Tuesday 27 March 2007

Emini Daily Update: Major Update

This is the first article in over a week. I have to be honest with you, I have been short since 16 March and was totally taken by surprise by the recent rally following the Fed announcement. As a result I have been sitting on a near 30% drawdown. In situations like these my objectivity is compromised and since readers of this website rely to some extent on my analysis I did not feel like posting any new articles. Apologies to all subscribers, I'm sure you understand.

My biggest fault trading is entering and reversing positions too early. This was certainly the case in the last two weeks. In some ways these experiences are good, as they force you to address your weaknesses and perfect the art of trading. However, I made excellent money shorting the first two legs down of the February correction and it hurts to have given a lot of this back. All may not be lost though. Below are a large number of charts - I hope they make it through to email subscribers.

The Emini chart below shows the recent action and the dilemma traders now face. The February correction left a gap between 1,452 and 1,460. We have come back up to test the 1,452 level and been turned back so far. Are we in the middle of a bullish continuation pattern that will see us bridge the gap (1,460) and test the February highs (1,475) OR will the rally fail and signal a more severe correction is under way?

Emini Gap Image

The following analysis shows:

  1. Bearish divergences in my major trend oscillators (Trading Index TRIN Oscillator, Open to Close Oscillator and Smart Money Oscillator). Remember all three of these oscillators use different market measures (TRIN data, open to close to open moves, direction of end of day trading) and are therefore non-correlated.
  2. Commitment of Traders data is very bullish but may be reaching an overbought level. To be honest this is the most bullish of all my indicators.
  3. The Emini is overvalued compared to Bond prices. In addition, turning points in the Emini typically follow Bond prices with a lag of 20 days - and we are now approaching one of those downward turning points.
  4. A "Complete" pattern (breakout -> pullback -> exhaustion) is about to form on Emini 45 minute bars with an "Exhaustion" pattern on daily bars. However, we are still a couple of days away from similar exhaustion patterns forming on 81 and 135 minute charts.
  5. The last top formed around the 1,452 level was on low volume and created a "No Demand" pattern.
  6. The upward trend line from the low at 1,375 was broken today at the 1,440 level.
  7. There may be some "window dressing" going on as the first quarter ends this week. Next week sees the beginning of Easter and markets tend to be strong going into holidays. Seasonally, mid April is a weak period for the markets, some analysts have suggested US citizens are cashing in to pay taxes (15 April).
  8. Lastly, the US$ is weakening against the Yen (and other currencies) indicating overseas investors moving money out of US markets.

In summary, I continue to be bearish but we may still be a couple of days away from a downward turning point. If you are long, move stops up. Check out the charts below.

Emini Trading Index TRIN Oscillator Image

The chart above shows bearish divergence on the Trading Index (TRIN) Oscillator.

Emini Open Close Oscillator Image

The chart above again shows bearish divergence, but this time on the Open-to-Close Oscillator.

Emini Smart Money Image

The chart above again shows bearish divergence, but this time on the Smart Money Oscillator.

Emini Commitment of Traders Image

The chart above shows the Commitment of Traders. The raw reading is very bullish at +3.3%. The COT Oscillator is moving up from oversold to overbought.

Emini Bonds Valuation Image

The chart above shows Emini valuation against Bonds (SPY vs. iShares 20+Yr Bonds). This oscillator has reached overbought territory but it can remain overbought for prolonged periods of time.

Emini Bonds Timing Image

The chart above shows 30 Year Treasury Bonds price action over the last 6 months. I have found Emini turning points tend to lag the Bond market by approximately 20 days. We are coming up to a slow rounded turning point in Bonds 20 days ago.

Emini John Ehlers Hilbert Sine Wave Image

Lastly, the chart above shows John Ehlers Hilbert Sine Wave about to make a "Complete" pattern. I know this is a complex chart and apologize for that. Trend moves typically follow a pattern of breakout, pull back and finish with exhaustion. We're about to get the exhaustion cross over on 45 minute bars.

Good luck Emini trading over the next few days.

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