Counter-Trends:
@gj0201, re your mention on XSO about entering index shorts. I‘ve set out a technical comment below on Counter-Trends and bar counting that will sound complicated but you’re someone who might like to work through it as a way of thinking about your short entry.
The market has broken down. However, this steeper part of the down trend will be subject to a number of Counter-Trends. i.e. it rallies for a few weeks then fails again. Of course you want to enter your shorts at the top of the counter-trend, not just before they start.
Although I analyse charts using a number of tools to tell me the overall story, counter-trend trading on the weekly chart is my core entry/exit criteria. I’m always counting counter-trends and so I've done a lot of work with this which might be of interest to your current thinking.
Gann’s work showed a confirmed trend is minimum 12 bars or more to the highest peak or trough (start at bar zero). Counter-trends are then typically 1, 3 or 9 weeks in the opposite direction. 3wk CT’s can fall 1wk early or late and 9wk CT’s can fall 2wks early or late. That sounds a bit complicated but it’s really powerful stuff if you can get it, particularly in setting up your short positions.
For example we had a big 9wk CT in MQG and a 10wk CT in SPX and DJI from late August to early November. DJI weekly chart below shows it, count the bars. Lowest bar is Zero, then count 9 or 10 to the highest peak. Once it fails it tells you that was just a counter-trend and you should be short and not a new up-trend.
As the down trend accelerates, the Counter-trends will get shorter. So you’re looking for 3wk Counter-trends at this stage that can fall 1 week early or late (i.e. 2 to 4 wk CTs). A good exercise is to open some weekly charts of indexes or major stocks and go back and just count the counter-trends. Lowest bar Zero, then 1,2,3 bars etc to the highest bar, before they fail. DJI weekly from 6 May 2011 high is a good example for a downtrend (6 bars down, 3 up, 5 down, 3 up, 5 down. Overall trend more than 12 bars). You’ll find you can get into a good rhythm with a chart. Test phases of similar steepness to the current phase.
You really need your other tools to analyse the big picture trend, but CT entries is great for setting shorts as well as longs. So text book you would see a downtrend of say 5 bars, then 3 bars back up, then red bar down. You enter as soon as the red bar is confirmed, proving that the 3 bars up was just running counter to the main trend, and not a new up-trend.
Dow Jones Industrial Index: So here’s where it gets tricky. There lots of exceptions of course in trading. Have a look at the weekly chart of the DJI and something really interesting has happened.
DJI peaked the week of 22
nd May 2015. It fell for 14 bars (weeks) to the low week of 28
th August. That’s more than 12 bars so it’s a confirmed downtrend. Tick.
Count the bars back up: 28
th August is Zero, then 10 bars up to peak at 6
th Nov 2015, then red bar. I was short on the red bar. So we had a 14wk downtrend and then a 10wk counter-trend. All good.
Now count the bars down. 11bars to low at 22
nd Jan. It didn’t make 12bars to confirm a downtrend. So I although I've been thinking we're in a downtrend, but it’s not confirmed yet.
Then two bars back up and failed with a Red bar this week (confirmed last Monday) is your typical CT entry to go short. BUT it didn’t follow through and break the previous low. The bar reversed overnight to close the week high. Wtf....?
So the 11bars down didn’t confirm a downtrend (nor did it break the low of 28
th August bar). The 2bar (2 green bars) then Red bar supposed counter-trend didn’t follow through. This tells you the DJI is not behaving right for a downtrend for the moment in accordance with the rules stated on Trends above. It’s not clear what’s going on but could it possible that the 10 bars up from 28
th August actually was a new uptrend forming and the 11bars down was the counter-trend against it?
This will do your head in if your new to all this. But I think you like analysing things technically so I’ve tried to lay out a different way of looking at the chart and you might find it rewarding if you work through my comments above on the weekly DJI chart.
Conclusion from all this weekly bar counting is that for the moment there is actually a question mark over the downtrend (and technically we might not even be in a bear market! I’ve been calling a bear market so long I didn’t even notice that potential question mark until I did the counts for this post).
The DJI looks like wanting to go up for a few weeks or even months at least. I’m going with it for the moment with no shorts, all long positions. Where this rally fails should give me another read on which of the above swings were the main trend direction and which were the counter-trends against it. But in terms of bar counts, everything since that 28
th August low bar has a question mark over it for the moment on the DJI as to which way the main trend has been running.
Bottom line. Be careful entering any index shorts at this point.
Note that my all positions are long here for the next while.
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