Trading Within A Volatile Monthly Structure

Changing conditions call for slight modification of swing strategies to increase risk-adjusted returns.

The August carnage in global stocks have established wide monthly channel structures that are grounds for changing volatility conditions, trade risk, and expectancy. The current NQ channel ranges 2395-1972 in August, unofficially -- there will be a lot of movement within this range in the coming months ahead, just as the 'crash' of May 2010 was a precursor for movement and consolidation for 3 months. The previous monthly lower boundary for the NQ at 2280 should stand as a resistance level, structurally. See the day chart of the NQ below for context. The 'brown' and 'blue' horizontal overlay lines represent the critical monthly and weekly structure levels and the 'black' trend line links the low prices established in August/Sept 2010.

Short Signal In Stocks

The NQ violates the hourly 3 Day Rolling Pivot Range in yesterday's session at the 11am hour, and continued lower signalling a short position. ES however, does not generate the 'sell' signal, but generates an indecisive close within the 3 day pivot. So, for ES traders waking up this morning to see the gap down move, any rally attempt at the open or through the day can be sold, using the updated hourly pivot channel high as a stop for the position trader.

Managing Trading Stress

Notice what happens to your 'state' and 'behavior' when a small string of losses accumulates in a short period of time. Our hardwired response, designed as an adaptive evolutionary reflex, driven by fight/flight is to try harder, narrow our focus and increase concentration, energy and intensity on the problem, shifting thoughts into 'potential' consequences or impacts. This inherent pattern does not serve a trader very well, and can lead to compounded mistakes because you are in a 'protective state.'

Short Term Up Trend Intact

Despite yesterday's intraday volatility, they were supporting the dip, as the stocks continue to find support and the hourly structure remains stable into today's session.

The stocks put in an intraday 'buy' signal at 9:45-10:00 today, which is again positive for the continuation of the up trend. The hourly pivot chart has also tightened up, which improves the overall risk side of this 'long' trade, making the 'hold' more manageable in the volatility. For NQ, the 3 day hourly pivot range sits at 2188-2181, which is a nice improvement from the 50pt range of risk as of the past few days.

Day Set Up

Markets rolling on weak GDP news Q2 in Germany - GDP only expanded by 0.1% from Q1 as per the headline. As far as trading set up for today, US stocks have sustained above hourly pivots, but have not generated any intraday momentum via 'buy signals' - the last 2 trading days have been effectively 'neutral' despite stability and up trend.
Today's pivot for the NQ on the hourly sits from 2185-2134. Any closing violation below 2134 would imply a short trading signal. The market can close within the pivot structure and still 'read' a long trade, but, in this market, I would suspect imminent weakness to follow.

Day Pivot: Set Up

To date, the market has put in a 'culmination' bottom Aug 9th very early in the morning and since then the market has not returned to those low levels; for the NQ we have a short term low of 2072 and for ES, the low is at 1077 level. These were the culminating low points established by the previous down swing that began uninterrupted July 27th. On Aug 9th, stocks put in a 'neutral' day - meaning they did not return to the overnight low levels mentioned above and they closed within the 3 day pivot range of the hourly chart. As of Aug 11th, stock indexes (US) make a transition day, by breaking above the 3 Day Rolling Pivot range and closing for the day back into the weekly channel structure to negate a continuation of the intermediate down trend established at the end of July. Importantly, the stocks have not sunk to retest their overnight lows of Aug 9th mentioned above, supporting the idea that there is a tradeable bottom in place.

Day Set Up: NQ, ES

The long signal for short term position traders comes in today IF the NQ closes decisively above 2143 (above the upper boundary of the pivot channel). This is also favorable as it implies that the stocks were able to move back into the weekly channel established last week with the lows of the channel at 2128, thus negating the continuation of the intermediate term downtrend implied by the weekly time period that was established in late July. This would be positive considering the market is coming off a deep collapse and multi-week downswing. We can see the chart below with today's overlays showing the current activity and objectives with target blue and brown horizontal lines indicating the important weekly and monthly boundaries.

Short Term Buy Signal?

The hourly chart below shows the NQ's violating the important 3 Day Pivot Range (Pink Overlay) as noted by the blue arrow as the stocks have re-entered the Weekly Channel structure identified below by the blue horizontal line. What does all this mean for now? If the stocks can hold by tomorrow's(Friday) close above the 3 Day Rolling Pivot Range, this would be the first short term 'buy' signal generated in 2 weeks. This would imply taking a position on the long side with expectation to 2280 level, which is marked by the 'brown' horizontal line below, indicating the important monthly lower boundary level that has provided critical support for this market since Feb.

Day Pivots: NQ, ES

Going into today, the stocks set-up with a 'bullish' bias on the back of a strong close yesterday 'above' the '1 day pivot'. This is the first time in 2 weeks that the major indices managed to close above this 1 day pivot level. The 2 charts below show the NQ and ES on a 15min interval. We can see the activity oscillating around the 'pink' 1 day pivot area, which is a visual regression of the previous days trading activity, and with a close above this 'band'.

Adjusting Strategies For Changing Conditions

What ultimately determines trader conviction is a 'sound' trading plan. This involves the development of a back test, through sufficient time and conditions, with a viable money management approach. The key point, I believe, is in understanding and learning about how your 'rules', 'strategies' and money management techniques function in different market conditions. My work to date in markets was borne out of a need to discover a technique that characterizes changing market conditions. Why was I performing well as a trader in 07', but struggling at times in 08'? Or why did my system perform so well from Sept 10'-Jan 11', and since then I've been struggling? Did you think to examine that batch of trades, not just on the basis of nominal P+L, Wins/Losses, but on the basis of 'Conditions' for that time period? What were the conditions for that batch? Trending? Quiet and Up Trending? Trending and Volatile? And how do we begin to create parameters to define the classifications?

August Downswing: Timing the trade with Structure

Let's re-visit the latest turmoil in markets with a closer examination of the Nasdaq 100 mini futures contract (NQ U1). We have been in a long monthly holding structure defined by the 2400-2280 level, that has generated profitable 'swing' trading opportunities for the agile trader. It's important to recognize this condition of the past 5 months as the culmination of multiple successive attempts to generate a monthly closing above the 'psychological' 2400 level. This turbulent failure by the Nasdaq 100 to do so has precipitated the 'violent' collapse that we have seen in this market over the past week (and all markets for that matter).

Trading Recap: June-July Volatility

We have seen increasing volatility defined by short term trending activity within the larger boundary structure defined by the Monthly overlay channel of the Nasdaq 100 (NQ Futures Contract) between the 2400-2280 range. These oscillations have carried the market to 'potential' monthly reversals of the 'Major' trend of the market, but have successively failed, closing within the confines of monthly range (2400-2280) by months end. Thus, the condition of the market to date is a Major, Multi-Month holding structure, which is revised from an outright Bullish to Sideways Condition, given the dated time period of 5 months without any embedded Weekly or Monthly trending. Given this Macro condition, we have to adapt by adopting an agile and maneuvering positioning strategy to capture the whip saws. Here's how: