Using the Chart above, lets rewind to the April-May intermediate-term top at 2400 level and track the structural changes underpinning this latest downside move in the NQ. We can see that the post-Bernanke QE2.5 Bloomberg 'leak' after hours on April 18th ignited a momentum push higher off the Monthly Channel Low Boundary at 2280 (Maroon Overlay), which structurally synchronized the action of the 2 Day Swing on April 20th ('red line' overlay pushed above the March 25th Pivot high) with the Weekly Structural Slope (defined by the 'blue' channel overlay which read Bullish) signalling a long position entry for short term traders. And, defining an expectation for the NQ's to move to the Monthly Channel Upper boundary at the 2400 level (Maroon Channel).
The market spent 3 weeks in late April to mid-May carving out a intermediate top underneath the Monthly structural boundary at 2400 and within a tight Weekly channel (see the above blue channel overlay) defined by the 2415 - 2371 levels.
Zooming in structurally to the hourly chart above, the longs get an early exit signal warning as marked by the red arrow above on May 3rd, following a 1 day closing violation below the 3-Day Rolling Pivot Range (see our trading rules) which defines the 'meat' of trading activity on a rolling 3 day basis. This Pivot Range, which sits on the hourly chart, is our traders faster position 'initiator' long and short. Now, keeping in mind as we 'glean' the hourly timeframe exit signal, the position of the longer timeframe structures -- the Weekly sits at 2415-2371 and Monthly Upper Boundary sits at 2400 -- as we move through time into mid-May below.
As described, the hourly chart gave us a 2389 exit off the Bernanke-fueled push higher from the 2280 level, allowing us to lock in 100 NQ points. But from our exit rules we know that when we have structural alignment in a trade (2 Day and Weekly Slope directionally aligned) as was the case AND the Weekly channel overlay structure is < 50 points (our Weekly channel = 2415-2371), we can choose to hold the position long and use the longer Weekly Timeframe to manage the position risk. Using a closing violation of the 2371 level (Weekly Timeframe stop) we can watch the market above on the hourly chart form a base above our stop and make a push back towards the 2415 level as marked by the second red arrow indicating a closing back above our 3 day pivot range and retest of the Weekly high at 2415.
Lets catch up in time by moving ahead to the important June 1st trading day below:
Back to observe the daily chart above, notice the 2371 Weekly lower boundary give away on the back of a weak Friday May 13th close with follow through on Monday May 16th which turns the Weekly Slope Down/Bearish. Using the logic described on our long trade above, short term traders would re-enter the market from the short side using the hourly timeframe chart and the action around our initiator the 3 Day Pivot range.
Now, lets move ahead to the more recent action in the NQ as per the June 1st outside reversal seen below:
It looked like the market was about to 'break out' technically on the May 31st push higher through the Weekly structural channel (Blue) towards the Weekly upper boundary at 2371. Or was it? We knew that the market had done 'nothing' at all to signal a Long position for short term traders here. 2 things were happening structurally to indicate that this was a 'trap': 1.W-Slope structure had indicated weakness and read Bearish or short and 2. The 2 Day structural overlay was also in a downtrend. Trading Long from that perspective is higher risk, as it would undermine the imbedded directional bias of the market - which was Short. Using the chart above, we waited and watched the market touch-off the W-upper boundary and move through it momentarily at 2381 and then reverse hard on June 1st - ominous reversal on the 1st day of the month.
This gave me the conviction to short the NQ June contract at 2343 level, see below:
We are back looking at the hourly chart above and the short set-up that was flashing in front of us. Peruse the intraday violation on June 1st (red arrow) of the 3 Day Rolling Pivot Range, an immediate sign that the previous rally was a sure-fade signal. Given that the Weekly Slope is down and aligned with the 2 Day Structure Down, I have the conviction to enter a 'full' position short with a stop either at the Weekly upper boundary on the day chart at 2371 or using the faster 3 Day Pivot Range as a exit at the 2365 level. I am comfortable with the 20 point risk/NQ contract given the synchronized market structure DOWN.
Finally, to wrap things up for the day, lets see what the market looks like as per the Day chart above:
The NQ is currently violating the Monthly lower boundary at 2280 level, and signalling weakness structurally. If the NQ closes on a monthly basis below the 2280 level, the Major trend will turn Bearish for the first time since the May-June 2010 market plunge and Monthly violation lower. But, lets focus on the Weekly structure that currently sets up; following the Blue channel above, we can see the weekly range sits from 2380-2284 a huge 100+ point channel. In order for the structure of this market to turn Bullish, the NQ would have to move up through this channel and close above 2380 on a weekly basis. This pivot would mark a Weekly and Daily structural shift to Bullish. This seems rather unlikely. It will be equally important to see how the market behaves around the 2280 Monthly level over the next 2 weeks. My stop now sits at 2293 level, as indicated by my 3 Day Rolling Pivot Range and this will be the basis of managing my position with such a wide weekly channel.
June marks a precarious month for investors from the perspective of ongoing macro-turbulance and uncertainty. Most importantly is the Feds halting of treasury purchase activity at the end of the month, which sets up an interesting dynamic from the perspective of the strong intermarket reflationary theme (commodities, precious metals and global equity indexes) at work since the QE1 initiative and the driving force behind the 09'-11' trend. With Fed market operations winding down, and the European debt-debacle on the forefront, again, along with very ominous signs coming from some of the asian markets and their inflationary problems creating cracks within interest rate, currency and stock index activity - things will get interesting.
For now, I remain short the US stock market via my preferred vehicle - the NQ futures contract.
We will follow the structural action of this market going forward and some of the Currency, Commodity and Interest rate markets, both from a Macro perspective and from an important structural basis.
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