It came as no surprise that the stock market sold off today. Pundits have been predicting for several weeks the rally was extended and events in the Middle East have telegraphed anything but stability in the oil markets. What caught me a little by surprise was the extent of today’s sell-off; it’s not like what’s happening in Bahrain and Libya came as a complete shock to the western world. But as a wise man (wiseguy?) once said – it’s always something.
The Dow tumbled 178 points after falling more than 200 points, to close at 12,212.79. The S&P 500 Index lost 2.05% and the Nasdaq Composite fell 2.74%. Soaring oil prices smacked the Dow Transports hard and that average fell 3.83%. Treasury yields plummeted in a flight to safety and oil, not surprisingly, was up again.
Any ETF with the word “inverse” or “Bear” in its name was a winner. CZI (3x levered China Bear) – up 10.60%. SQQQ (levered short Nasdaq-100 Index) – up 8.87%. SMN (levered short basic materials) – up 6.95%. It’s worth noting that all are still below both their 50-day and 200-day SMAs. UCO, the levered crude oil ETF, rose 8.69%. Please click on the symbols for details.
Two weeks ago I discussed a trade entry for USO, the oil ETF. On February 7th and 8th I described the Multiple Days Down (MDD) strategy issuing a buy signal. An initial entry was made at 36.66 and the second entry (scaled-in) the next day at 36.64, for an average price of 36.65. The exit came Friday the 18th on the close above its 5-day SMA of 36.36, for a loss of 0.8%. Sure wish the trade held on through today (today’s close was at 38.62) but hey – a loss of less than 1% before transaction costs is acceptable. Not all trades are winners and of course, past performance does not guarantee future losses will be so benign!
Part of the nature of technical analysis is that many of the techniques are fractal. “Fractal” means a pattern that is repeated at every scale, so for example, a Fibonacci price retracement analysis may be used with weekly, daily, monthly, or intraday charts. The principles are the same regardless of the time scale.
A good example played out today. Sharp price moves in either direction sometimes act as a setup for a gatekeeper pattern. Developed by my AAPTA colleague Dave Landry, the Gatekeeper is a reversal pattern that looks to identify when a market, stock, or ETF has completed a “last gasp” higher or lower, a.k.a., a top or a bottom.
The Gatekeeper incorporates some of the elements of Fibonacci analysis I’ve described in previous blog entries. While the Gatekeeper can be used for buys/bottoming action, I’ve found it more effective for short sales/topping action. Please keep in mind that you don’t have to actually sell short when using the Gatekeeper; you can apply the technique to an ETF and buy its inverse when the short signal is triggered, e.g., track DIA for a short and buy DOG when it’s triggered.
Here are the short sale rules for the Gatekeeper:
1) The stock/market/ETF must make at least a new two-month high.
2) This should be followed by a sharp sell-off.
3) After the sell-off, the stock/market/ETF should retrace to at least 61.8% and ideally 78.6% of its sell-off. In general, this should occur within 10 – 11 days.
4) Look to place a short entry at the low of the bar in Rule #3.
5) If filled, place a protective stop above the high of Rule #4.
6) Use your choice of profit exit.
Because the Gatekeeper relies on Fibonacci, it is fractal and it works within multiple time periods. Below is a five-minute chart of SSO, the levered short S&P 500 Index ETF. Please click on the chart to make it full-screen:
Using the methodology described above but substituting “bars” for “days” we see how a short entry on SSO could have been entered. Rather than shorting SSO you could have gone long SDS, the levered short S&P 500 Index ETF.
The S&P 500 Index made a multi-month high last week (1S). Today’s opening bell sent the index down sharply. Ten minutes after the open SSO made a short-term bottom (2S) and it rallied over the next eight bars. Note the candlestick at 3S – that’s a “long upper shadow” bar (a candlestick with an upper wick that has a length equal to or greater than the range of the candlestick) and its bearish. Note too that the candlestick stopped dead on the 61.8% Fibonacci retracement level.
Now there was no way of knowing at this point whether SSO would keep moving higher. A tick or two below the low at 3S therefore becomes your short entry price. Once short your buy stop is a tick or two above the high (4S). Had SSO kept rising up towards the 78.6% retracement level, the low of that higher bar would have become the new 3S.
The low at 3S is 54.07 so a short entry could have been made at 54. You would use your choice of exit on the trade but as of today’s close you had a 2.7% gain.
Was today just a pullback within the trend, a.k.a., a Trend Knockout, or is it the start of a deeper pullback? The global situation is very fluid so whether we keep going down or today turns out to be a buying opportunity is something we will know in the fullness of time.