Classic Set Up in S&P and Dow Coming into Payrolls.

[Shaun Downey 10]

Major trends often begin within a major news event or the sudden decision to ignore what would have been bullish or bearish news previously. I call this good news bad action or bad news good action. Normally we only know this after the event, but on occasions the market sets itself up in such a way that we know coming into a news event that it should create a trend.

 

Such a set up is very clear and a perfect example in the S*P and payroll. It is when the market becomes perfectly balanced right at the moment when the news event is occurring.

 

Figure 1 shows two charts of the Dow, which show a previously mentioned monthly trend line and then a switch to the daily chart with the same line. Yesterday saw price close almost exactly on that line. This means that the line is set to become major support or resistance. The daily chart also shows one of my proprietary divergence based signals. This uses the Rsi and is qualified in more detail in chapter 4 of my book Trading Time. The signal is rare and its history shows that the signal is either brilliant or useless. There is rarely a situation where the low of the pattern is broken and then subsequently the market reverses back up. Therefore I am simply looking for a 1 or two day conformation on the daily chart that the signal has worked or failed.

 

 

 

However, it is the S* P that the really powerful set up is evident.

Figure 2 shows the distribution from the lows in November. The point of control or the longest line is exactly where the market settled last night ahead of the report at 841. It is uncanny how many times this occurs ahead of a decision making time. It is as if the market sub consciously needs to return to the point of fair value before beginning a period of unfair value or a trend. Even more significant and difficult to see is the fact that the mid point of the trend is also exactly at the point of control. This means that the distribution is also balanced and now ready to trend.

 

 

There are three plans of attack.

 

For the day or short term trader go with the initial move, but be very wary of a sudden reversal as the market goes in the opposite direction. Short term traders could just wait for this reversal but remain aware that it might not happen.

 

The second line of attack is to wait for the pit opening and then look for the break out after just 10 minutes.

 

Traders could also wait for price to trade above 854.80 as this would place price in a higher distribution and be bullish. The downside break is clearer and is at 807 and 798.

 

For the strategic player waiting until Monday or Tuesday is an option as the trend should be clearly defined and fresh opportunities to go with the trend will present themselves.

 

Whatever your time horizon remember that a major trend is due.

[Shaun Downey 10]

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