A Brief Review
Our number one tool for generating trading signals is trend following with the dominant trend defined by a mathematically created trend line based upon a 7-10 day look back period. Secondarily, we use the pattern recognition parameters of Elliott Wave Theory, including Fibonacci based retracements, for additional insight and an occasional trade. My conclusion after 30+ years of trading stocks and options is that, nothing else works (except blind luck). With the trend algorithm currently identifying a downtrend pretty much across the board in our stock and index models, it is pattern recognition that comes to the forefront in assessing where the current road trip is headed next.
Pattern recognition I can best be explained on price charts, it's a visual analysis. On the Dow charts below notice the market's pattern since the January top. Steep drop, counter-trend rally, steep drop. Understanding that pattern, especially the counter-trend rally part, will make staying with the dominant trend psychologically much easier to follow.
Intermediate Term - Daily Price Bars
Shorter Term - 180 Minute Price Bars
Very Short Term - 90 Minute Price Bars
Very, Very Short Term - 45 Minute Price Bars
The pattern is for new lows, followed by steep to mild retracements, followed by new lows. So long as this pattern remains in tact the road ahead tracks lower and suggests we wait out any counter-trend rallies no matter how dynamic they may seem at times. In addition, these temporary excursions up have so far turned out to be excellent times to initiate and/or add to Short positions and the market is not setting off any signals or reasons why this time it will be any different.
Next Update: Thursday.