the most hated rally ever

This has been dubbed “the most hated rally ever”. Here are my thoughts on what happened late last week and what I am looking for this week.

It is difficult to think of Friday as a real trading day as it was a holiday and there was only half the normal volume. I felt tired from the craziness last week and I took Friday off. On Thursday however I felt I had a decent read of what was likely to happen from having watched the DAX opening at 7am local time and the next couple of hours into the US open. This was the day I wrote run it up run it down (I describe the Berlusconi resignation rally followed by insane plunge caused by an overnight change in sentiment). I published that 2 hours after the US market opened and all the gains of the morning had evaporated, or so it seemed.

The Asian and DAX opening levels were retested once in their sessions but held. The European market jumped 25 handles before US Opening. I noticed that at 9am local time (4am EST) the bond auction had completed successfully and the markets rallied as a result. When it got to some congestion from yesterday at prev vpoc it stalled. The Euros had handed the baton over to the US in as good a shape as they could manage. It was up the the Americans now to do what had to be done next.

There is a saying by a great trader I know who says “they had to take it down before they could take it up”. Another I know says “when they get to their desks they have to make money today so they have to make it move. They are not going to let people who moved their market to keep it. They bring it back to where it closed and then carry on”.

I wrote on twitter 30 mins before US opening:

https://twitter.com/#!/atoast2toast/status/134631722645073920

I felt it was looking a bit toppy (making a triple top). I thought the American traders would take the decent overnight showing and they would drive it down and maybe later get back to the highs. To me it would seem like the perfect opportunity.

(I have labeled the 10 handle move that immediately followed the bond auction news. This level proved to be important later as it provided support – notice how buys orders for the overnight lows were left alone, if they had been hit it could have gotten real ugly – and that did not seem to be part of the plan).

As it happens I took the opening swing as strong for the buyers however the US session dropped 20 handles in the first hour (3 large red bars to the right of 14:00 which is 9 AM EST). When I saw it happening it was violent The cascade and the huge spikes down made it impossible to be trying to take any position, even though I had a plan to buy the DAX early in the day and I reversed pre US market.

I had closed my short only to watch my original trade carry on in its direction. My goal is frequently to have a good position in pre-market and try to let some of that run if my pre market call is right. This way I can make some money and hopefully benefit once the US opens (after the Floor Traders fade the opening orders and the robots drive the market the desired direction before a strange reversal on rumours later in the day). I took only a fraction of the moves that I could see coming. I need to work more on pushing winners and letting a runner do the job it was created for.

The lesson was that even if you have a good read there is no guarantee you will make money. The other lesson is not to try trading in the chop of the first hour, wait for a direction and a setup for a pullback or reversal … easy to say.

I am not a big fan of making market predictions and anyway why would anyone listen. I have realised that after watching the day to day stuff for a long time I am getting used to the games on the micro level. The macro level was being ignored the longer I stared at the flicker of each individual tick.

“Trading is simple but not easy”. I traded well initially with bare charts using the key areas as support and resistance. I got volume charts to assist me in knowing if a move was real.

This chart shows the market on a wider time frame. The hated up move over the last 30 days keeps going but is reaching a critical point soon – the third test of the 1275 region in 3 weeks. The daily range increased every time it made a move up and the daily volume did on the first two attempts. Sustained buying and an increase in range are moving it to that level again. It will look like a triple top to traders, similar to what I said above about the intraday indices but this time it is Daily candles. It is also at the Value Area High for the last 30 days. If it takes this level out without bad news then expect this resitance to become support. Large volume is required to take this back near 1300. (what is it doing up there with all this crisis looming? the Euro itself is the problem).

The 2 lines in red are prices that I saw provide support/resistance many times over the course of intraday moves. 1186 and the 1220-21-22 area was ridiculous as eminiwizard was talking about, one example here. It would seem like someone was determined to be the buyer of last resort at these levels when it all became too crashy to touch. It will be interesting to see what level becomes the magical no mans land now.

One last thought: the market has gapped up tonight after the cheap shot rally on Friday. As one trader I know says “they will pay for this on the way down”. I think he means that here is no market structure in place for that day to sustain a drop in a down move.

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