E=MC2 TRADING

7:00 am  - Price = 851

Yesterday, we held 850 early, and price worked its way to 870 as expected. The move up developed with deep pullbacks, so the various trades canceled each other out.

Once we started down, 850 broke, and this created many nice shorts.

If you were looking at intraday structure, however, a trend day down was NOT in force, and the big picture was in a very explosive responsive buying area near the low of the bracket.

There fore, no surprise to see a rally unfold, and once 850 broke, 870 was easily reached again.

This created a daily reversal up day for today.

Expect an attempt at upside follow thru above 870.

The pullback this morning to 850 is right inline with a normal retrace after the large afternoon move up, so as long as 850 area holds, expect upside to continue, and if not, then we could be going back to the lows, but an attempt at upside follow thru is our primary focus to start the day.

7:00 am  - Price = 837

Yesterday was a tough day trading.  This happens from time to time, is part of the game, and good trading always lies around the corner.

The important thing about yesterday is to highlight how E=MC2 is a mechanical approach that always ties into the big picture first and foremost.

If you were aware of the big picture, perhaps you could have avoided some losing trades yesterday, but even more important you can use this knowledge going forward to really stay aggressive when the mechanical signals of E=MC2 lines up with good big picture conditions in the future.

Lets examine yesterday more closely, which leads to an opening view for today.

Looking at the attached chart, you can see how yesterday stayed within the overnight range all day.  We highlighted 870 –850 before the market opened as key big picture levels. So lets take a look at 4 highlighted developments yesterday.

(1)   The market gapped down, but not below 850. This created a trading trend down at key support, and a few small losing short trades. Finally when the market rolled over and started down (good trading), it was only to test these lows, so all short trades after this test also were small losses. In many cases losing trades are avoided in poor big picture conditions (key S/R levsls) by the way the method looks for setups, but on this day this did not happen

(2)   Next, the first move of the leg up was missed because our entry pattern didn’t form.  Again, this is frustrating, but in the long run this has no material effect on trading results, so always keep this in mind.  The series of long trades that followed got things back to even, but in the end the probe the key 870 level was nothing more than a push to take out overnight highs.

(3)   By the time the trading trend turned back down, you should have senses this was nothing more than a range day between our established 870-850 consolidation area, and price action began to tighten ever further within this range.

(4)   The best trading conditions occurred near the end of the day. A downside break from a tight intraday coil allowed price to easily work its way to the low of the range.

So again, yesterday is over, and looking back is a good exercise to understand how E =MC2 works with the big picture.

We start today with the trading trend down below 850. Therefore, watch for the 850 consolidation low to provide resistance on any rally, and if we move back above 850 expect a move back to 870 as a start.

Again, we are testing key big picture bracket lows, so it is tough to know how strongly we will follow thru to the downside at the open.

The only thing you can do, is see if trend day down conditions form early, or if not, then a stick with the downside for as long as the Volume ratio maintains a down bias, and then look for any signs of this changing as a sign that we may be rallying higher after the open.

The possibility of a downside breakout, and/or a strong reversal from this area should allow for good trading conditions to unfold.  Also, as stated yesterday, if we continue to tighten here inside of the last few weeks of price action, this will lead to an eventual very strong breakout in the big picture in the weeks ahead.

8:00 am  - Price = 855

Technically this is an important week for the market.  Two weeks ago, we had a up reversal on the weekly charts (middle) Since then we failed to follow thru higher, but haven’t completely broken down either.  We are back near the lows.

Is this a big picture consolidation for another push down, or do the lows provide another springboard for a reversal week up, which will have a much higher probability of following thru than before?

If we happen to sit here in a narrow range all week, than a breakout next week will likely tell us which way we are heading.

We open right at the responsive buying 850 area with the trading trend down.

If the market builds time below 850, then we simply could be following thru to new lows.

Our pullback to swing resistance is now the 870 area (see Fridays intraday chart) which lines up nicely with the overnight highs, so if our trading trend turns up, we will take long trades in this big picture responsive buying area, and know that 870 must be taken out if we are going to move higher.

Many scenarios can unfold this week, and we will certainly know more as today unfolds, and the days ahead unfold relative to the weekly chart.

Our first clue will be how the market reacts to a probe below 850, and then a first sign of a potential reversal up week can only take place if the market can move and hold above 870.

8:15 am  - Price = 891

As mentioned yesterday, we were working lower into a very strong responsive buying area and therefore prepared for a potential “nice rally later in the session.”

The panic move down at lunchtime set up a classic blow off bottom, and eventual reversal.  The moves provided great trading down and up, and using the big picture as a guide it was easy to stay aggressive to the long side all afternoon.

It also shows that some of the best trading occurs in the lunch hour, and I’m always surprised by those who wont look to trade during this time.  Price reaction to the big picture is always the key to trading, and key developments (Breakouts. Reversals, tests/failures, etc,.) can happen at any time.

Today we start with the trading trend down, but need to be wary.  Sure the market can retrace a bit of yesterdays gains, but expectation is for follow thru to the upside on the daily charts (913 area)….

The logical pullback to swing point is 880, so if we get down there, and the trading trend turns up, you can look for an eventual test of yesterdays highs.

If the 880 area cant hold, then 860 is next, but again if we cant even make it to 880, that is a stronger case for an eventual test of yesterdays highs.

Watch for early volume extremes to see if a pullback from yesterday’s gains is likely to start the day.  If not, we will have to wait for the trading trend to turn up, before looking to the long side…

8:00 am  - Price = 850

Very tough trading at the open.  Our trading trend starts in total chop, and big picture price is at a critical juncture.

These last two days will determine how the week closes.  There is still time for a rally to keep this a neutral week in an overall consolidation area preparing for an eventual big picture rally.

We  had our weekly reversal higher, and one of the scenarios was a few weeks of consolidation before another up week, which almost assures a rally.

On the other hand, the trend is clearly down, so perhaps we are getting ready to blow thru the lows again?

Our first sign will be to see how our trading trend develops.  The overnight range (chop- chart, right) will need to be penetrated and hold either up or down.

The 860 top coincides nicely with a consolidation low, so there can be no upside until the area is taken out.

If we start lower, this is such a strong responsive buying area (chart, left), that we have to watch for any failures (volume extremes back to upsides, C3 sell trades that cant follow thru, etc.) and actually prepare for a nice rally later in session.

As always keep an eye out for trend days (like yesterday), and don’t fight a trend day if it develops.

Wait and see seems to be the best course of action to start the day today.  There are a variety of big pictures outcomes that can unfold.

Note- Yesterday was a clear trend day down, that provided somewhat tough mechanical trading.  Whenever you gap lower, there’ a strong possibility of a rally to trendline reisistance, so this makes early (with the trend) trades aggressive.

Then there is often a time during trend day where the intraday trading trend briefly turns.  We’ve disucussed over and over and how this is often the perfect time to enter with the bigger picture trend and hold.

But if you don’t, you have to be patient to allow the trading trend to turn back your way later on, and miss a nice part of the move.

Most trend days still do very well mechanically despite these conditions, but every so often (like yesterday) there is also some choppiness thrown into the picture which stunts the expected big gains on the day.

We were looking for the 860 area yesterday if a strong rally didn’t develop at the open.  Then once a trend day kicked in as well (Weak and holding DOW and A/D line), the best way to take advantage of yesterday was to get aboard, and hold.

Again this takes experience, but as you watch these trend days in relation to the big picture over and over again, you should develop the confidence to give this a try.

8:15 am  - Price = 880

We start with the trading trend down, price holding below the 910-895 range, and breaking yesterdays lows.

This sets the path to 860, (middle chart) as long as no strong responsive rally develops right at the open.

We still have to see if a trend day down develops and holds, because this is a strong responsive buying area in general.

Yesterdays trend day failed midday, and resulted in a lot of up and down volatility for the rest of the day.

8:00 am  - Price = 907

After yesterdays daily down day starting from a strong gap up, it does seem like the market wants to probe below the 900 area again.

At this point everything is still just in big picture consolidation mode between 1000-900, so only a true trend day down would sustain price below 900.

The overnight highs around 925 lines up with upper consolidation and is the area that must be taken out to the upside to move higher in the big picture.

Yesterdays lows around 907 is the pullback to swing to hold right at the open if we are going to test below 900 first thing, if not, we may stay in the 925-907 area first and then see what develops.

But we start with the trading trend down, and then everything today will be determined by how price reacts to the 900 area, and/or if it can break above 925 area

6:00 am  - Price = 955

The market is up strongly in the overnight session, but for now all this really means is were bouncing forth between the highs and lows of the 1000-900 bracket, and for now this bounce off the lows is right at the first pullback to swing 960 resistance point inside the bracket (chart, right)

So we will have to clear 960 on the way back to 980 and then 1000.  If not , then we may see the market stall in the 960-925 area for a while.

We also go into our second week observing action on the weekly reversal chart (middle).

There is still the expectation for a bear market rally in the weeks ahead as long as the 900 area holds, so the gap up this morning in an encouraging sign for this scenario and allows us to draw a lower trend line to determine whether to stay with the rally expectations or not.

If a rally does develop, the upper trend line between 1200-1100 is a good target that also aligns with a big picture pullback to swing area.

But this big picture rally off a weekly reversal low scenario has many smaller levels to monitor first.  The 960-925  consolidation area starts off the week, and while it looks like we want to bounce back to 1000 off the 900 lows, we need to see the 960 cleared first to the upside and/or the 925 area hold on any move down.

8:15 am  - Price = 910

Looks like a tough open to trade….The market has dropped significantly over the last 2 says in anticipation of today’s bad economic news.

The 900 bracket low is strong support, so it looks like we start out in chop with a slight bias to the upside based on the bracket low, but it almost looks to be a morning to sit back and see what develops later in the session relative to any attempts to rally above 920 or move lower below 900…

8:00 am  - Price = 945

It looks like the bigger picture consolidation scenario inside the 1000-900 bracket is unfolding.

After being rejected at the top of the 1000 bracket, price seems to be moving back to 900.

There are three layers inside this bracket and price starts out inside the 955-925 consolidation area this morning .

Therefore look for the 935 overnight lows to be broken down to 925, and if that breaks then it’s a clear path back down to 900 area.

As long as the overnight highs around 955 holds (which lines up nicely with the top of the consolidation area, then we are heading lower, unless other breakout, or responsive buying conditions unfold later in the day…