From the May 11' top to June 11', there have been 5 signals generated: 4 short, 1 long (which I did not take as explained below due to low R-Value/Expectancy). The signals have on balance generated a +7.1R-Value over 8 trading weeks versus the Nasdaq 100 Index -6.8% return over the same period.
In order to position appropriately within the shorter hourly time period, we must characterize the directional condition of the larger time periods.
Start Date: May 3 2011
Monthly = UP/SIDEWAYS (Maroon Overlay)
Weekly = UP (Blue Channel Overlay)
2-Day = UP (Red Line)
The 'black' arrow below shows the May 3rd candle as our starting point on the day chart of the Nasdaq 100 futures contract (NQ). The 'red' arrow below shows the change in trend of the 2-day structure to UP (in April 11') as a result of the upside violation of the previous 2-day peak in late March 11'. The 'blue' arrow below shows the day candle that changes the weekly condition to UP, following a weekly closing violation above the upper channel boundary in March 11'. We can also view the monthly maroon overlay 'holding' in a multi-month sideways structure.
From our characterizations above, we have directional 'congruency' across our trading time frames; month = up/sideways, week = up, and day = up. This can be summarized as a shorter term trending market condition (Up Trend) within the context of a larger sideways monthly holding condition. Our rules state that higher probability trades occur when we are positioned in line with the weekly directional condition, AND when the day and week conditions are synchronized directionally, which is the case in May 11' (both time periods UP).
However, viewing the chart on display below, we begin with what became in hindsight the market-top, as an early exit signal is generated on the hourly time frame as per the 'black arrow' below on 05/03. I have illustrated the position of the weekly and monthly time periods that we saw on the day chart above by the 'blue' and 'brown' lines over-layed on the hourly chart below to provide additional context of our larger time-boundaries in relation to the faster hourly time period.
From above, our exit rule states that following a 1 day closing violation of the hourly pivot range (shown above), as per the black arrow, we have the choice of a full exit from our existing long position at 2389 OR we can take a half position exit and allow the lower weekly boundary (blue line at 2371) to manage the remaining position risk (IF the weekly channel < 50pts). If the market were to close below the 2371 level on a weekly basis, we would have to fully exit our long position. Because the day and week time periods are aligned directionally, we do NOT have a stop and reverse signal (SAR) at this level (see the rules on SAR set up)
Continuing with the hourly chart above, we can observe the markets' volatile progress in the first 2 weeks of May 11'. The second 'black' arrow denotes the market moving off of the lower weekly range (blue line) and pushing back above the hourly structure to re-test the 2400 level defined once again by the upper blue line, representing the weekly overlay boundary. It fails again very quickly at the 2400 level and closes back below the hourly pivot structure on 05/11, signalling weakness within the hourly time frame. Yet again, the market surges above the hourly pivot structure on 05/12 to re-test the 2400 level for the 3rd time in 1 week. Repeatedly, it fails at this level, as denoted by the 3rd 'black' arrow, which is the final 'straw' that turns the weekly structural condition to DOWN, as can be seen by the activity that breaks below the lower 'blue' line on 05/13.
Continuing on our journey through the hourly time frame, we can see from above the 1st 'black' arrow shows our early short entry signal, as the market violates the hourly range structure to the downside, for the 3rd time in 1 week (discussed above) at the 2379 level. Our risk is defined by any closing violation back above the hourly structure which sits at the 2400 level. I enter a half position short as the directional alignment of the market is still UP on both the daily and weekly time frames, which implies increased risk to the short trader. We can see from above that the market continues to trend lower in the 05/16-05/20 trading week. The 'blue' arrows show the markets activity move back up to the weekly upper boundary, but fail, as per the 2nd 'black' arrow, indicating a resumption of the DOWN trend as the market breaks below the hourly pivot overlay structure. This signals the 2nd increment short at 2340 level. As you can see, our risk is always defined by the hourly pivot structure that follows the price action to the downside in this case.
At this time, we can update our market Conditions overlay:
Monthly = SIDEWAYS
Weekly = DOWN
2-Day = UP
See the day chart below for the changing condition in the weekly time period as indicated by the black arrow, which shows the closing day bar that sets the weekly condition to DOWN, along with the blue arrows emphasizing the 'new' weekly range.
From the chart below, we move into the 05/23 - 05/27 trading week with a short position having taken our initial entry at 2380 and our 2nd increment at 2340. On 05/24, the market moves all the way down to the monthly lower boundary at 2280, illustrated by the 'brown' line overlayed on the hourly price action below. Proceeding to the 05/26 trading day and the 1st closing violation above the hourly pivot range gives us an early exit signal at the 2316 defined by the 2nd 'black' arrow. We thus had an average entry of 2360 and exit of 2316 = 44 pts of profit in 2 weeks on 20 pts of risk = 2.2R (44/20).
We are given a long entry signal on 05/29 seen above, following a 2 day closing violation above the hourly rolling pivot range. Long signal entry given at 2336 level with risk defined by violation below the hourly pivot structure at 2311 level. Expectation must be generated for this trade, by the upper weekly boundary defined by the blue line above, sitting at 2371 level (we are currently in a weekly downtrend and must expect that the weekly upper boundary resists any upward movement). So, we can summarize this as 35 pts of expected profit for 25 pts of risk. Expected R-Values for my trading purposes must generate an R > 2. In this case, we have a 1.4R (35/25), suggesting we do NOT take the long signal and thus wait for the market to re-exert its down trend.
The short re-entry signal would occur on any 1 day closing violation of the hourly pivot structure. This occurs on June 1st intraday as defined by the 3rd black arrow in the chart below at 2340 level
Our short trade on 06/01 at 2340 is stopped as seen below by the 2nd black arrow on 06/14 at 2242 as the market violates the hourly pivot range structure. This generates 98 pts of profit in 2 weeks on an initial risk of 20 pts for a 4.9R (98/20).
We have a fast re-entry signal to the short side as the market fails below the hourly pivot range as can been seen by the 1st black arrow on 06/15 below. It becomes increasingly difficult at this level to generate expectation on the short side. And, because anything can happen in markets, we take the short trade at 2216, despite the big move down. I can subjectively say at this time that there is a likelihood of increased risk to the short trader as a result of the big price slide from the 2400 level that we discussed earlier at the April top. Nonetheless, we define our risk by the hourly rolling pivot range structure at 2242 level = 26pts. But, we also use intuitive judgement here and reduce our position sizing simply based on the large 'space' movement to this point.
The 2nd black arrow above signals an exit from this short position at 2216 - the cost is commission only on this trade. Using the chart above, we can move into the latest market activity and continue to define our trading conditions as weekly = DOWN, day = DOWN and monthly = Sideways (we need a closing monthly violation below 2280 by June 30th to change this condition to DOWN). Nothing overly eventful happens over the 06/20-06/24 trading week. There is NO long signal generated within this weekly activity as seen form the chart above. We do NOT have a 2 day closing violation above the hourly structural boundary. But, we can see from the chart above that the market rolls over again on 06/24 giving another short signal within this weekly range, as defined by the 3rd black arrow at the 2220 level. Expectation is based on movement back to the 2176 level in time, which would create 65pts vs risk of 30 pts as defined by the upper blue line in the chart above, which denotes the weekly upper boundary. This generate a potential 2.2R expectancy for the short trade. I'm now using the Weekly time structure to manage out the risk on the basis that any weekly closing violation above 2252 would be construed as potentially short term Bullish. As we head into the last week of a tough month of June, it is possible to expect some stability in stocks, but there is still much uncertainty looming over the market going into the summer and 2nd half of the year. So, I hold my short position at these levels, with a stop at the 2252 level.
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