Manic Markets

So far this week, the Dow has had three days of triple-digit up and down days. The market has moved up 300 and 200 points, and down 200 points. Last week, there were two days that exceeded 200 points up, and two days that exceeded 200 points down. If this doesn't make for a manic market, I don't know what does.

Dynamic Technical Analysis and a Setup for a Breakout

Over the past month, the Dow has been trading within the Bollinger Bands and hasn't breached them and closed outside them. This is considered to be a prime set-up for a Cahen breakout based upon the Dynamic Technical Analysis trading methodology. It also suggests a period of minimal volatility on the longer time frame, despite the large numbers of triple digit days. The Bollinger Squeeze indicator also shows the small red dots that indicate that volatility is too low to trade on this time frame. Long-term trades at this point would be very risky and imprudent. When I trade stocks, I will only day trade them for now.

The longer we must wait for that breakout to occur, the more forceful that breakout will be when it occurs. In this daily chart for the Dow, we can clearly see that the Dow has been contained within a trading range defined by the Bollinger Bands since July 16th.

Direction of Breakout

While the breakout may occur in either direction, up or down, the Klinger Volume indicator suggests a breakout to the upside -- for the moment. Volume is building for the stock index futures to move higher.

The Bollinger Squeeze indicator seems to suggest a bearish breakout, while the MACD indicator also suggests a bullish breakout. Note also that the number of bullish candles (green ones) over these past few weeks outnumber the bearish (red) ones by a ratio of nearly two to one (2:1), especially this week. That also suggests a greater likelihood of a bullish breakout. Furthermore, the lows have edged progressively higher, while the highs have remained about the same, which seems a somewhat bullish omen. And most of the trading has been done above the Bollinger Moving Average (20 period SMA). As the older candles age out of the Moving Average, it will begin to move higher, unless prices drop below the MA and take the average lower within the next few days. This might also be considered to be bullish because the moving average tends to serve as support.

Bullish Stock Market Bias

I've mentioned prevously that there always seems to be a bullish bias for stock indexes. This is because the Fed and the U.S. government approve of stock price inflation. All the rescues, bail-outs, stimulus, credit supports, interest rates, monetary policies, PWGFM (President's Working Group for Financial Markets, also known as the Plunge Protection Team) interventions, and liquidity injections are intended to provide price support for Wall Street and create the impression of prosperity. Our government loves inflation, despite the jaw-boning to the contrary. Asset inflation creates the illusion of prosperity, and provides cover for elected officials to continue overspending, but unfortunately doesn't provide any sustainable benefits. Inflation is the policy!

Wheat Long Again

Note in this chart that, as usual, the Klinger Volume indicator, as a leading indicator, turned up in its predictive role. I entered just as price crossed the EMA and the Bollinger Moving Average, which also turned up shortly thereafter. Prices also bounced upward off the EMA of the 15-minute chart at this same point.

Wheat Turns Lower Again!

In this chart, the three red arrows are confirmations of a downturn in wheat prices. After a strong, sustained move in one direction, I usually won't take the opposite direction until I have multiple confirmations. Here are three confirmations shown and numbered on the chart below, and explained following:

1. The Klinger Volume indicator turns first. It is a leading indicator, and has alerted me to an imminent downturn. It has also indicated to me that I must prepare to liquidate my long trade.
2. When prices close below the Exponential Moving Average, it is time to liquidate my long position and prepare for what may come next. Technically, this is also the best point to go short, but after such a strong move up, I want additional confirmation.
   Sometimes, following a significant move upward like this, longer-term charts (I use the 15 minute) may provide price support at a future time for prices to continue upward. However, I will take a short trade in the meantime, keeping in mind that I will keep a tight leash on the short trade, and will probably go long again when the EMA on the 15 minute chart approaches prices, providing dynamic price support. Then I will go long again.
3. When the Bollinger Moving Average (yellow dotted line) turns down or flat, I will be ready to take a short trade once price touch the lower Bollinger Band.
   

Wheat Bounces Back Nicely

Since soybeans are lock limit down today, I am now trading wheat, which is rebounding nicely from its lows near the open this morning, after trading slightly down on weak volume overnight. I suspect that many other day traders are doing likewise. Look at the rebound in this chart! Nice! Look at the Klinger Volume indicator on the right side of the lower panel. It has already turned, and, as a leading indicator, is suggesting that prices may fall yet again. However, following such a strong rise, I tend to discount this indicator unless it is confirmed by other indicators (like the Bollinger Moving Average). The Klinger Volume indicator works best as a leading indicator when trading in the direction of the dominant trend, and must therefore be confirmed by a momentum and/or trend indicator (moving averages, for example).

Dream soybeans trade

This is the kind of trade that we traders live for. It was both profitable and quick, lasting only a little over 20 minutes. I like trading the last hour of the grains trading session because it intensifies and moves smoothly.

I like to enter when prices cross the Exponential moving average, and the Klinger Volume indicator (2nd panel, red/green line crossing the yellow MA) cross at almost the same time. It is an added plus if prices have recently crossed the Bollinger Moving Average (yellow dashed line), and prices are coming off of recent highs, which they also did in this case.

I decided to exit at the end when BOTH the Klinger indicator and the MACD showed a bullish divergence at the same time, as indicated by the green lines in the 2nd and 4th panels. I have marked them with green arrows.

I probably would have gone long at the point where I exited part of my trade, except that after prices cross over the EMA, I require a confirmation by continued price movement in the new direction, which didn't occur. If there is no follow-through, then I will hold my position, or perhaps reinforce my position by adding to it. I am reluctant to reverse my position immediately following a sustained move, as occurred in this situation. Usually, after a significant move in one direction, prices will take awhile to stabilize, giving me more than one opportunity to exit. I like to see a 2nd attempt to move up, with a higher low than the previous one, before I change directions.

In this case, I wish I had added to my position, but I didn't because the Bollinger Bands were contracting rapidly and the stochastic was oversold.