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Flushes and Whipsaws
The chart pattern(s) everyone is watching
June 10th, 2012
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Hello:
What do you when you are wrong? Last week we sent out a note to you where we suggested that we had a breakaway gap in the ES and that you should short all bounces. We also suggested that GOLD would be buys on pullbacks. We were right about these ideas for about a day or two and then the gold market flushed and the ES had a decent rally. So, in this edition of our newsletter, we will take another look at these markets and examine if our thesis failed (and updating our outlook based on new price information that was gathered last week). Please note: We sometimes send out real-time updates via twitter: If you wish to receive these updates, simply follow us: our handle is structuredmkts. ( http://twitter.com/#!/structuredmkts) |
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| S&P: Breakway gap Failure?
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Last week, we sent you the above chart and suggested that the ES had a breakaway gap to the downside and that all bounces should be shorts. This idea carried weight for a day or so and then a nice rally took us up to fill the gap and then some. This is a textbook case for why stops are needed in trading - the breakaway gap looked really good at the hard right edge of the chart but MAY have failed (we're not quite convinced yet even though there is positive news out of China and the EU as we're writing this).
Anyway, Let us take a look at the updated chart to see what it is telling us:
 The rally at the end of last week carried us all the way up to a prior resistance level. IF price closes above Friday's high, then we would have to give the bullish case the benefit of the doubt and consider the possibility that we simply formed another bull flag on the weekly charts. However, if we take out Friday's low, then we can continue to give the short side of the market the credit it deserves. For now though, we would suggest standing aside and seeing where price closes on Monday. Unfortunately, the nature of this newsletter (once a week) means that we cannot update you in real-time as events unfold. Therefore, the best we can say at this point is that we would be cautiously bullish on a close above Friday's high and aggressively bearish on a close below Friday's low, whichever one occurs first next week.
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| Metals - Gold
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The above gold chart was the one we sent out in last week's newsletter and we suggested that buys were in order on any pullback. This worked for a couple of days and then the market FLUSHED really hard. But, lets look at where the flush stopped...
Price did something that it does often on breakouts - it retraces to retest the breakout trend line. Because this was a diagonal trendline, the retest level was extremely deep and probably shook out all the weak longs. So, we believe that we can continue to be buyers on pullbacks.
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| The Trade(s)
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S&P: We believe standing aside for now is best until we see if price closes above Fridays high - then we would be cautious buyers. A close below Fridays low would continue our bearish stance.
Buy pullbacks in Gold. Because Friday's lows are so far away, stops will have to be set at intraday levels depending on the chart patterns.
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| Important Risk Disclosures and Legal Disclaimers - This stuff is important!
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First you should realize that PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS! The risk of loss in trading commodities can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
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