[Analysis] ES analysis for March 26, 2009

We are dealing with an awkward situation here. ES was appearing to break the uptrend, dropping to below 790 in afternoon trading. Yet within 30 minutes of closing, it recoup all the losses and went back to 810 level.

Let's analysis the price movement from an intraday standpoint first. When I look at a 5-minute chart, it tells me the following:

• The market is still sensitive to bad news. The poor treasury sales is enough to trigger a drop to wipe out the gains created by two days of positive news.
  
• The last minutes rally is clearly a short covering rally. The short sellers are not committed. At below 790, they rather take the profit and run.

To me, the strong drop in early afternoon indicates that the buyers do not consider stocks cheap when ES is above 800. It is hard to tell what price the market considers stocks are good value, but longing above 800 sounds not like a good strategy unless more economic data suggests otherwise.

The bears' reaction is easier to understand. GDP and Jobless claim numbers are to be announced on Thursday at 8:30 in the morning. There is no need to fight these data.

This makes Thursday's economic data and price action are extremely critical in determining which direction ES is heading.

The market has been receiving a series of good news lately. The current ES price level seems to indicate that it is expecting more good news to come. So unless the economic data is exceedingly good, ES cannot justify at current price level and will eventually drop. Remember, today's price action tells us that the buyers do not consider ES above 800 cheap.

Trading plan:

• Prepare to short after 8:30 data. Interpret the data first.
  
• Spikes that push ES close to 820 are good shorting opportunity. Either use long put or prepare to cut loss should ES breaks 830. Ideally, short at around 9:30-10:00.
• If economic data is so-so or bad, after 8:30, ES will likely drops. In which case, look for intraday rebound to short.
  

Position: None

[Position Update] Short Call Covered

Today I covered my ES 820 short call at 21 - 12 points profit.

I was unable to trade according to my own plan because my ideal long price (795) was not reached until late into the trading session. I was expecting an early morning pullback, but instead I had to trade with a morning rise and sharp afternoon drop.

I've only scalped with YM today.

Position: None

[Analysis] ES analysis for March 25, 2009

Let's consider the facts:

• ES has broken 800 level and close above.
• First retracement has happened.

Everything is pointing to a continuation of uptrend. So the natural tendency is to go long. The unknown factor here is the overnight reaction in Asia and Europe. So let's assume there is some noise introduced during the overnight session.

Let's consider our assumptions:

• Uptrend.
  
• Second retracement point at 790.
• Uptrend broken if ES breaks and stay below 790.
• Conservative target 815
• Aggressive target 830
  

The key is to translate the fact and assumption into a trading plan.

Ideally, I should take advantage of the overnight noise to gain a good entry price for the long. It is unlikely that the second retracement point can be reached in the overnight session. So if I want to go long, a good price would be below 800 so in case of stopping out, the loss will be minimal.

Here is the trading plan:

1. Overnight long order at 795.
2. If order filled before market open, look for chance to double position if 800 can be broken again.
3. If not filled before market open, look for chance to long on intraday retracement.
4. If holding 2 contracts, use 815 to exit 1 contract.
5. If holding 1 contract, decide whether to ride the full trend.
6. If holding 2 contracts and break below 795, consider cutting 1 contract.
7. If holding 1 contracts and break below 790, consider stop loss.

[Position Update] First Retracement Point Reached

ES did not reached the first retracement point (801.25) until almost closing. I am hesitate to initiate a long position near market close.

As for trading today, after I close out the short term short position, I only scalp using YM. As for the short call, the profit is getting attractive and I am tempted to cover the position if I can buy at 21 tomorrow.

Positions: -1 ES 810 Call (33)

Update: ES Scalping Covered

My 2 ES shorts are covered at 808 and 811.25. They have met their objective.

Now waiting for the first replacement point I talked about to go long (low 800's).

Positions: -1 ES 810 Call (33)

Analyzing this Rally

The current ES uptrend is much stronger than I anticipated. Recalled earlier I was expecting ES could start retracing at 750 level. But first meaningful retracement did not happen until ES touched 800.

One can argue all day that this rally will not last, because it is ignited by government rescue plans. But the fact is the uptrend is very strong. Anyone who short in the past month who did not take profit has seen their profit wiped out.

The important thing now is how should one handle this rally? Let's observe the following facts:

• The market is significant overbought in the short term. My estimate is the overbought signal is at least twice as strong as other overbought signals I've seen in months.
• ES has broken the 800 psychological barrier.
• This rally is an extension to an rather strong rally, breaking an attempt to the downside last Friday.

It is quite obvious now the 820 level will be broken in the medium term. However, due to overbought situation, this is the wrong time to enter a longer term long.

The first buying opportunity would be after the first retracement. It would be a mistake to use previous price or moving average to estimate where the retracement would go. Because ES has broken the 800 barrier, I can count on the first retracement will not reach the 800 level. Any price near 800 in the new few days is a long opportunity.

More interesting is the eventual down draft. This will likely be the entry point for a long term long. I will use that opportunity to buy stocks, not futures. Rough estimate is the 790 level, but it is too early to tell.

I am currently take a bet on a retrace to the downside before the rally can continue, and I do not mind holding it for a few days. However if a retracement does not materialize, I will have to cut the positions.

Positions: -2 June ES (810.25, 812.50), -1 ES 810 Call (33)

Quick Update: Shorted covered with profit but taken by surprise

On Friday I covered the ES short at 768.75. Profitable but not that great. I was expecting an intraday retrace to the upside before reaching the 761 target, but I never managed to get back on the short.

Since 761 target was reached. I put in an order to short at 773.50, expecting the down trend to continue.

My short was eventually filled at around 8:30pm Sunday night. Unfortunately, the market got driven by the news of US government buying bad assets. I eventually have to cut loss at 785.50.

Since this is pretty much a news shock, my money has stayed on side line for much of the day. Near end of the day, I initiated new short positions, betting on over buying retracement:

• -1 June ES, entry 810.25.
• -1 June ES, entry 812.50.
• -1 April ES 810 call, entry 33.

I expect to cover at least 1-2 ES contracts in the coming days. The short call I will let it sit for a bit.

Positions: -2 June ES (810.25, 812.50), -1 ES 810 Call (33)

Sign of Turning Tides

The June ES contract closed at 780 today. I consider this is a sign of possible turning to a down trend.

My reasons:

1. ES has made a double top at the 800 level.
2. There is no meaningful retracement to the upside during the day. This is a very clear sign the longs are taking profit.
   
3. After hour, it has dipped a little below 780, a level I considered important.
4. The up move yesterday was caused by a Fed decision to increase money supply, not a change in company profitability.

This has give me confidence in keeping my current ES short. I have confidence that ES will test the 760 level or below in a couple of days.

Friday is option and futures expiration day. Because the chart formation is pretty clear now, option expiration is only adding noise to the chart and may be delaying the drop to next week.

Friday's trading plan is as follows:

1. Maintain ES target at 761. If 761 is reached before market open, take it and short again after market open.
2. If 761 is reached after market open, re-short decision will be based on intraday pattern.
3. If 761 is never reached, but ES does not rise in significant way, add one more short near market close.
4. If 761 is never reached, but ES turn around and stay above 800, cut loss.

At current price level and chart pattern, it does not make sense to initiate any longer term long position, unless ES drops below 760 and shows a promising turn around.

Thursday trading: I did some scalping using the YM contract, not touching the ES contract.

Position: -1 June ES

Forgot FOMC meeting

This is as embarrassing as it can get for a trader. I totally forgot Wednesday's FOMC meeting.

I entered a scalping/semi-positional short entry and watched it get filled and then run into deep losses.

Lesson learned.

As for Thursday, I am not considering entering any long position. The market is in significant over bought state. This does not mean a correction will start. In fact, chances are, I am more likely to win by going long. However, should a correction happens, it will run relatively deep. Thus, while going long has better chance to win, the reward does not justify the risk.

Because I already has one ES short, I will not add more to my position. I may do some scalping, but that's it for now.

Position: -1 June ES

Sometimes, it is just not going your way

June ES did not quite reach my expected low of 742. Thus I've been doing scalping long for most of the day. My entries were not very good and only manged a small profit with the scalping.

What kills me is a scalping short enter at 3:42pm. I didn't expect ES to break previous day high with only 30 minutes to go. Unfortunately it did and with a vengeance.

Now holding on a "scalping" short and what is my trading plan?

1. The scalping short was a mistake, pure and simple. It should be cut. I am trying to do it at 744.
2. Overbought signal has been digested. This means I do not expect another big drop within 1-2 days.
3. Interesting enough, I believe the 770 level will be retested in the next retracement.
   
4. The conclusion is to look for sell signal at 780 or above.

It is too early to talk about specific price level yet, but one possible strategy is to short ES calls at next major breakout.

Entering Short Term Sideway Market

The market is currently in retracement. However, the afternoon drop of ES is not severe enough to break the current uptrend.

So the question becomes, when is a good time to re-enter a long position.

I expect the retracement to last 1-2 days. For tomorrow, ES can either continue to go down, or be in a very choppy mood.

This means I would like to go long in the low 740 level, and expect an uptrend continuation on Wednesday or Thursday.

Despite the market will look like it is going down again tomorrow, this is exactly the wrong time to enter a longer term short postion. Trades for tomorrow should either be scalping nature, or for building up a long position. I will believe downtrend resumes only if ES breaks below the 730 level.

As for trading, the lower high created on Friday was once again broken on Monday before market open. In this situation, it is quite clear the market is unlikely to start retracing until later in the day. Thus, I cut my short position.

On the other hand, the market is severely overbought and it is quite clear a correction is just around the corner. The question is when.

I made the decision to short ES again at a much better price and ride most of the intraday retrace. The entry price is very much based on "scalper instinct" and it is hard to describe in words how I arrive to the conclusion.

Today's trading summary:

1. Stop loss on the March ES short entered last Friday (-7 points).
2. Scalping.
3. Short June ES contract at 770, covered at 754 (+16 points).

Position: None.

Shorting the ES for a small retrace

Today I did nothing until 4pm. At which I short the March ES at 756.75.

This is moderately risky short term play. I am expecting a small retrace of ES back to 745 level before the uptrend can continue. Thus my target is 745.50.

At the current moment. This is no reason to enter a long term short position. Most likely, any dips will be buy back up.

Position: -1 March ES.

Money on side line now

I waited today for 8:30 news before initiating long on ES. Unfortunately the retail sales news is better than expected. The price I got was 719 (March contract). I exited the position at 729.25, hoping for an intraday retrace to 725 to re-enter long. Alas, did not happen and I never got the chance of re-entering long.

As of 1pm, ES intraday high is 739.25. This has already meet my original objective thus the long term money will be on side line.

Scalping wise, I expect a small retrace near closing. A small short opportunity for a few points.

I also covered the ES 725 short put. The put is already in money and will be dropping slower compared to the index and the risk of holding the short put is not worth it.

The outlook for tomorrow is still positive. However, one should consider only scalping long at current price level. I see no sign of initiating longer term short yet. I will consider shorting April ES call at extreme price level.

ES long entry readjusted

Despite a failed intraday rally, I still believe ES is on an uptrend. I will change my view if ES drops below 705.

Trading wise, there was no overnight retracement for me to hop on the ES uptrend bandwagon. ES has been going up all night and continue into market hours, then exhibits a choppy downward movement after market open. Since I didn't get on a good price, all my trades are scalping trades for the day.

ES did one point touch 732.50, very close to what I predict as resistance yesterday (735). This happens earlier than I expected.

Current trading plan is to go long at around ES 707-713. I like to enter the position after the 8:30 retail sales data, with a 735-740 target in mind.

Positions: ES 725 SP

ES on uptrend?

Today's S&P 500 movement likely confirmed we are on a new uptrend for the S&P. The previous resistance, 700, has been broken and we are closing at a healthy 720 level.

This is a relatively fresh uptrend. So I do not expect a big retrace. I will be trying to enter a ES long position at 703-704 level, with a 735 target in mind. I think it is quite possible for ES to eventually reach the 750 level, but because we are in a deep bear market, I rather use 750 as a potential short entry than a long target.

Position disclosure: Short Put 725 ES.