My first statement in regards to managing uncertainty is to develop a methodology that can minimize your subjectivity and opinions about 'what may happen'. Because humans beings derive meaning from the past and past experience and project that into the future, we almost always carry some degree of personal judgement and bias within our present decision making. We also feel the need to express opinion about the uncertain future because not knowing threatens the stability and comfort that knowing brings us and in so doing establishes a 'feeling' of having some control over it which may bring back the stability. So regardless of whether or not we're right in our opinions about reality, we develop them anyway.
The trading method I describe is about 'surrendering' any opinion I may have about what the market may do and instead objectively using the markets language in different ways to derive a series of hypotheses based on clues to determine what may happen. We can't look at the Nasdaq 100 as an isolated thing in our evaluation of it, we also have to incorporate other markets and other data and events into our thinking, as everything is interconnected.
One of the theme's of this blog in learning about what the market is doing or what it may do in the future is to leverage an understanding of the intersection of conditions that are taking place across multiple time frames or time periods of analysis (Quarterly, Monthly, Weekly, Daily, Intraday Conditions).I've laid out the theoretical foundation for how I determine this here.
Let's look at what the Nasdaq 100 is doing respective of the intersecting time frame boundaries that I've just referenced by examining the day chart below:
If we look at the price of the NQ (Nasdaq 100 e-mini future) above we can see that last Thursday following the ECB sterilization program announcement the market pushed above some important structural time frame levels:
1.Quarterly High (in place since March 12') = 2790
2.August Monthly High (1st New Monthly High produced since April 12') = 2802
These are the Major Structural boundaries of the market. These levels say everything about what the market may or may no do because they are comprised of a considerable amount of trading time (and clock time) which have a lot of voters or participants expressing there opinions about the markets 'value' or 'fair price' within these time frames. So, when the stock market makes a fresh monthly closing high for the first time in several months and makes a directional push above an all important quarterly time boundary, the market may be saying something and so we have to pay attention and try to look for the evidence to support or refute that the market conditions on Major levels of time are changing - something they haven't done in several months and 2 quarters of time.
The first thing we can do is establish whether participants are 'accepting' the price levels at these new 52 week highs: Is the market bidding above these important levels (price acceptance) on the day chart above (Monthly High, Quarterly High) or is the market being 'rejected' at these price levels? So far in the very short term we have some early rejection of price at these levels. We can see from the day chart above that NQ closes above all these intersecting time boundaries, holds for 2 days and gets rejected back below them and into last months high level price consolidation (2750-2800 range).
Last Thursday we saw a big short covering rally and probably some new fresh buying as the market exploded > 2800 on the ECB announcement of bond buying. So, were we to all of sudden begin buying up the market at these levels? Despite my system giving the BUY signal 3 days prior, the answer is NO, I didn't do anything. The reason is simple: let the market tell you which way it wants to go. But, we've established that it broke 2800 on a weekly and daily closing basis. It did, but we need to wait and see if price stays buoyant at these levels. I have an empirical rationale for the 'waiting to see part' below:
Typically in trading books, you're told to buy breakouts or sell breakdowns, when old highs or lows are decisively broken or violated. This is incorrect advice. We need to look at every breakout/down in the context of time or the swing duration that has elapsed up to the breakout/breakdown point.
If you reference the chart above you will see the notations for 'Weekly Pivot Swing High' (Red Arrows) and 'Weekly Swing Pivot Low' (Green Arrows): These points on the chart reference the initiation of new weekly swings - these are the swings that I am looking to capture in my trading. I use the Major Monthly Structure or bias of the market to establish a longer perspective or directional gradient and I use my short term indicator to try to pick off the early development of Intermediate Weekly Swings (as referenced). I've analyzed Weekly Swing duration in the Nasdaq 100 (NQ futures) for 9 years and have found some interesting pieces of information:
We can evaluate Swing duration (weekly basis) from Swing Low-Low, Swing High-High and Swing Low-High, Swing High-Low: Here are the results:
Median Swing Duration (since 2003):
L-H = 40.58 days
H-L = 26.69
H-H = 64.22
L-L = 68.55
The data reflects a bull market bias as L-H (40.58) duration is much longer than H-L (26.69), implying an up-trending bias over the sample. The important piece is the L-L and H-H durations:
Mode Swing Duration (since 2003):
L-H = 15-25 days AND 60-75 days
H-L = 5-15 AND 15-25
H-H = 60-75
L-L = 60-75 AND 75-90
Again the data above reveals the up trending bias with significantly longer L-H swing frequencies in the sample. But where we need to look is in the L-L and H-H modes as it related to todays current swing durations.
Current L-H = 68 days
Current H-H = 91 days
Current L-L = 68 days
With L-L I'm assuming that if the market formed another Swing Low at these levels we'd be at 68 days today. So what all this tells me is that the market move from the June lows did not make an intermediate swing low correction at any time and has essentially been in a Weekly up trending condition for 68 days. One of the L-H modes tells us that the stock market is likely to swing from L-H for 75 days before getting tired - we are almost there. That's not to say that the market may turn necessarily, but we use this piece of time measurement to establishes a basis for taking risk at these levels. In other words, even if the market gets accepted at these high levels there is ever-increasing long-side risk in taking the trade because time is not on our side as time on the long swing (initiate din June) has almost expired. On breakouts/downs that have been preceded by a long duration swing (matching historical modes) tend to fail -- they reverse back as a false break. The reason is that time above anything governs all market activity and when time is up on the swing nothing else matters, because the market has an internal rhythm or cycle specific to each period time that will manifest in the form of swing and counter-swing, coursing through larger time periods (Monthly and Quarterly Frequency).
So my conclusion to the current activity is still on the sidelines. If the NQ had made a fresh Swing Low into the latest run up, I could objectively say that the market would have had a better test into the new highs that may have been more sustainable into these new highs. That didn't happen and the market despite the big run is due for a Swing Low soon.
The first level to watch for is decisive break below the 2753 level. This represents last months Monthly high that supported the late August high level consolidation. This is marked on the day chart by 'Day Swing Low' and any break below that would signal a breakdown. From the long side we need to see something sustainable develop above 'Monthly High' and 'Quarterly High' (2802 and 2790 levels).