It’s not the most fascinating topic, but it’s definitely important to know of this relationship, so let’s take a look at a couple of recent charts.

First, a ‘zoomed in’ view of the recent action:

You can view this comparison in StockCharts with symbols:

$IRX for the 3-month T-Bill Discount Rate (short-term)

$USD (US Dollar Index - a basket of 6 FOREX pairs)

What’s interesting is that - relatively - the indexes move almost in lock-step with each other, which makes sense.

While this isn’t the “Fed Funds Rate,” in general higher rates translate into a more attractive (expensive) currency, and lower rates translate into a weaker currency for a country.

We’re seeing this in the recent charts of short-term Treasury Yields and the Dollar Index as expected.

This is in line with talk of the Fed “eventually” (at some point in the future) raising the Fed Funds Rate… but that is an entirely separate discussion.

Let’s step the chart back to see the one-year comparison in yields and the Dollar Index:

In both charts, the US Dollar Index - green - is scaled on the left side of the chart while the 3-month T-Bill Discount Rate is scaled - in percentage terms - on the right side.

Thus the current 1.4 value corresponds with 1.4%.

The 3-month T-Bill Rate - and shortly after the Dollar Index - bottomed at the end of 2009 to give us the current simultaneous rallies we’re seeing.

I wanted to call this to your attention as an interesting comparison and method to sharpen your inter-market analysis skills.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Not only does it serve as a great example of real-time identification and follow-through of the pattern, but we see a similar though smaller compression triangle forming today at 1:00 EST on the SPY.

Let’s see this development and note key breakout trendline levels to watch.

(Click for full-size image hosted by Chart.ly)

I happened to capture yesterday’s triangle minutes before the expected price breakout, and we’re winding down to the apex of the current triangle now.

This means traders would be looking to buy a breakout above the $115.50 area or short a breakdown under $115.25 - again another 25 cent compression in trendlines.

I’m using a pure price chart above so you can see how to draw the trendlines and visualize the price compression better.

Be ready for another potential range expansion move from a breakout of this smaller triangle, and note the ‘apex’ level just under $115.00 as a possible support target, or the morning high of $116.00 to play a potential upside breakout resistance target.

See my prior educational page on “Trading Price Triangles.”

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

According to the long-standing price principle of “Range Expansion and Contraction,” the next move in the market is likely to be a range expansion breakout swing move, that will offer opportunities for those aggressive enough to take them.

Let’s take a quick ‘pure price’ look at the S&P 500 ETF SPY and note the symmetrical triangle compression and the boundaries to watch for a potential breakout.

I drew the dominant trendline boundaries in blue, with the lower line coming in at the $114.75 level and the upper line resting at the $115.00 level - giving us a 25 cent compression boundary.

These levels correspond to 1,140 and 1,145 respectively on the S&P 500 Index itself.

Traders often fear taking breakout moves due to the potential for a bull or bear trap (a false break) to occur, and that is indeed a risk for trading these compression set-ups.

True breakouts trigger “positive feedback” where one side is forced to take stop-losses while the other side puts on fresh breakout positions.

A break above 1,150 in the S&P 500 would likely trigger a flood of stop-losses as the index breaks to new recovery highs, but should a downside break occur, we would see bulls running for the exits while bears put on fresh breakdown positions.

The edge often comes from the breakout itself (and relatively small stops) due to the potential large range expansion move that can occur (again, relative to the stop - popularly on the opposite side of the trendline).

I’m also showing the compression in the 3/10 Oscillator and the intraday TICK extreme readings (to show what happens to indicators in a price compression zone).

I wanted to put this chart up quickly to show the potential breakout that could occur if not by the end of this session (one hour left) then potentially overnight or into Friday.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Fewer people know what an AB=CD pattern is than do a bull or bear flag - though the two patterns are similar.

Let’s take a look at today’s AB=CD Measured Move and see how we could have traded it so we’ll know this concept next time it forms.

First, an “AB=CD” Pattern is more commonly called a “Measured Move,” and it is like a flag (we’ll call this a bull flag for comparison) except for two distinctions:

1.  The “impulse” or first leg (flagpole) is often more ‘drawn out’ or takes on a 45 degree angle while the bull flag is more steep/sharp/vertical

2.  The Retracement (flag) is almost always deeper than a standard flag pullback

Everything else is roughly the same… but with one more exception in trading tactics.

Most traders only trade the “Projection” of a Bull Flag (meaing the “CD Leg” in the chart above) and that’s usually all you get from a flag - there’s no reason to flip and reverse once a flag completes… but to take profits at the price target.

However, in an AB=CD pattern, some traders will trade the “CD Leg” measured move, while others will wait specifically to see if the pattern completes fully into the 100% Projection Target BEFORE putting on a short-sale position.

In other words, flags focus on the “price projection” leg up while AB=CD moves may focus on that, but mainly focus on the retracement down from the “D” target.

Confusing?

Take a moment to read over the information at my “Bull and Bear Flag” section as well as:

How to Project a Measured Move of a Bull Flag.

In the pattern above on today’s chart, a “Measured Move” Trader would be looking to short-sell any weakness (reversal candle, divergences, etc) at the $115.20 target, which was established by making a Price Projection from the “C” low (keep in mind that these labels are not Elliott Wave notation).

There actually were two opportunities to short at the $115.20 target - the first being the morning swing that formed upper shadow dojis just beyond the target, and the second chance being the afternoon bearish engulfing (like) candle before 2:00 CST.

Take a moment to study these opportunities and the “Measured Move” structure above, and see if this pattern - again similar to a flag - would be a nice fit to your trading style.

I described this pattern - and other intraday opportunities - in greater detail in today’s “Idealized Trades” member report.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Let’s learn the lesson from this breakout, discuss another example of the “Popped Stops” and “Open Air” concepts, and be ready to apply this lesson in the next stock where it happens.

First, let’s set-up the scenario on the Daily Chart:

We see the aftermath of the breakout, but let’s step back and visualize the calculus as price tested the underside of the confluence resistance level of $160.00 per share.

Reference the previous lesson I wrote from the “Open Air Pockets Lesson in RIMM” for more insights into an almost identical situation, only RIMM used Fibonacci resistance levels instead of moving averages.

The main idea is that traders will short-sell a move into a confluence resistance area and then place stops on the opposite side of the level - in this case - above $160.  Perhaps they were playing for a target of the prior lows of $145 or lower.

However, those aware of the “Open Air” and “Popped Stops” concepts were able to see supply and demand more clearly and utilize “IF/THEN” logic to capitalize on an unexpected break above key resistance.

Once price breaks above the resistance level, triggering the stop-losses of the short-sellers and also triggering new “breakout” buy (long) orders of the buyers, then a “Positive Feedback Loop” or “Open Air Pocket” occurs which gives intraday and swing traders a distinct edge to play in this “air pocket” breakout price move.

For reference, the $160 level was a convergence of a prior price support level (black line) and the 50 day EMA (along with being “round number” resistance).

The IF/THEN statement would go like this:

“The expectation is that GS will hold resistance and swing lower, but if buyers push price into the ‘pocket’ of stops, THEN we could see a quick positive feedback loop develop that thrusts prices higher in a tradeable set-up”.

And that’s exactly what happened:

Price busted above $160 then $161 then $162 on a surge, creating immediately a new volume and momentum high along with a “go long” signal to play the breakout for those intraday traders who were bold enough to tackle this breakout set-up - a bust above key resistance.

The chart above is one of the best examples of the “Positive Feedback Loop” of how price ’sliced’ through the Air Pocket above a key resistance area.

By “Positive Feedback Loop,” I mean that buyers are buying, driving prices higher which triggers more stop-losses of the sellers, which also drives prices higher, as momentum traders jump on board, buying - pushing price higher, triggering more stop-losses from the sellers, and so on.

Even if you don’t take advantage of these situations - it is an aggressive/bold move - then at the minimum, you should NEVER try to fade or short-sell a market caught in a positive feedback loop.

There’s no way to know how far a market will rally while in this breakout/momentum mode, so the safest play is to trade in the direction of the breakout until you see crystal clear indications - such as trendline breaks or lower timeframe EMA breaks - that the momentum is slowing (seen by a negative divergence) and price could reverse.

Even still, price continued rallying higher despite a negative volume and momentum divergence, which underscores the power of this ‘breakout’ mode.

Take some time to study these concepts in more detail to add them to your trading arsenal.

For related posts, see the following:

Open Air Pockets Lesson in RIMM

“1,100 Resistance Level to Hold or Break,”

“Lessons From Failed Signals and Popped Stops”

“What Happens when Resistance is Broken?”

“Opportunities from Popped Stops Intraday”

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

I’ll re-copy some of the charts here, but the full commentary is at the column.

Traders and investors monitor Fibonacci Retracement Levels for the following reasons:

• to take profits once a level is reached,
• to consider shorting if price finds resistance at a level,
• to signal the “all clear” to continue trading long once a resistance level is broken to the upside

Here are the retracements from the 2007 market top to the 2009 bottom:

Dow Jones:

S&P 500:

NASDAQ:

Russell 2000:

Fibonacci Levels are not magic, but sometimes they can create little “self-fulfilling prophecies” when price comes into one of these levels.

These charts can serve as a permanent reference of the dominant retracement levels going forward… but do note that the NASDAQ and Russell 2000 have exceeded the upper 61.8% retracement in a bullish break.

It would be a strong bullish argument for higher prices if these indexes can hold above these levels.

See full post at the Green Faucet site for additional comments.

(Charts created with TradeStation)

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Link order is always ranked by Alexa Ranking:

1.  Dr. Steenbarger of Trader Feed shares a few linked posts on Strategy and Tactics in Trading.

2.  Andrew Horowitz shares the 15 most popular/read posts this week aggregated at the Disciplined Investor site (stock ideas).

3.  Some personal insights from John Forman of the Essentials of Trading as he answers an email question, “Is Trading Worth it Financially?”

4.  Mike Bellafiore of SMB Capital published a 24-minute educational video on StockTwits.tv discussing the “Best Ways to Get Better as a Trader” that is a must-view.

5.  Options for Rookies asks the important question, “Are you a Trader or a Gambler?” with insights.

6.  The Stock Chartist takes a look at  OBV (On Balance Volume) and asks if it is a “Leading or Following Indicator“.

7.  Random Roger updates us on the “Big Picture Outlook for the Week of March 7, 2010”

8.  A Dash of Insight updates us on the recent ETF Sheet - Midcap Movers.

Bonus Picks:

I’m only allowed to select 8 posts from the NewsFlashr section that covers a wide portion of the financial community, and there’s always more than 8 picks I would like to link to, so these are some of the extra picks of the week:

Mish’s Economic Analysis reveals that “Mutual Fund Cash Depletion at Highest Level since 1991.”

The Big Picture wishes a “Happy Birthday to the Top and Bottom!“

Dr. Steenbarger of TraderFeed explains how to Interpret the Market Delta Charts he uses.

In a detailed post, Fibozachi addresses “The Narrowest S&P 500 Range in the Last 2 - 3 Years“.

VIX and More takes a look at the VIX Price Channel Chart.

The Kirk Report takes a great look at “Sacrifices for Success,” not just in trading.

Corey Rosenbloom, CMT

]]> http://blog.afraidtotrade.com/newsflashr-business-blog-editor-picks-for-march-9/feed/ http://blog.afraidtotrade.com/newsflashr-business-blog-editor-picks-for-march-9/ http://feedproxy.google.com/~r/afraidtotrade/NRSd/~3/xpvhVKuB1mg/ http://blog.afraidtotrade.com/rimm-shows-us-a-lesson-in-open-air-pockets-mar-9/#comments Tue, 09 Mar 2010 18:04:08 +0000 Corey Rosenbloom http://blog.afraidtotrade.com/?p=5614 I wanted to highlight an important lesson we can learn from the recent breakout action in Research in Motion (RIMM) as it relates to “Open Air Pockets” and how traders can manage risk and take advantage of these opportunities as they develop.

Let’s take a look and see what RIMM’s recent chart can teach us.

What I’m showing is a pure price chart with the dominant Fibonacci Retracement grid from the September $88.00 high to the $55.00 low.

The highlighted zone between the 50% retracement at the 61.8% retracement can also be called the “Pocket” or “Open Air Pocket,” especially when you combine it with prior resistance at the $71 level, both as support and resistance going back to July (black line).

Why is this important?

That’s because, when trading, you need to establish “IF/THEN” statements to guide your thinking, stop-loss placement, and target setting.

Let’s assume two scenarios.

1.  You are bearish, and believe the $71 resistance level and the 50% Retracement will hold, and so you short RIMM as it breaks under $70.00 on Friday.

Where is your target? Perhaps you target the prior low at $60.00.  Easy enough.

Where is your stop? Clearly, your stop will be located above $72/$72.50 because of the “Open Air Pocket” principle.

Why?

In the event that buyers push price above the $71.20 level (50% Retracement), then that will trigger the stop-losses of the sellers (yourself included) and if buyers are stepping up, will create a “Positive Feedback Loop” where a quick ‘pop’ is possible.

In the event this happens, you don’t want a wide stop because you could be hit with a larger than expected loss… and that’s what happened.

The next logical zone for price to stop - or to face resistance - is here at the 61.8% Fibonacci Retracement of $75.00.

So you survived to trade another day with a smaller loss than if you stubbornly held to your short-sale and got pummeled by the rapid upward movement.

Alternatively, let’s assume neutrality and that you were waiting to see what happened at the $71.00 level…

2.  You are neutral, but have an “IF/THEN” target of $75.00 in the event that buyers push price into the “Pocket” and begin triggering stop-losses.

In this case, you would not have taken a short-sale, but perhaps anticipated the “IF/THEN” of the positive feedback and entry into the “Open Air Pocket.”

As such, you would have been monitoring this stock very closely on your intraday frame, and seeing the move above resistance, put on a buy order early on Monday’s session as price and volume began to pick-up intraday as you trade long (buy) to target the next ’stopping point’ (resistance level) at $75.00.

At this point you would be exiting your trade near the $75.00 level as price interacts with another key inflection point, and another “IF/THEN” scenario unfolds now.

You had to set this scenario up in advance, because the move off the open was a “gap and run,” so you had to be confident in your assessment of the “IF/THEN” probabilities and the concept of “Open Air” zones.

Keep in mind that Open Air zones are not always highlighted by Fibonacci Grids, but sometimes by trendlines and prior price levels (it doesn’t have to be complicated).

I refer to this phenomenon many times as “Popped Stops” or “Open Air Pockets,” but the concept and opportunities are the same - again both for…

Risk Management (do not “give the market room to run” by dragging your stop-loss up if price is in “Open Air”) and

Quick Opportunity (trade as price unexpectedly moves into a “Pocket” of stop-losses/buy orders to play for a quick ‘pop’ to the next level)

Take a moment to study this principle on other stock charts as well as intraday frames and see if you can incorporate it into your own trading plan.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Divergences aren’t perfect, so let’s look at the structure of the most recent development, this time using the NYSE Index itself to compare to its internals.

Usually, I show the S&P 500 in relation to market internals - and the picture is identical, only the S&P 500 is forming its divergence at the 1,140/1,145 level instead of the 7,300 NYSE Index level.

I prefer using NYSE Internals because they give a broader measure than the 500 stocks in the S&P 500… and most large media outlets quote the NYSE internals in their discussions.

Even though we made a marginal new high today in all indexes (the Russell and NASDAQ made new recovery highs), all new highs were met with a decline or a negative divergence in key market internals, as shown above.

I monitor the Breadth (NYSE Advancing stocks minus declining stocks), TICK, and Volume Difference (volume flowing into advancing stocks minus volume flowing into declining stocks).

Along with volume, these give a great view of the “insides” of the market and have an uncanny skill in hinting that reversals/retracements are ahead (meaning, take profits!).

The prior negative divergence (March 2 - 3) did very little downside action (highlighting that internals are not a crystal ball tot he future), but Thursday’s (March 4th) slight positive divergence did precede the nice rally on Friday.

Now we’re in a consolidation or ‘digestion’ mode to work-off some of those gains, and it might be a good time to take off profits if long and consider shorting any trendline breaks in the indexes or ETFs you trade in the event that this divergence does produce a market decline to test a prior support level.

If anything, it’s always important to monitor the signals from market internals, even in the face of this seemingly non-stop bullish move we’re seeing currently.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Let’s take a quick look at both the daily and weekly Russell 2000 chart to see what level we should watch for important clues as to the strength - or pause - in the recent strong rally.

Russell 2000 Daily:

In the daily chart, we see one of the most powerful sustained rallies on the Russell 2000, which gave us 16 “up” days and 3 “down” days since the early February low of 580.  The first rally witnessed roughly nine consecutive days of gains.

The current structure places us at new recovery highs above the 650 highs in January 2010, with a new momentum (oscillator) high confirming the recent bullish strength.

With that picture in mind, we would expect the Russell to continue its power climb higher, and it very well could, but it is going to have to content with a confluence resistance area that might give bulls pause.

Let’s take a look at the ‘triple’ confluence resistance area on the Weekly Chart.

The most obvious form of overhead resistance comes from the 200 week SMA (red) at the 675 level.  It would be absolutely key for the bulls to drive price back above the lengthy 200 week (roughly 4 year) simple moving average, as this level is an important psychological ‘mile marker’ on the charts.

Until then, it is possible for the average to hold as resistance.

There is a prior price line of support - which becomes resistance in the future - from the 650/675 level as seen in the triple price lows of early 2008.  According to the “Polarity Principle,” this prior support area could become a future resistance level… which is where we are currently.

And although I’m not showing it on this chart, the 61.8% Fibonacci Retracement of the 2007 high to the 2009 low rests at the 660 Index level, which is roughly where price resides currently.

To sum up the resistance areas…

675:  Weekly 200 SMA
650/675:  Prior Price Support in 2008
660:  61.8% Fibonacci Retracement

A break above 680/685 would likely be enough for a confirmed break depending on your threshold of “break,” which would suggest that odds favored a move back to the 750 level as marked on the chart above.

Let’s see what happens at these all-important boundary levels.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade