Watch Out For The Bear Trap

The market has shown both bullish and bearish attributes in recent days. When we look at the ups and downs with Gann analysis we start to see which way we should be trading. 

We saw the S&P500 bounce off the 150% resistance level from 2 ranges back on the 29th February. The market took a sharp fall to the short side breaking all our long stops and closing long positions. We then consider entering the market short. But should we expect a strong decline?

My first thought that the market was short was definitely confirmed on the 6^th March with the sharp decline. It is most important that we clarify that the short trend is the confirmed trend at the moment.  Aggressive trading could have opened a short positions at around 1349 as swing bottoms were broken.

This would have been a fair result due to the overbalance in price to the short side.

But by the end of the trading day we also had some more data to consider.

The first concern was the low of the day being 1338. This was exactly 50% of the previous down range. Gann is always looking to see if the markets can break this 50% point. In this case we stopped exactly on it – being a strong price vibration for support.

Secondly the 1338 is exactly 360 degrees in price on the square on nine chart from the December 19^th bottom of 1195.

Thirdly when we look at the increased volume that came into the market we can see that a lot of buying was present – a very bullish signal.

These 3 signals are just that - signals and not a confirmation that the market is returning to the long trend.  But lets not ignore them either.  As usual - high alert to the next few days is necessary.

Gann Analysis Consideration – Time, Price, Position, Pattern and Volatility.

Time

The swing bottom on the 6^th March is:-

90 solar degrees from 8^thDecember 2011 top.

225 solar degrees from 23^rd July 2011 top.

Price

The current swing bottom of 1338 is at the

50% level of the December 2011 down run.

This price vibration keeps us alert for the possibility of a change in trend off the 1338 bottom.

Position

The market is showing weakness by breaking recent swing bottoms however the recent up run from December to February is no doubt an impulse wave. Having said that the down run we have just seen over the past few days would most likely be a correction. 

Immediately we look to main pressure points of the previous run. The market has found support at 50% being 1338 and is a strong position to commence another bullish run.

Pattern

The daily swing charts is indicating a break to the short side, however we now have 3 very strong up bars which are a very bullish signal. The pattern is confirmed as bearish.  Until 1377 is broken the swign chart is bearish.

Volatility/Volume

The volume has has certainly increased on the 6^th March. This increased volume on a down bar is a very strong bullish signal usually seen at points in trend change.

Summary

Trend Direction

Daily Trend:-

The daily swing chart in very much undecided. Technically speaking the swings are to the short side however the bullish up bars of the last 3 days certainly keep us on alert to a bullish run commencing.

Trend Reversal

Aggressive trading would consider a change in trend to the long side once the swing top is broken at 1377. Any aggressive short positions that were opened would be stopped out and new long positions could be opened at the same point or on the first higher swing entry. 

Conclusion 
The swing chart trend is short and we always trade with the trend.  For traders who opened the aggressive trades at 1338 they should keep stops at the swing top of 1378.  If this point is broken close trades and look for a long entry.  The swings will have returned at that point to a long trend.

The other option for traders is to take the short trade using the lower swing top entry.  This could be acheived today when the market breaks Fridays low of 1366.

I am not convinced of the market moving to far too the short side.  This is my opinion and even if the first lower swing top entry is triggered today we may only see and ABC Elliott Wave style correction pattern before the up run returns - (see chart below).  I personally always take the trade if it is available and in this instance I would be putting my entry at 1365 and stop loss at 1378.  This stop allows me to stay in the short trade until the market confirms the swings and trend is long at 1378.  At that point we look for a long entry. But if the market continues short with the swings and trend, we are able to take some profits.

Elliott Wave Analysis

From and Elliott Wave perspective we see the potential market structure unfolding as follow:

It is more than likely we have just had a minor wave 4 correction being 50% of minor wave 2. However it could trace out a more defined ABC correction as shown on the chart. Being the case we will be looking for the market to break 1377 to confirm we are in the minor wave 5 up run which we would expect to see profitable trading.  The simple question remains is the 1338 swing bottom the end of the correction or simply just the first part of the ABC?