

If that’s the case, we shouldn’t revisit yesterday’s bottom of 126.58 (SPY) before September 2nd. If we do, then this scenario is invalidated and we have to re-assess the situation.

There’s indeed a couple of other aspects in recent action calling for a rally in the next days, which would be in agreement with a new top on or around September 2nd.

First of all, today we closed above DMA 25×5 (@127.41), DMA 3×3 (@128.34) and on top of DMA 7×5 (@128.66) [It’s now 4:20PM ET and SPY is trading around 128.63]. Needless to say that Stochastics and MACD are both in positive territory. The trendline shown above was touched today, but not breached. However, we traded a good chunck of today close to it. Now, market sentiment, our friend VIX:

Notice the two bluish trendlines. They’re not exactly a wedge, but then again, VIX is not exactly a stock. Anyway, the bottom yesterday in SPY sent VIX up to kiss the upper trendline and bounced back down. We might be heading now to the lower one. When we reach it – if we do – we would be in between the levels that I mentioned before. I marked with green circles where the numbers 18.63 and 17.56 come from: the two close bottoms following May 19th. In an ideal world (and maybe we live in that world, afterall) the reversal would happen in that range. However, if we do come below 16.09, then the market would have rallied way too far and we would need to re-asses the situation. As a target, I have SPY 132.55.

Just to be in the game, at the beginning of the day I opened a tiny position, buying SPY calls, September, 130. Yesterday I said I wouldn’t do so, but I couldn’t resist. As many say:

“Trading is like shaving: if you don’t do it everyday, you’re a bum.”

Advertisements

Leave a Comment »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

%d bloggers like this: