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Friday, March 28, 2008

 

trade rules


a good set from globetrader, linked by dr. steenbarger. examining my 3/14 UYG position this way:

i entered too early, very arguably, by jumping on the bear stearns bailout -- and did so for capitulative sentiment reasons rather than technical action. dangerous and very probably unwarranted. but now, being in the position, this is the picture.

You go short a test of a lower high in a downtrend

moreover, there can be little question in the longer timeframe that UYG is in a downtrend. as such, the fail at 35.5 to breach the high of 37 from february 27 could have been a sell.

this i am treating instead as a special case in consideration of the capitulative bottom of january 22/23, which was retested (successfully, imo) in mid-march. this is not a trend trade as globetrader would define it; instead, it is a bottom call. the rule on consolidation trading is appropriate, with the directions reversed.

Markets go from equilibrium to equilibrium. Usually the range covered in a trend phase stays constant within limits. If you know the contract you trade, you know when it has reached an extreme of a move. (such as january 22/23 -- gm) ... That does not mean you blindly take a counter trend trade, but if you see Resistance not taken out and say a Double [Bottom] forms (such as mid-march -- gm) or even better price is unable to retest the former [Low], then you go [long] with a Stop [below] the [lows] in case the trend resumes.


that low is 25.

Sellers are in control as long as the market is making Lower Highs

back to the short-term picture -- the powerful positive rebound ran 10.5 points off the low at 25. when price failed to swing to a higher high (marked 'LH', lower high) one could have sold in the 33s.

a normal retracement would be 33% to 66% back, or the window from 32 to 28.5. a move below 28.5 would indicate a possible retest of 25, so a sell stop should be placed at 28.5. this could easily happen on a gap fill to 27, retest of 25 or fail to new daily lows.

for QLD, a similar picture can be drawn, with the expected retracement window from 70.3 to 66.1, below whcih should be a sell stop. again, a lower high sell on this timeframe came late wednesday around 73 -- particularly in light of a momentum divergence.

in summary, sellers are in control on the short-term picture, driving what has been to date a normal consolidation. it remains to be seen if my bottom call stands up -- if it will, this consolidation will hopefully stay normal and provoke gains next week.

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