Monday, September 9, 2013

Market Stops in Whipsaw City

Friday was a pretty wild session, with a dramatic intraday reversal.  The S&P 500 (SPX) has been Whipsaw City (which is near Chicago) since 1627 -- and so far, the failure to break below that level has kept alive the alternate count that 1627 marked a significant bottom.  The market is compressing now, and preparing for a sustained directional move.

Trading anything but the edges of the range can be dangerous in a market like this, because patterns that form within the range are often worthless noise, and typically fail.  The "job" of a pattern like this is to continue whipsawing both bulls and bears until one side throws in the towel -- at which point, they trend strongly away from the pattern.

Trading these, I try to stay away from the middle of the pattern.  The main way I've had success with this type of pattern is to buy the breakdowns and sell the breakouts, which is the opposite of what one normally does.  And those are risky trades, because you're basically playing for a rather direct whipsaw -- and meanwhile, there typically isn't a clear stop level.  In fact, you're essentially taking the opposite end of the trade from the people who just got stopped out. 

And that only works until it doesn't.  At some point, the compression reaches a crescendo, and the market either launches or collapses strongly.  The only reasonably clear levels which indicate much of anything (beyond the next five minutes) are outside of the noise zone: 1627 and 1670.

The fractal in the Nasdaq Composite bears similarity to the pattern from May and June -- it will be interesting to see if it reaches a similar resolution:

Contrasted with Nasdaq, which is flirting with the summer highs, the Philadelphia Bank Index (BKX) is presently still stuck below its topping pattern:

When the near-term is this noisy, I often look to the NYA for clarity.  NYA doesn't really add much to the picture -- it looks very similar to SPX:

 In conclusion, the market has created a heavy noise zone and has been whipsaw city lately.  Personally, I prefer to take profits sooner rather than later when trading a range like this -- and we're going to need to wait for a solid breakout/breakdown before committing to more than a short-term projection.  Whichever way it breaks, the market appears to be preparing for a strong move.  Trade safe.

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

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