Trade Alert: Short

Following a 15 day up trend in the NQ Sept futures, which produced nice profits, we get a Short Entry signal today going into the close (SE-C 2763.75 See chart below). The short entry should be conservative at this stage, as there are some unconfirmed directional components; for one, the monthly channel high price of 2753 (brown-dashed horizontal reference) is still supporting the price and until the NQ can violate this to the downside, the short side represents risk. The second cautionary thought on the short trade entry here is that given the duration of the previous 'long' trade -- 15 days, which bettered our 2012 average holding period by 11 days implies some long intermediate bias embedded in the US stock market, even at these levels. My rule of thumb on these types of transitions coming off of big runs is that if they are to occur outright I need to see a second consecutive trading day close < 3 day pivot structure to imply that there is an underlying short term weakness/bias in the market. Today would fall as day 1 of that type of short term price action, so we're not in the clear yet.




In terms of managing risk in this trade you can reference the chart below to see that any closing back above the 3 day pivot structure (pink overlay) at 2783 would coincide with a closing back above the weekly channel high at 2780 and would imply a complete reversal of the position I've just placed. So, there is a very good reference structurally, that is a reliable place to place a stop above, because any trade above the 2785 level could be construed as bullish again and would there result in trend-continuation to the upside.

The next thing I've been watching is where the 'value' has been developing in this market over the past few days. We've essentially had sideways trade from these levels which is dull activity, but the 'value' or 'fair price' for the past 3 trading days is 'unchanged-to-lower' and has occurred at the 2770 level - between the weekly channel high (2780) and monthly channel high (2753). The market has spent the most amount of time and has transacted the most amount of volume over the past 3 days at the 2770 level. This increases the odds that the market should begin to move directionally from this level in the short term..

So the question is - which way will the market move?

I start looking for macro inter-market correlations. The DJIA (YM futures) is beginning to show weakness having violated the weekly channel lows today on a closing basis, which if confirmed by Friday close would imply that the DOW has broken down on an intermediate level, which is negative. See the day chart below of the Dow 30 Industrials: If the Dow manages to reverse and close Friday higher than 13073 then the weekly up-trend remains intact, which would imply further caution to short term short traders.

Lastly, it appears that our risk-off barometer is heating up again from a trend-based perspective; US Treasury Bonds: the 'Bonds' closed today back above the previous months lower boundary at 147'26. If the bonds can hold here or close above the Weekly upper channel at 149'09(light blue) then the bonds will retest old highs, which spells trouble for the US Stock market.

 We can use what appears to be a 'failed' structural breakdown in the bonds as a small inter-market clue that the stocks could be on the ropes. To boot, the action in the precious metals has looked very strong, with Gold and Silver breaking out higher.