Mar 092012

We pushed lower this week as predicted, but went through my support projections by a good margin before heading back higher again.  Finding a bottom on the 6th at around the 1332.75 area on the S&P Emini chart.

Like most analysts, I get into trouble understating. It is safe that way.  We had just gotten so beat up by bulls any time we probed lower, I decided to play it safe.  Anyway, the important part here is that the bears did get some traction before the buying came in, so beware "they" (the bears)  lurk in the shadows going forward.

In the meantime, the still robust bulls have pushed us almost back to new highs; 1367 area as I write.   The Russell futures still lag however, and it is typically good for small/mid-caps to lead a bit. Double tops can be nice (from an opportunity standpoint).

Understanding how smaller capitalization stocks function can tell us a bit about the lead/lag factor on small caps.  The square root theory (method of measuring volatility) says,  that stocks move by the square root of their price.  So if you move the square root by a factor of 1,  in a $100 stock that is to move to $121 (from 10 squared to 11 squared)  A $4 stock moving by the same factor goes from $4 to $9 (2 squared to 3 squared).  If you add these kinds of factors with a small float for normal volume, high beta and a good technical entry, you might just need to hold on to your hat- lol.

Oh... back to square roots....   I did not have exact data for the Russell, but a screen of micro caps showed an average price of  around $11, while the S&P 500 component stocks have an average of $44.   So, by applying the same math, a $1 move in square of the average price of the S&P component stocks is (Sqrt(44) + 1) Squared or about $58.  For the microcaps, we'd move to (Sqrt(11)+1) Squared or around $18.5. So the microcaps would make a 69% move, while the S&P moved 32%.

If you didn't follow that, don't worry about it.  It is a long winded way of saying small caps should move more than big caps (not that I am accusing myself of being long winded :-).

OK, well, that was a fun math exercise. What that really means is I think the Russell will need to go higher for the S&P to truly make new headway, and the Russell is just now toying with the Feb 1st level (after having a strong and quick rally this AM).

Speaking of this AM (3/9/12), we had a strong non-farm payroll report this AM which pushed things higher. This is the kind of day, daytraders live for, cause if you really know what is happening, you can do very well, very fast.

So, what does all this have to do with next week?  Who knows- lol, but I am thinking we might try lower again.  After all, we have had nothing but good reports for weeks and the market struggled.  And, who benefits the most from an (supposedly) expanding economy, but small caps?  Anyway, something smells a bit funny so I remain cautious on the upward excursion into new territory.

Of course this supposes a miracle does not happen in Europe over the weekend- or something like that. So, being near recent highs on the Emini S&P futures of 1371.50 or so, I would propose a little double top action is in order.  The nice thing about being so close to  the high on a friday, is a short trade is relatively low risk, and you can hop back on if the signs of a resumption of trend are there.

Remember, from last week, I mentioned the 1429 area on the monthly chart is key, so that remains a possibility. If we break higher, I think we can go there.

To the downside, of course last week's low of  1332 or so, on the futures is key, and I am already seeing some selling start off as I write, with one hour to go into the weekend.

Something worth noting today was the net volume ran up 70,000 contracts today, made a high in price and then sold off and watched the volume plummet back down to near neutral (see chart below).  That is not exactly what you like to see following a "good" (non-farms payroll) report. Further, "ya don't see that very often."

So, bulls beware.





You may or not be aware also, of the following.  I tweet under the title @MarketTraderRob.  You can see these tweets in the bottom right margin of the blog.  But, it will not refresh automatically- so if you want them in real time sign up on twitter.

One reason I urge for you to sign up, if for no other reason, is the daily targets I put out (nailed the S&P Emini today to the tick :-)  I recently did a (re)study on these levels, which are often 10 points away or so, depending on conditions.  These levels ran between 77 and 94% correct depending on the conditions. So, it is worth following/taking a look at (even though it is free).

On top of that, I am constantly in a research mode, and have developed in recent months some of the most powerful stuff/research I have ever done in over 20 years of doing this.  It is amazing how you can look at something you think you know (or had seen it all) and then suddenly one day you see it all in a new light (after all markets only go up or down, how complicated can it be, right?)

A couple more things before I go.  This double top we are forming projects lower to the 1271 area (I stated resistance areas already).  That is a little bit bigger structure than I am thinking for the coming week, so something a little bit more relevant are the virgin points I am seeing at 1356.75, 1345.25 and 1336.5.  All of those happened this week in the strong 30 point rally we had off the lows.  Outside that zone, I have another at the 1322.25 area.

Breaking that 1345 area is likely to go further down.  If that 1357 to 1353 breaks, lower would be expected there also.  Above that is the home of happy bulls.

That's all for now




 Leave a Reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

− six = 3

Commodity Futures Trading and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.