Perfect Head&Shoulder in Dow >> Massive Crash Again

It could just be the steroids though... couldn't it?

FxPetra and Darkstar: Great posts. Hopefully I'll be able structure arguments on those kind of issues one day. I just don't have a clue at the moment.

Cheers

Yup. The euro has been shrugging off bad news ever since it broke through 1.2150. Wave after wave of semi bad news and the market barely budged save for some intraday retracements. A few weeks ago the market was moving lower off those pieces of news but not anymore. There are still a ton of people stuck short euros and will need to cover soon.

Quite a lot of option players expected EUR/USD to be stuck in a range of 1.18/1.19 - 1.25 DNT's. Lets see if those 1.25 barriers get cracked.

Supposedly there seems to be a decoupling taking place between the sovereign debt crisis and the risk assets/currencies including the EUR.

Risks still exist for sure including but not limited to:

1. Further credit downgrades (especially if big country like France, Italy gets cut)
2. Deflation starts to occur signaling anemic/negative eurozone growth
3. How the people continue to respond to the austerity measures, how economic growth is impacted by austerity, how well will the tourist season will be for club med countries.
4. If there is a eurozone wide ban of naked short selling on cds's, bonds etc

Some of the above are contingent upon the sovereign debt crisis fading more and more and markets will start caring about growth differentials and who is going to be closer to raising interest rates. Although that time could be a few weeks, months, who knows.

How have you learned what weight to give to individual pieces of information? I can't comment on the quality of your analysis here, but it looks like the kind of deductions I would like to be able to make one day. What can I do other than listen to news/fundamentals/reporting on orders and participants, and watch their impact? Is there some way of establishing a framework of the importance of each of the above? Anything to read?

These are very much perspective questions; how do I gain the perspective which will allow me to put all the variables together in a way which best fits the reality. I've got a list of books to buy as long as my arm in the hopes of being able to create a personal view of the financial system and all that effects it in to the correct context. I was just wondering if you had any advice, I would be very interested to hear anything you have to say on the subject.

Regards,
Leon

PS. Sorry about this message, it's rushed as I'm in college, I just wanted to get to you before others started cueing with questions.

I have been a student of trading for a few years now. I certainly have much to learn from all of you. When I read posts such as Darkstar's and Petra's I see a level of understanding and knowledge about detailed, market economy variables and workings. It is impressive.

What I do not understand however is the staunchness with which people contend that global/macro changes are implausible. Seems like a forest for the trees kind of vision to me. I mean, sure there are all sorts of things that can be done to stave off "the big one" but when the very instruments used are more of the same policies, debt instrument band aids etc it is simply unsustainable. Wealth production, macro or micro, does not occur by more spending, e.g. backstop, cash infusion from the ECB to the tune of 1 trillion. It is DEBT. Why are people so conditioned to not see that.

What is a better 'indicator', I think, is human nature and history herself. People always contend that "Everything is fine, don't be such a pessimist. That couldn't possibly happen to us." Why? Because now we have space travel or IPods? Or somehow governments are more evolved and honest? (laughable actually)
Markets that are truly free, devoid of machinations(which is what every Central Bank policy in the world is, in actuality), can reflect economic health accurately.
It is folly to ignore basic principles of debt, interest, lessor and lessee. Too many companies and countries are being served wake up calls for not adhering to sound monetary tenets. It is hubris to carry on as though by virtue of living in modern times the status quo on a grand scale is free from change. Every major crisis in history occurred when people were living in 'modern times,' because of course at that moment in time, it was the most modern up until then.

One thing is certain, entropy (2nd law of thermodynamics) disrupts all of our best efforts and nothing is forever. So IMHO a big market dump is far more plausible than not.

There is no book I am aware of that can put together order flow/information flow/market sentiment/liquidity analysys, micro structure analysis in such a way to instantly give you a great leap forward in your trading. Darkstar's book will probably come close. I could probably write a guide too, but I'll just stick with making some comments here and there.

The book that helped me a little bit was the Trading and Exchanges book. But even after reading that you still need to slog it out every day for a few months before you can start making sense of things and formulating a good system.

Yes you can establish a framework for judging certain event importance and impact. Will it be 100% mechanical? It isn't for me, but you can gather some good data watching how the market responds to various news releases, speeches, and other events. Sometimes the market cares about retail sales, other times it doesn't give a hoot. Sometimes the market cares about home price change from month to month, other times it doesn't. Sometimes it cares about consumer confidence, other times it doesn't. Sometimes it cares about CDS spreads, other times it doesn't.

There is so much information out there, news, analysis, that I start putting the information into various categories. I have a category that states if this happens the market will definitively move immediately. Another category states if this happens it can provide a strong bias for the day. Sometimes I deem the information to be absolutely non market moving, so i disregard it. Sometimes I deem the information to be non market moving, but with potential for moving the market, just not on this particular day. Everything happens in context. But bear in mind that I have read thousands of articles on market sentiment as well as economics, monetary policy, etc so there is a lot of subconscious information in my brain.

If I remember correctly back in March the market was highly sensitive to spreads between Greek and German government bonds, but in today's market environment the market doesn't care anymore.

As a general rule I try to assign a certain sensitivity level to pieces of information/news, etc. Sometimes its hard, but look at how the market responds to news, figure out the 'Why' of price action can get you a feel for the market sentiment. Eventually there is only so much research you can do and the rest of the analysis falls on what is your 'feel', your intuition/subconscious understanding of the market.

What works for everyone is different. Depending on what style of trading you want to do, and if you want to figure out why price is doing what it is doing I would recommend this: Keep a daily list of all the 7 major currencies eur, gbp, jpy, chf, aud, nzd, cad, and write down every day why you think price did what it did. Write down everything that you believed generated order flow on that particular day. I'm not talking about moving average crossovers, or bollinger band bounces. Think about who is providing liquidity to whom at various price levels and time of day.

So for example for the eur/usd some of the factors for bullish for today could be:

1. continued short covering from swing traders/longer term players
2. Real money buyers adjusting their allocation to euros from being underweight to more neutral position. (since they were underweight for so many months)
3. Stops tripped above 1.2355
4. Hunters knocked out the 1.2400 barriers and stops above it

For eur/usd bearish you could say:

1. Any Macro related offers who missed out on the huge down move to 1.19 are getting in late now
2. Profit taking on long trades
3. Barrier protection related offers ahead of 1.2400


Things like that, there are more I can add, but you need to figure out how to mold the information and style of trading to fit your own personality.

Thanks a lot for this, it's good to hear/see someone explain their trading as such a fluid thing; this aligns with the market perspective I've come to warm to, and the direction that my reading and planned college studies will be taking me. I'd definitely be a lot further along the road if I had an extended amount of free time to dedicate to trading; time, or lack of it, is probably the biggest problem I face regarding this.

A couple personal questions if I may... this is just me being nosey and you don't have to answer, you've been very helpful already. How long have you been trading, are you full-time, and what's your occupational background? The trend seems to be that most of those succeeding come from professional or successful entrepreneurial backgrounds.

Thanks again,
Leon

There' no H&S there. Looks more likely we are seeing the start of an inverse one - which would signal a continuation of the uptrend.
H&S needs to form over a much longer period. Look at the inverse H&S formed from October 08 to July 09 on the Dow. Now that's H&S. Or look at the ones on Gold. They are much bigger and uglier looking. Your just seeing a few bumps over way too short a time frame.

Joe GX "There' no H&S there. Looks more likely we are seeing the start of an inverse one - which would signal a continuation of the uptrend.
H&S needs to form over a much longer period. Look at the inverse H&S formed from October 08 to July 09 on the Dow. Now that's H&S. Or look at the ones on Gold. They are much bigger and uglier looking. Your just seeing a few bumps over way too short a time frame."

Joe are you even looking at his posted chart? It covers a similar amount of time as the one you suggested. The formation of the left shoulder, head, and beginnings of the right shoulder are all over a 7-8 month period, equivalent to your Oct 08-Jul 09 scenario.

He even highlighted it to make it obvious. Seems pretty reasonable to me...

Anything is possible. Crash or not there is always a degree of probability and that is all needed to create a situation possible. Just like the big conspiracy theory on Dec.2012... not a huge believer however when i think of Nibiru's orbit approaching Earths and the degree of tilt it could create once is passing Earth could be catastrophic.

Anything could happen.

The Niburians need gold at a very high price to get their underlings to mine as much as possible for when they reconnoiteur with them in 2012. So look for gold and silver to go a lot higher.

it's Nibiru & reconnoiter.


anyway, are u a geologist, spy/military, engineer?
or an alien geologist, spy/military, engineer?

the people from Nibiru wont care about gold's price. they just need humans to gather the gold for them.

Heh.

I'm no expert but the posted chart looks more like a double bottom. If the market were to continue down to break the neckline then we would have a head and shoulders and we would be heading down for sure but it hasn't yet. patience grasshopper.

I have a number of theories on the stock market. One is that when people are bearish and they start buying puts the big boys on the other side of the trade buy stocks to minimize the payout for when those options expire. Since today is option expiry day i'm expecting this recent rally to now end. The profits the big boys make will let them repeat the cycle again.

Has anyone noticed how stock markets rally anytime anyone pumps a trillion dollars into the system. The reason for that is that some of it always ends up in stocks. Any bad news then creates another buying opportunity.

But fundamentally there are no pillars holding up the sky. What keeps it up there? How are chinas exports increasing while everyone elses imports are decreasing. Chinas markets dropped 1.8% yesterday and they are too big to ignore nowadays.

don't be someone else's liquidity.

Well all I see is a pretty screwed up and lop sided H&S if you have a really warped imagination. In fact I can also see a very lop sided inverse head and shoulders that is completed if I really try and "fit" one. H&S is not H&S until it is complete. At the moment all I can see is bumps and they don't add up to a head and shoulders and this guy is just scare mongering. However gold is hitting all time highs, the Chinese economy is considered to be slowing by the world bank. Employment is low in the US and Europe and debt is high everywhere. So there is reason to be concerned for sure, but money has and is being pumped into this thing like no tomorrow so my guess is this sucker won't sink yet.
At the moment there are heaps of US shares that have completed perfect inverse head and shoulders patterns and they have broken out upwards - check out Apple and Las Vegas Sands for instance. This would indicate a continuation of the uptrend. Until you see a completed pattern it don't mean Jack.
It's really possible to convince yourself you are seeing into the future when you look at a chart but most times what you think is going to happen really doesn't. And that is not surprising cause none of us have a crystal ball.

Like your thinking

They don't buy stocks that's far too difficult and costly. They pump the indexes which the stocks then follow. The stocks follow the index not the other way around.

when this shot rally in Euro is over we are going to see euro crashing to 0.**** level mAYBE by this year end.....

if it takes the dow also down is a possiblity.......but for now a rally is there in dow untill a couple of months and even if it crashes maybe at the most up to 97** area. ...........

I don't disagree with the fact that the pattern needs to complete itself. However, all of the upward movement currently in the market you are talking about has been achieved on almost NON-EXISTENT volume. The $ being pumped in is governmental/institutional and it is likely a facade. The quadruple witching hour on Friday was a good reason to keep markets up, let options expire useless to erase all the bears.

Scare mongering is a pretty strong phrase. It alludes that the inducer has reason to gain from his tactics. What does a small fry like him gain from scare mongering?
This economy has a consumption orientation with little productivity to support its appetite. From top to bottom, debt is a real problem and we have administration after administration fighting fire with fire by printing more money (which is DEBT creation).
Most serious Economists who are not bought and paid for by the Fed media machine have well documented that we are already in the same realm as the PIIGS (Portugal, Italy, Ireland, and GREECE, if you are unfamiliar with the acronym) financially. It is only going to take a small nudge from one of our nation's creditors (T-Bill purchasers) to send us over the precipice.
I daresay that at this point in the game, many speculators and citizens are operating from what I like to call "delusional optimism." Leprechauns, unicorns, and fairies are their economic/investment strategists....

How about :

China unpegs RNB > RNB rises > China purchasing power increases > global resources (commodities) go up to satisfy Chinese demand > debtor nations like US and most of Europe go further into debt and start to experience inflation as global prices rise > China reduces purchases of US T-Bills as its RNB asset base rises in value > China's reduced exports are balanced by strong internal growth and increase in relative wealth > US & most of Europe experience the very painful and lengthy recession that years of political & financial mismanagement have made all but inevitable.


... hey, China unpegged the RNB last weekend ...

If anything remotely resembling the above scenario were to come about - my personal opnion is that it's a real possibility - dollar, euro, and the DOW are all heading down in real terms.

Nothing lke a cheerful view on a Monday morning...

Edit : not that my post has anything directly to do with the chart presented by the OP !

Simple question.

Would the pin on the dow daily right now, qualify as a 'good' pin?
Would u trade the break?