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Technical Report
by: Jim Ellis, TimeFrameInvestor.com
Babies and Bath water.
I don't think that there is any indicator left that is not showing oversold pressure. But
one thing about oversold conditions is that they can get even more oversold. One recurring
theme that we have seen for quite a few days now because of the oversold warnings, is that there has
been a risk that the prices could begin to snap back up after how far the prices have fallen.
In these reports we use the charts to help outline what we look ahead for. Because of the
oversold warnings and over extended conditions, in looking forward, the best prospects for a new
position would be for the downward move to come to an end, and possibly for a bounce to start to
develop. I have pointed out how we want to use the hourly chart for an early indication of
when the move would be coming to an end.
"As I have mentioned over the past several days, a bottom on the hourly chart is an
early and aggressive indication that the downward move is coming to an end ... The
over riding factor is that the hourly chart MUST form a bottom first, to show that the price would
not be setting new lows. We would then look for the price to begin to move up from a
double bottom or higher low to show that the bottom has formed."
This week we are following the NDX in the Red Option Technical Report.
This hourly chart of the ndx is as good of one to use to talk about the bottoming process.
Yesterday it formed the lower low in the 1300 area, and then formed a lower high around 1375 before
dropping back in the late afternoon.
This morning there was a small gap up, but not enough of one to set a higher high, and the price
basically fell back from the initial opening surge and the price moved sideways at the 1330 to 1350
area. and was fighting to try to create a higher low on this hourly chart.
The price was trying to develop some strength as the oscillator crossed down thru the price, the
candle turned green and an up arrow appeared. But there was not a second candle with strength
to confirm the changes, and the price was unable to move up to create a higher low. This lead
to just a sideways move until the price began to turn down in the late afternoon.
When it started to turn down the bottom just fell out and the price plunged into the close.
What all of this means is that while we had probably the most promising conditions for part of
the day, the hourly chart came close, but it did NOT form a bottom. The price put up quite a
"fight" as it tried to form a bottom, but strength just did not appear, and the price did
not begin to move up to confirm that a bottom had formed.
In the recent reports I have spoken about how using the hourly chart is aggressive and higher
risk. Because the hourly chart did not form a bottom, we did not get even the higher risk
indication that we were looking for. Even if a person "jumped the gun" and was
extremely aggressive due to how promising the smaller intraday charts were looking for the early
part of the day, those small time frames are more suited for a day trade, and as such, a very tight
stop should have been set due to the higher risk presented by being so aggressive. That stop
would have been hit when the price started to turn down from that fight.
As to the breakdown, once again, due to the warnings and high risk conditions, the continued
downward move was a day trading situation. With how fast and hard the price fell at the end of
the day, people are making a rush towards the exits and are panicking to get out of any long
position that they may be holding. This is showing that people are throwing out the baby with
the bath water. This could be from the public abandoning long held positions, it could be from
institutions that are facing margin calls, or mutual funds that are facing outflows as people try to
stop the pain.
With the new low on the hourly chart, we are once again back to "square one" where we
need to see a bounce and then a drop to be able to create either a double bottom or higher low on
the hourly chart. This would be the preferred method of seeing a bottom develop on the chart.
Due to how far the price has fallen, and how relentless this move has been, there is a lot of
pent up energy that could show up in a "hard reversal" where the price starts to recover
and then just takes off without forming a well defined bottom, also commonly referred to as a
"short covering rally".. As I have mentioned before, a hard reversal is not
something you can count on, and the risk that you face with the start of a hard reversal is that it
could be just a "relief bounce" that forms yet another lower high before dropping back to
actually create a bottom. Because of this, it is after the move is underway before we can
determine that it is becoming a hard reversal and not just a relief bounce.
Take the ndx for example. A bounce back to 1320 would just have the price test a broken
support level, so the price would have to move above 1320 to cancel the breakdown on the hourly
chart. This is real close to the highs from today of 1360, so we would want to see the price
start to move above 1360 to be able to say that instead of just a bounce the price is "taking
off" as a hard reversal.
I look at these levels and I am simply amazed by how much ground the price would have to cover to
show that a hard reversal has developed. Just to cancel the breakdown on the hourly charts
would require moves that traditionally would take many days, if not a few weeks to take place.
This is why for now, the best strategy is going to be to sell a shorter term put spread, one that
would have a tight stop and would be expected to lock in gains sooner rather than later, and for now
to treat the directional trades on a day trade basis until we start to see some more stable
conditions develop.
Jim. www.TimeFrameInvestor.com
Here is a link that explains the
different colors and indicators on the charts used in the Technical Report.
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