After spending most of the winter on the defensive, the bulls have finally been able to put together a blossoming rally in the past two weeks.
Talk of "the worst being over" is pervasive on the street now, and a bit of optimism is coming back to the market.
The perception now is that the Federal Reserve, through its recent actions, has shifted their main priority to providing a backstop to the fragile financial system; hence, fighting inflation has been placed on the back burner.
Whether or not this sanguine view is warranted -or even misplaced - is tough to say. At least in the short run, the market wants to believe it.
With the uncertainty of the first quarter reporting season kicking off this week, and more bad news on the economic front (a subpar jobs number and a record low pending home sales number), conventional wisdom would dictate that the market should have reacted negatively.
The mere fact that the market has held up well, under the constant barrage of bad news, perhaps is a bullish signal.
From a technical basis, most of the major averages are up against some important resistance levels (more on this later).
In our trading discussion today, I want to touch on a common misconception among many novice traders, this is the view that in order to realize big gains, one has to assume big risks.
This may be true if the beginner is not schooled in the true ways of how the market works or is relying on extraneous information, such as advisory services or the latest indicator.
This, in my opinion, is not the way to gain a trading edge, learning to identify inflection points and trends is the most important lesson for the would-be professional.
Indeed, once the trader gains proficiency in pinpointing these levels, he or she must muster the courage to take these trades - as often times these are not what would be "feel good" entries.
I frequently hear students say, "I'm waiting for confirmation before I take the trade", and as is regularly the case, by the time they get that confirmation, they end up chasing price and skewing the risk-reward ratio.
In my view, the only verification needed to take a trade is having the conviction to know the probabilities are in your favor.
In the illustration below, I've highlighted some recent low risk entries utilizing the Keltner Bands concomitantly with support and resistance.
In past newsletters, I've commented on my use of this channel as a way of measuring extended markets, the set-up is quite simple: When the price approaches one of the bands, I look for the nearest support or resistance levels and place a limit order around that price point - along with a 10 tick protective stop.
If I'm correct, it's usually a 5R (5 to 1 reward to risk), as the market tends to snap back dramatically from such stretched levels, If I'm wrong, and yes, this does happen, I lose very little ($100 per contract in the ER2).
The reason I use this set-up, and have been for many years now, is that I've gained the confidence to know that it works a high percentage of time.
The reason why only 10% of futures traders make money consistently comes down to the fact that they will take these types of trades, on the other hand, the 90% that lose consistently will not take these low risk trades because of FEAR or because they lack the knowledge of what support and resistance truly means.
In our usual fashion, let's review the technical picture of the E-mini Russell ER2, additionally, going forward, I'm going to start looking at the S&P, as I've been getting more inquiries about this popular index.
The hourly chart of the ER2 below indicates we're still trending higher off the March lows, the important support level in the near-term is 705 with resistance at 721. The ER2 along with the S&P are in extreme overbought territory, and as previously mentioned, are touching major resistance areas.
In the daily chart of the S&P e-mini (ES) below this resistance level is evident. This area looms large, if the bulls are to continue their charge.
To recapitulate: In my last newsletter, I made the case for a rally lasting several weeks. Since then, (although it hasn't felt like it) the Russell and S&P have rallied 60 and 70 points respectively.
So, where are we headed from here? We are in a tougher situation now, the recent move has put the market in an overbought condition and this has to be worked off.
Moreover, earnings season tends to add further uncertainty, which makes things a bit dicier, I sense we're setting the stage for a battleground (range-bound market) that will probably not be resolved until the reporting season winds down. In the meantime, find low-risk, high-reward trades and get on the side of the 10%.
Until next time, I hope everyone has a profitable week.
To recapitulate: In my last newsletter dated March 19 , I made the case for a rally lasting several weeks. Since then, (although it hasn't felt like it) the Russell and S&P have rallied 60 and 70 points respectively. So, where are we headed from here? We are in a tougher situation now. The recent move has put the market in an overbought condition and this has to be worked off. Moreover, earnings season tends to add further uncertainty, which makes things a bit dicier. I sense we're setting the stage for a battleground (range-bound market) that will probably not be resolved until the reporting season winds down. In the meantime, find low-risk, high-reward trades and get on the side of the 10%.
Until next time, I hope everyone has a profitable week.
Gabe Velazquez
www.educational-dvd.com
DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.
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