Saturday, October 20, 2012
Predicting longer term moves
Its easier to make predictions on long term moves than to be able to successfully capitalize on it. That's not saying much because longer term predictions often are apparent only post-facto.
The above chart is a monthly chart of the ES 12-12 contract and note that the last bar is an incomplete October bar (i.e. we are mid-bar).
From a structural view, we have had a spike or trending channel from around Mar of 2009 to Apr 2010 and then we have a channel phase. The channel lines are shown in blue. At present, we have poked above the channel line on the third push. We should likely get at least two pushes down. Often the lower trend line (blue) is the target. The most pessimistic scenario is that the move will test the start of the channel near Jul 2010.
Given that this is a monthly chart, this could mean a big drop if this happens suddenly or a prolonged horizontal to down move over the next year or so. A bit more optimistic scenario is that the magenta trendline from the start of the move acts as a support (especially on a 2L or 3L approach) and continues to push the market up. Even more optimistic scenario is that the steep purple trendline combined with ema arrests any down move and continues the move up.
The most optimistic scenario is that the upper TCL will fail to contain the move up and give a rally up by an equivalent amount as the last up move. Such failures are extremely rare and only occur after a lot of violent up and down moves.
Given we have three pushes in a channel and there has not been any recent violent up and down move, my guesstimate is that we will dip below the magenta line and probably also test the channel trendline.
The summary here is that there is lot of good trading in store for 2012 Nov and Dec is unlikely to be a dead market.
Long term investors could take puts on their positions unless they want to exit them. The proceeds of these puts can be used to add on to the same stock positions when the market bounces at long term support.