Monday trading pattern from Ed Down's Signal watch ...
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SignalWatch with Ed Downs is the first daily newsletter on the web dedicated to teaching traders how to win in the markets using Technical Analysis.
Each day, Ed Downs evaluates the overall market, teaches trading lessons, and picks out charts that are exhibiting proven Technical Analysis patterns. Ed is a 20 year veteran of trading, CEO & Founder of Nirvana Systems, Inc., and the creator of OmniTrader.
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Updated Friday, 9/14 for Monday's Market
Key DOW Levels for 9/17
UP At the Open
DN Not Applicable
Special Report
Rally anticipated as Nasdaq approaches bottom formation and intense nationalism surges.
This edition of SignalWatch is perhaps the most challenging of any I have written over the last three years of daily publishing. What does one say about the market in the wake of the events of this week?
As you know, I am a technician. I believe in chart patterns. And, I think we have seen strong evidence over these past three years that these techniques work. Markets react at key support levels, and tend to honor such things as trend line breaks and fibonacci retracements. Therefore, each day at about 5pm Central, I look at the charts and assess the probability of an up market or down market based on what I call "fulcrums" or "lines in the sand" in the charts. Since technical analysis is based on psychology, the most obvious conclusion one would draw from a devastating attack on the financial center of the world, is that the market is going to go down. However, from everything I have seen this week, it would appear that Americans and the World have drawn their own "line in the sand."
I have included some special pages I would like you to review, below this introduction. These pages come from subscribers and folks who have passed emails along this week. While I think I'm pretty good at reading the Dow, you are going to have to be the judge this time. What I am seeing is a very strong attitude on the part of both Americans and our neighbors around the World - an attitude to "fight back" against terrorism by going Long next week. Because of this, I think we could see a very, very strong rally.
Now, I could certainly be wrong on this. And, I have outlined some conservative approaches in my commentary, below. But here's what I'm going to do: No matter what the Open looks like, we are going Long on this page. I don't care if it's down 100, 200, or 500. I will be Long, profesionally AND personally. Why? Because I feel the same as every one else. There is no way I would short a stock on Monday. Now, there is nothing wrong with going Short. It's an important part of trading. But it just doesn't feel right. It's a negative response. I can't do it. And, I don't think most other Americans can either. We're all mad and we want to fight back.
Please read the following articles. We are proud of our customers, proud to be Americans, and proud of our glorious free world markets - and the freedom to trade them. God bless all of you.
Ed Downs
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* Go Long, America
* A Letter to Terrorists
* America, the Good Neighbor
* Letters from the World to SignalWatch
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Prior commentary, "...In the Medium Term, we are still Short on the move below 9,875 giving us about 275 points of paper profit. I am going to tighten stops down again to 9,675 to lock in 200, because I am expecting an upside move (I may be wrong, but that is how it looks to me for the reasons noted above). If we rally through this level, I don't think we are going to see a 'tanking' market on the flip side..."
On Monday's 15 Minute Chart, you can see the obvious "Drop and Pop" in the first 30 minutes, leading to a rally all the way up to 9,671 - just 4 points shy of our stop level. We turned back down to consolidate at the 9,600 level. Based on the 30 Minute Rule and our Higher High rule, we did not go Short, but rather stood aside all day, watching the market spring back and forth in the 9,500 to 9,675 range.
We formed upside saucer patterns on the NASDAQ and OEX. We have been speculating that there is probably a bottom on the high tech index, and now all three indexes appear to be posturing for an upside break, which is the way I would bet for Monday.
Since we are, technically, consolidating at the lows, there was the chance for a failure at 9,500. I stand by my analysis from Friday, with the adjustment for today's low. Watch 9,700 for a solid break indication up, and 9,500 down. On the downside, I would stand aside until the market firms. As I indicated in my introduction, I am going Long on this page no matter what the Open does, for the reasons stated.
Short Term Dow
In the Short Term, we want to watch the tight range from 9,560 to 9,625. This range is an expanding triangle in the 5 Minute Chart - an unstable formation. If we drop hard, we could go to 9,500 where a bottom should form. If we break 9,675 right away, I'd expect last Monday's high to quickly be taken out.
Medium Term Dow
In the Medium Term, we are still officially Short on the move below 9,875 giving us about 275 points of paper profit. We came very close to getting stopped out last Monday at our 9,675 stop level (hitting 9,671 intraday) and so are still Short on the page. I am going to tighten our stop down to 9,625 which I am sure will take us out of this position and lock 250 points of profit on our Short trade. As I posted on Monday, September 10, I felt the market was going to rally for technical reasons. Now, I think it's going to rally for patriotic reasons.
My goal on this page is not to "predict" the market. I don't think anybody can do that with any degree of certainty. But, in this case, with evidence of strength on the NASDAQ and OEX, both at historical lows, plus the prevailing sentiment in this country and the world, I think it is prudent to take our large Short profit and immediately go Long. If you want to stay conservative, wait for 9,700 to be crossed, because that is the upper fulcrum in the 15 Minute Chart. Cover Shorts at 9,625 and go Long at 9,700 with stops at 9,675.
NASDAQ Composite and OEX (S&P 100)
The NASDAQ formed a saucer in the 15 Minute Chart, but also shows us an expanding triangle, along with the OEX. So, we will be watching for instability at the Open on these indexes, with the expectation of a rally developing within an hour of the Open. *
Summary
We are still Short based on our prior position from last week, and now tightening our Stops down to a point where we will almost assuredly be taken out at the Open for a 250 point gain from our Short entry. I am expecting an up market, and for the page, we will go Long immediately at the Open with Stops below any relative low that forms.
How far could such a rally go? Difficult to tell. As I say, I think nationalism will propel the market up a great deal, but that is not a "technical" measurement, rather a psychological observation. If we do NOT rally at the Open, and fall through 9,500 instead, I would simply stand aside until the first bottom and higher low forms, and go Long there. I expect chaos in the first 30 minutes, followed by an upward acceleration.
Thanks for listening, and good luck in your trading!
Ed Downs
edowns@nirvsys.com
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