Let’s take an updated look at the Gann “Square of Nine” trendlines and the default Andrews Pitchfork Tool:

(You’ll need to click for full-size image)

Without getting into the mechanics behind the lines, I’m using two ‘advanced’ charting tools, one of which is default in most charting platforms.

This is the same Andrews Pitchfork ‘auto’ trendline tool starting with the November 2009 low to the January 2009 swing high and then connecting the pitchfork to the March 2009 low.

The detaulf Pitchfork tool draws the outer lines as well as the “50% Midpoint” line, though I’ve added the Fibonacci percentages of 38.2% and 61.8%, as well as divided the grid into quarters, by adding 25% and 75%.

I’ve posted previously on this and other uses for the tool in:

Feb 25:  “Dollar Index Rides the Trendlines Higher”

Jan. 15:  “Why the 1,150 Level is Important Resistance to Watch”

Dec 7 (’09):  “Broken Andrews Pitchfork Grid on Crude Oil”

Nov 24 (’09):  “Interesting Convergence to Watch at 10,500 on Dow Jones”

Nov 5 (’09):  “Andrews Pitchfork Bounce for the SP500″

Oct. 18 (’09):  “Quick Andrews Pitchfork Update on the Dollar Index”

Oct 19 (’09):  “Andrews Pitchfork Update on the SP500”

as well as:

July 28th S&P 500 Update (showing the Fibonacci numbers for the Pitchfork which are still valid)
June 18th on the S&P 500 (which show the ’standard’ Andrews Tool)
May 13th S&P 500 which shows a Downward Pitchfork from the Market Highs

Beyond the Pitchfork tool, I’m showing the derived Gann Square of Nine trendlines starting with the March 2009 low of 666.

What we want to find are convergences in the trendlines and the Andrews Tool, and to notice how price has reacted to in the past to these levels.

These tools both have found ‘hidden’ support and resistance levels - as well as a comfortable trend channel - all the way up.  I find that fascinating.

Here are a few prior posts on the past Gann Squares (Trendline) Levels:

December 17 (’09):  Gann Line and Volume Update on SP500

October 22 (’09):  Gann Trendline Reference Grid from High and Low on SP500

To me, these charts are better filed under the “Hmm, that’s interesting” category rather than the “Rush out and make a trading decision based on a single trendline” category.

If anything, it broadens your awareness that there are other techniques used by the technical (charting) trading community that don’t make their way into the general public very often.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Let’s take a look at the recent “Angular Momentum” chart and see what I mean:

(Click for Full-Size Chart)

The way to create one of these charts is to draw rising trendlines to connect as many price swing lows as reasonably possible, and be sure to draw additional trendlines as needed.

Usually, you’ll come up with three or four separate trendlines you can draw on your chart… and this works for all timeframes.

Keep in mind that - depending on how you scale your chart - your angles will be different, but it’s most important to pay attention to the rate of ascent or steepening of the angles instead of the absolute angles themselves.

What I’m showing here is the three dominant rising trendlines that show the recent shift in character or behavior of the market… to one of urgency to rise and despair on the part of short-sellers/bears.

Often, these type of cycles often progress in the following order for the Bulls:

Phase 1: Doubt, as in “This is a bear market rally and then price will fall.”

Phase 2: Realization, as in “Ok - so the market is going higher, but the moment I get long is when it will reverse.”

Phase 3: Euphoria as in “Oh my gosh I’ve been so stupid to miss this rally that I have to buy NOW! NOW! NOW!”

And, as you might suspect, the cycle takes a different turn for the Bears:

Phase 1: Doubt, as in “Here we go!  This is a rally to short to plunge the market to new lows!”

Phase 2: Confusion/Realization, as in “Ok, so I know they’re driving it higher, but I’ll keep trailing my stop higher because the market will turn at ANY point now and the moment I exit my short is the moment it will fall, so I’ll hold on.”

Phase 3: Capitulation, as in “*$^%@! They did it to me again!  AHH, I have no choice but to take a much larger stop than I thought - gosh there I go again losing money.”

This type of logic has been explained in many different forms, but it still surprises me at how many times it plays out in text-book fashion.

That’s why the first ‘phase’ often has a smaller, more reasonable angle which gives way to a steeper angle which then finally morphs into an absolutely unsustainable angle as price climaxes while bulls pile in and bears capitulate.

No one knows where the absolute top will be, but when you start to see angular momentum increase like this, it’s a safe bet that we’re in the third phase and to monitor your emotions very closely and follow price and be aware of any sudden shift and not get caught in a downdraft.

Take some time to study this principle in more detail - it could save (or make) you a lot of money.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Here is the ‘price purism’ chart of the @CL crude oil futures contract (TradeStation):

You don’t need indicators to tell you the current structure of the crude oil market since November - it’s clearly a trading range with an upper boundary at the $83.00 level and lower boundary just under $72.00.

That gives a $10.00 trading range that has contained price over the last few months with a mean or average ‘midpoint’ price about the $77.00 level.

Astute traders would also identify this as a potential “Head and Shoulders” price pattern, which would be confirmed with a downward break under the ‘neckline’ at the $72.00 level, or disconfirmed with a break to new highs above $85.00 per barrel.

Why is focusing on ‘character’ important?

If the ‘character’ - that of a trading range - continues, then we can assume crude oil’s next move will be to move lower off of resistance, after making a potential swing to $84.00 as the ‘last line in the sand.’

And then if price break solidly above $85.00, we could say that the ‘character’ changed, and would thus expect a trend continuity move higher, perhaps to the $92.00 level.

As long as the ‘characteristics’ remain the same, then we would be taking profits here and getting ready to see if buyers can thrust price to new highs, triggering a breakout trade, or if sellers can contain price under $83.00, which would set-up a short-sale opportunity depending on your aggression level, or how much confirmation you need (such as waiting for a break back under $80.00).

Indicators are wonderful - but sometimes it’s very helpful for seeing potential ‘pathways ahead’ in price (often called “IF/THEN” statements) by viewing price in its purest form.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

“Three Percent Mutual Fund Cash is Troubling.”

Andrew pays special attention to the recent data that state mutual fund cash balance totaled 3.6% in both December and January - which is often a counter-indicator, suggesting that there’s not much more “sidelined” cash to keep driving this market higher as we’ve been seeing in the past.

In addition to showing plenty of other charts and indicators, Andrew writes:

“Of course, Abby Joseph Cohen (Goldman Sachs) still believes that the trillions of dollars on the sideline will help to drive the S&P 500 toward 1,250 -1,300 before year’s end. While that may be possible, the cash appears to be getting sopped up.

But, even with this, investors are in a risk taking mood and the general trend remains generally bullish. It will take a good deal to shake out the bulls…Nothing lasts forever though.”

Corey Rosenbloom, CMT

Let’s take a look at the recent ‘popped stops’ rallies and how they reveal the character of the market… and what that matters to you more than indicators or anything else.

(Click chart for full-size image)

I started this chart on March 8th to today, showing recent false breakdowns that have resulted immediately in a sharp rally that triggered the stop-losses of the shaky bears.

The “Popped Stops” phenomenon occurs when two conditions are met:

1.  An ‘obvious’ (or at least reasonable) sell-signal is given

2.  Sellers place stops at roughly the same (tight-stop) levels

The ‘trigger’ comes when buyers - in whatever manner - step in to overpower the sellers and thus drive price higher (often with surgical precision) and then create (manufacture) a rally due to the bears (short-sellers) buying to cover their positions.

These are always temporary plays, but can allow quick profits for those traders ‘in the know’ when these set-ups (situations) trigger.

We had a trendline break and overnight downside gap to start March 9th, drawing sellers in and then buyers immediately popped them out all day long in a massive short squeeze.

Price fell later in the afternoon and then into the next day, where an almost identical short-squeeze formed (in equal proportion).

See my prior post for a detailed summary:

“Measured Move AB=CD Example March 10″

Price then consolidated into two triangles, a smaller and a larger structure:

“Get Ready for Range Expansion Play in SPY Intraday March 11″ (a great lesson in breakout tactics)

“Second SPY Intraday Triangle Forms March 12”

Price did expand/breakout as expected, and then formed a mini-exhaustion gap on Friday, marking the high of the day and then trailing off into the close.

Monday’s action gave us a “Rounded Reversal” that was a perfect mirror image and then a “Bear Flag” and second trendline break which triggered in the short-sellers…

only to pop them out violently into the close and into today’s session, which has broken above the key 1,151 level on the S&P 500 which could set off sparks, triggering longer timeframe swing and position traders (who are short) to cover, and cause others - who have been on the sideline so far - to ‘capitulate’ and buy this market, driving prices higher.

Finally, why is it important to understand the current market character, which is ruled by ‘popped stops’ and almost making a mockery of short-sellers and sell signals?

Simple - if you put too much faith in sell signals and bearish positions and even classic sell signals, you will likely continue to suffer the same fate in terms of ‘popped stops’ and losing trades.

If you are aware of this reality, you’re far more likely to profit from it than someone who is not (who keeps taking the same short-sale set-ups, keeps calling this market overbought, and keeps stopping out).

To brush up on this concept, study my prior posts:

“Lessons From Failed Signals and Popped Stops”

“What Happens when Resistance is Broken?”

“Opportunities from Popped Stops Intraday”

Those posts summarize the “popped stops” lessons.

For application of the principle and to further your knowledge, review the prior “action” posts:

The 12 Failed Sell Signals on the S&P 500

“Recent Bull Traps and Sell-offs in the S&P 500?

“Recent Failed Sell Signals and Short Squeezes in the SPY

If History Repeats, Will it Mean New Highs for S&P 500?

“New S&P 500 Highs Forecast by Fifth Sprung Bear Trap”

“Could S&P 500 be Building Yet Another Power Move?”

Assessing the character of the market is far more important than using indicators - after all, certain indicators do better or worse in certain market environments.

Knowing the character can make all the difference.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Let’s take a look at the 30min combined chart to see the positive relationship… and where it recently hit the rocks.

(Click Image for Full-Size Chart)

The Gold color is the GLD ETF, scaled on the left axis while the black color is the SPY (S&P 500) ETF, scaled on the right side.

With few recent exceptions, these ETFs move in lock-step, with gold sometimes having a very slight lead in turns in the SPY (and sometimes vice-versa).

Everything has been perfectly fine in this relationship until Gold in early March (3rd) last week began trailing lower and diverging from the continually rising (non-stop!) SPY (and other US Equity Market Indexes).

It’s possible that the SPY formed an ‘exhaustion’ gap early Friday morning and will now begin heading lower, following the prior decline in gold prices from last week until present.

This is why inter-market relationships can be important - when one market cleanly deviates (diverges) with expectations, it can send a signal that “all is not well” and could precede key turns as the relationships head back into balance.

Keep a close watch on these two ETFs and how this situation resolves itself this week.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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