[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