Data Diary

The trade is clear even if the outcome isn’t

Posted on 19 November 2009

The market is readying for a move – and the odds are mounting that it’s soon.  Following is a daily chart of the XJO – the narrowing in the trading range over the last few days, while the USD has been testing its lows and gold its highs, hints at the struggle to define the direction.

You can (hopefully) see the trade.  We either break through the resistance around 4810 – with reasonable odds that we can then go on to make new highs.  Or we break lower – and test 4500 tout suite.  It’ll come as no surprise I’m betting that the gods of the underworld will prevail.  The divergences in MACD and RSI continue and even accelerated in the latest price action.  Momentum made a new low on the recent dip – and while it recovered strongly, failed to make a new high (okay – this may be clutching at straws – the point is momentum has progressively waned as the rally has aged).

On a wave count basis, we are either finishing up (ii) of a larger 3rd wave down or we are in a new bull market and we have completed a first pulse higher in a 5th wave (and have a dip into a (ii) which could take us to 4600 in any event).  I’m figuring it’s the former – and that it has all but met it’s upside targets and, from a day count perspective, by Friday it will be ripe and smelly.

The conclusion?  The risk/reward favours the short from here (4800 v 4500 in round numbers)…with volatility pushing the low 20′s and a reasonably brief period for the theory to be tested one way or another…all adds up to loading up over the next couple of days.