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).



The day chart below shows the late July attempt of the NQ to retest the 2400 hurdle for the fourth time in 5 months and fail at that level.

Above, we have a visual of the 'brown' horizontal line overlay showing the 'critical' price levels of the monthly trend and structure of the NQ defined by 2400-2280 range. And within this range, we can visualize the 'blue' channel overlay within denoting 'weekly' activity as a turbulent 'tunnelling' process carving within the larger monthly channel overlay. We can also visualize the 4 successive attempts of this market to violate the 2400 level as seen in Feb, April-May and twice in July.

The chart below shows the hourly chart with rolling pivot overlay and monthly and weekly horizontal lines demonstrating key price levels on larger time periods as described above ( blue = weekly, brown = monthly). The chart below shows the July 20 entry signal 'long' (Green Arrow) given early in the trading day with an early morning 'gap' on a very tight pivot day (3 day pivot spread < 4 ticks) implying a directional move is underway. The 'Red' arrow show the exit signal on July 27th early in the trading day as the market moves back down, slicing through the 3 day pivot range AND violating the key upper monthly boundary at 2400 at the 10am hourly close. This was the early warning signal to get short the NQ's.

Now let's examine this latest short trade: We're given the short signal on July 27th at 10am as the NQ fails below the pivot combined with the weak close below the 2400 level (brown line), which implies that trading activity is now vulnerable to revert back into the 'larger' monthly range (2400-2280).

The hourly chart below show the most up to date visual on the current activity of the Nasdaq 100 futures. The Red arrow demonstrates the initial short signal as described. We move into August 1st overnight trading activity, highlighted below by the series of black arrows showing the initial reaction to the US debt agreement on the Sunday. Following this news we have a very definitive short signal given as a result of the markets early and violent 'selling the news'. We can see that the overnight trading 'spike' high on Aug 1st didn't even penetrate the 3 day upper pivot boundary, which kept me in the short trade overnight.

August 1st aggressive selling was the 'real' signal to cover your longs and start getting short. We have the roll over on the news, marked on the 1st day of the month, which creates an ominous mood for the month of August. And, going back through historical monthly trading data, it becomes evident that August is a very active and pivotal trading month; Aug 07' saw the continuation and bottming of the severe correction that precluded the begginings of the credit crisis. Aug 08' marked the early rollover into what we all know became the 'crash' into Sept 08'. Aug 10' is the transitional month that gave way to the big multi-month uptrend into Feb 11'.

So, here we are in Aug 11', coming off an exhaustive and turbulent multi-month, directionless period in stocks, and coinciding with the debt-ceiling catalyst that was the final straw triggering the meltdown.  We can also see from above that the market has failed to stage any kind of intraday rally into the 3 day pivot from the chart above. We can also visualize the recent activity noted by the 'gray' arrow with violation below the important 2280 level.