When a giant whale shows up

Trade of the Day (SPY ETF)

It was in the cards.

A week ago we discussed the shift in the momentum picture, and the reason why another round of weekly, or daily, sellers might be successful in the month ahead. Or, as we put it, bulls on “the weekly chart are not confident enough to buy breakouts above previous highs anymore.” A week ago, the S&P 500 had five “ugly bear bars,” and now we count eight – today’s trading was quite a story.

The day (January 13, Tuesday) started out as a bull trend day with the possibility of a higher close than where it opened. Also, a breakout above last Thursday’s high was in sight, but reaching the 2014 SPX close of 2062 was feasible. As we see it, the day must have been traded with a bullish bias until about 9:00 a.m. PT (noon EST). I’ll show you why using the popular SPY SPDR® S&P 500® ETF (exchange traded fund):

Identifying the reversal of the trend on the SPY ETF chart
Here originally bullish day failed to resume the trend in the SPY ETF – click to enlarge

By 9 o’clock we had enough evidence on the change of trend (check the chart above):

i) The initial trend was only 30-minutes (usually it is above 40, if a typical bullish day). ii) Then we saw a 2nd bearish reversal with a lower high in price. iii) Still the first pause after the open should have functioned similar to the previous fourth of one lesser degree (i.e. key support at the red horizontal line), but…

…it didn’t as iv) both of the two bullish signal attempts failed to continue up. From this point on traders worked on exploiting bear signals as the day’s major breakout attempt above yesterday’s high failed big time. The moving averages were separated and smoothly sailing south at by that time.

There was a line of bearish opportunities throughout the next 30 minutes then little after 10 came Moby Dick. For the setup of the day it is better to check two timeframes simultaneously:

3-min chart to the left 1-min timeframe to the right with the head and shoulders
For details click on the chart. Smaller time frame to the right with the head and shoulder pattern. Larger time frame to the left shows the strong bearish context.

At 10:06 am PT we saw the largest correction, since the change in trend, in the form of a steep zigzag starting from the sustainable bear trend zone in the RSI (therefore our bear bias remained in place). The size of the correction was identical in height to the lower high test of 7:54 am. A little later, with the lower high in place, we had a head and shoulders top in a bear trend far away from the absolute high of the day. The down sloping neckline was a strong argument for the short trade. Trader’s had at least four possibilities to enter (all marked on the 2nd chart):

  1. Aggressively with a sell stop order at the head one tick under the black inside bar.
  2. At the sweet spot during the bear bar which tested the top of the lower high (at the right shoulder).
  3. At the momentum break of the previously formed support.
  4. As price sliced through the neckline.

Finally here is the chart by the end of the day:

This is the chart of the entire day, SPY ETF January 13, 2014
The overview of the SPY day with the reversal and the head and shoulder. Click to enlarge.

 

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About Laszlo Nagyferenczi

Laszlo Nagyferenczi is a day trader, analyst and instructor as well as the creator of the proprietary Context-Momentum-Signal concept. He has authored over 200 blog articles about his unique approach to trading and the Elliott Wave Theory. His clients appreciate his ability to go from the theoretical to the practical i.e. all the way to the actual trade set ups.

Originally hailing from Hungary, Laszlo is fluent in English and Hungarian with a long list of education credentials including BA in Economics, Certified Elliott Wave Analyst (CEWA), Certified Adult Educator for T-Groups, Professional Co-Active Coach (PCC) at CTI. The real education, though, has been the trial by fire in the markets, with real capital at risk.

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