Trend Lines and Emini Basing Pattern

The Emini closed down 14.50 points today and the news all around is bad. We’re now down 18% from the October high. But there are signs of strength.

I am not suggesting that the Emini will rally in a straight line up from here. The markets are shut on Monday and this will give the “man in the street” more time to worry about how badly his portfolio is doing. He’ll probably decide to dump and run, giving the professionals good buying opportunities on Tuesday and Wednesday.

Then at some point we should get a short covering rally. But this will not last and we will come back to test the lows of Friday and early next week. Once we’ve done that and everyone is convinced that the markets will fall further, then we’ll start to rally.

I’m sticking my neck out by painting this possible scenario.

Anyway, on to the signs of strength:

• Volume Climax yesterday followed by Stopping Volume today on the Dow, S&P500, NASDAQ and Russell.
• The adjusted Trading Index (TRIN) was +14 today, showing net buying despite the indices being down – a bullish divergence.
• Bond market rallying and the Emini valuation against Bonds is very attractive now.

Remember, trade what you see, not what you think.

Good luck with your Emini trading.

Possible support at long term Emini trend line. The weekly Emini chart below shows a long term trend line I've added by hand. It connects the April 2005, October 2005 and July 2006 lows. You can read more about the bar coloring and auto-trend lines here.

Long Term Emini Trend Line

The best sign that this trend line will act as support is to see confirming volume patterns. We usually see exhaustion or climax volume followed by a low volume test of the lows.

At 3.2 million contracts traded, today's Emini volume was no doubt high. But was it enough to signal exhaustion volume? The chart below shows the daily Emini volume with the Better Volume Indicator added.

Emini and Exhaustion Volume

Update on the Better TRIN Indicator system. We closed out the long trade after the close on Tuesday for a loss of 21 points. All part of the game with system trading.

Good luck with your Emini trading.

Emini consolidating between 2 trend lines. We closed up 12.75 points at 1,420.50 today. Both range and volume were relatively small at 13.50 points and 1.5 million contracts respectively.

Emini Trend Lines: Triangle Consolidation

The 81 minute Emini chart above shows the triangle consolidation, with resistance at 1,435 and support at 1,415. The trend lines are drawn automatically using TradeStation EasyLanguage. The Emini bars are colored red in an uptrend, green in a downtrend and white when in consolidation.

Above the 1,435 level we also have the gap left over from the 4 January decline. If we get above 1,435 the next resistance point will be this gap between 1,443 and 1,449.

My TRIN indicator oscillator is still trending up and the Better TRIN System is still holding a long position entered at 1,411. Good luck with your Emini trading.

Emini trend line consolidation. The Emini closed down 4.25 points at 1,485.25 Friday on very light volume. The Emini has now consolidated between the upper and lower trend lines. Which way will it break?

Emini Trend Line Consolidation (daily bars)

The chart above has the trend lines drawn automatically by TradeStation. Breaks above a falling trend line are colored red and breaks below a rising trend line are colored green. When the Emini consolidates between rising and falling trend lines the bars are colored white – a typical triangle consolidation if you like. We now have resistance at 1,520 and support at 1,470, last Friday's break away gap level.

Bonds Trend Line Consolidation (daily bars)

The chart above shows the Bond market is in the same position as the Emini - consolidating between trend lines. In addition I've marked what the Bond market was doing 20 trading days ago with the vertical blue line.

The Bond market tends to lead the Emini with turning points having a delay of 20 days typically. This article on Bond market analysis describes the phenomenon and more Bond market examples are shown here.

The Bond market topped out just over 20 days ago, tested that extreme level and then fell away sharply. I am not suggesting that the Emini will do exactly the same, but the direction over the next week may follow the Bond market – down. In addition:

• The 135 minute cycle is down
• TRIN, Put-Call Ratio and Smart Money oscillators have turned down
• Commitment of Traders Oscillator near over-bought
• US Dollar versus Yen has weakened
• Crude oil near record highs
• 1,475 to 1,485 gap looks like getting filled

Good luck with your trading.

Trend Lines Consolidation Pattern

The Emini closed down 3.75 points at 1,508.50 on Monday. The chart above shows a triangle consolidation pattern is now forming. We have a descending trend line creating an upper boundary and a rising trend line making a lower boundary. The last bar on the chart has turned white, signaling this consolidation pattern.

All the trend lines on the chart are drawn automatically using some fancy TradeStation EasyLanguage code. The bars are colored red for an uptrend, green for a down trend (none on this chart) and white for consolidation. Note that the trend lines have been signaling an uptrend for the duration of this chart.

The Emini Composite Trend peaked 3 days ago and continues down. It is reading -52 on a scale of -100 to +100. Tomorrow's CPI announcement may see us break out of this consolidation pattern.

The Emini closed down 7.00 points at 1,448.75 on Wednesday. We got the expected downward break today. Range was above average at 13.50 points and so was volume at 1.2 million contracts traded.

The 1,458 level again proved to be resistance and was in fact the high for the day. It looks like the gap created from last February's fall won't be closed for the time being, as we failed to hit the 1,460 low from 26 February 2007.

Trend Lines

The chart above shows how the rising trend line provided support at 1,444.50 for today's downward move. This trend line will probably be important going forward. Any downward trend line breaks on heavy volume will signal lower Emini prices.

The Emini closed down 0.75 points at 1,426.75 on Monday. Today was an inside day with low volume and so far support at 1,422 is holding. Take a look at the chart below that shows the rising trend line started on 11 October last year.

Trend Lines

Auto trend lines

As I've mentioned before, I'm a big fan of TradeStation EasyLanguage and what you can do automatically on charts. The pivot points and trend lines are drawn on the chart above using some custom, but simple, code. The pivot point lows are shown as green dots and the rising trend lines are green. We've now had 4 points that connect this rising trend line and bounces off it over the last couple of days.

The pivot point highs are shown as red dots and down trend lines are red. Resistance is shown by an almost horizontal down trend line above 1,440. The pattern looks like a rising wedge with the up trend line and horizontal resistance line – and wedge patterns can break out either way!

The bar coloring is based on trend direction. Red bars are in a rising trend, green bars in a falling trend and white bars are undecided. Undecided means that the price action falls above the up trend line but below the down trend line. So effectively, white bars show indecision and lead to breakouts.

And still waiting for upswing

My current analysis points towards an upswing in the Emini, however, I've held this position for the last week with no significant movement upwards. Other commentators are saying that the market is waiting for the Fed meeting and public statements – I'm sure they're right.

Friday's action did see climactic selling at the beginning of the day and the Emini finding support at 1,423 and then 1,422 later that day. Monday's test of 1,422 was at significantly lower volume than Friday which suggests that the bears have run out of steam on the downside. I will remain bullish unless 1,420 is broken on high volume.

The Emini closed up 6.50 points at 1,431.00 on Thursday. My bullish read of the market has paid off this week – over the last 2 days the Emini low to high range has been almost 24 points. New high closes on the NASDAQ and Dow, but once again my analysis of the market is not as bullish as the media and market commentaries. Check out the Emini trend line chart below – haven't seen a double cross pattern like this in a long time.

Emini Trend Lines

Double trend lines cross

The Emini met resistance right where the two trend lines cross at 1,436. The trend lines are automatically plotted using TradeStation EasyLanguage – so no 20/20 hindsight. Up trend lines are colored green with green pivot points. Down trend lines are colored red with red pivot points.

I use an automatic algorithm to color the bar red for uptrend and green for downtrend. When the market is undecided and between rising and falling trend lines (triangle pattern) the bars are painted white. Interesting to note that the current trend is down using this method.

Uncertain rally

Here are the factors that don't give me confidence in the current rally:

• Profit taking during the afternoon saw the market drop almost 6 points
• Stopping pattern – new high but with higher volume, smaller range than yesterday
• Weak adjusted Trading Index (TRIN) reading of only +13
• Approaching cycle high on 135 minute (3 bars per day) time frame
• Semiconductor index closed down – usually a market leader
• High volume churn on Google and Apple, market leading NASDAQ stocks (Google pattern was a "Get Out" gap up high churn pattern)

Decided to take profits and stay out of the market until after the long weekend.

Amazing sometimes how precisely the market reacts to trend lines. The Emini closed up 5.0 points at 1,388.50 on Tuesday. The low was put in today on high volume as anticipated yesterday. Are we still in an uptrend?

Emini Trend Lines

The Emini gapped down at the open, 2.25 points below yesterday's close and 1.50 points below yesterday's low. Professionals took advantage of panic selling by the non-professionals and entered the market with large volume.  Yesterday I mentioned that the low had not been seen because there was no significant buying volume – well that is exactly what we got this morning.  The low for the day was 1,380.00 and the market eventually rose to a high of 1,390.50 and closed at 1,388.50.  Range for the day was average at 10.50 points and volume was above average at 1.5 million contracts traded.

Auto-Trend Lines

Classic Larry Williams Oops pattern at the open with a gap down and professional buying stopping any significant decline.  The chart above shows my auto-trend lines.  Sometimes it's freaky how precise the turn points are.  The Emini reversed exactly at 1,380.00 just where the trend line says it should. And don't forget, these trend lines are not plotted after the fact – they are generated by TradeStation code and know well in advance.

Which direction now?

All trend oscillators show a down trending market.  Today's bounce was professionals taking advantage of panic selling by amateurs.  I expect to see the market bounce a little further, maybe retrace to the 50% point around 1,395.00. If we get any panic buying and a gap open though – look out for the market to churn and start to reverse again.

Trend line bounce today. The Emini closed down 8.25 points at 1,384.75 on Friday. Three trend indicators have now turned down but the market bounced on a rising trend line. Was this the break we are looking for?

Trend Lines

The Emini has risen strongly over the last couple of weeks, so it was no surprise that we finally got a downside break. The market opened down 2 points, managed a small rally hitting a high of 1,392.25 and then dropped strongly to hit a low of 1,381.00.

Six touch points …

At this point, the Emini bounced on the rising trend line we have been talking about since 3 October. The chart above shows this rising trend line starting on 11 September and which now has six touch points! As we’ve said before, the more touch points the more significant the line. Any break of this line on large volume would indicate a definite change in trend. Anyway, the market rose after this and the Emini closed 3.75 points off the low at 1384.75.

Today's range was 11.25 points and volume 1.2 million contracts. Although this was a down trend day, with range and volume both above average, range and volume were not so large as to indicate panic. In addition, the TRIN reading (as I calculate it) was negative but not strongly so. I wouldn’t be surprised to see a bounce on Monday with the smart money taking advantage of the non-professionals and their decision making over the weekend.

As usual on Friday we also got the release of the Commitment of Traders data. This has continued to show the professionals selling into the rally this week. Commercial short interest has fallen from -6.3% to -7.7% over the week. Check out previous posts to see how I calculate this useful market sentiment data.

Trend indicators turn down

Lastly, 3 of my 4 trend oscillators have now turned down:

• Trading Index (TRIN) oscillator
• Secret #2 oscillator, based on the open and close prices
• Secret #3 oscillator, based on smart money

You can read more about these on previous posts using the category headings on the right-hand side.

Do a Google search for trend line to find out more.