This week was totally phenomenal in many ways, and I was overwhelmed by the market reaction.  I guess the market was celebrating the 1st anniversary of the crash 09??

Gartley Pattern Update

First thing first – let me give you an update on my Gartley Pattern.  In my last week's post, as a part of the bullish scenario, I documented as follows:

"Now, someone asked me what would negate this Gartley pattern and here is my answer:  if the market closes above Feb 22's high, then, the market will most likely come to retest the recent high of Jan 19."

As of March 1st, SPY closed above Feb 22's high, and therefore, Gartley pattern is no longer valid and I'm expecting the retest of Jan 19's high.

Jumping the Creek

One of the reasons that I found this week's market movement "phenomenal" is that SPY was breaking above the major trend line as follows:

Here is a close look at the SPY daily.  It's been a known fact that this market has been very "gappy" – i.e., it has a tendency of gapping up or down whenever the market approaches the major resistance area.  This was one of those "jumping the creek" events.

SPY Three Drives Pattern

As illustrated below, the first upside target is 115.94, and if SPY is able to maintain the current upside channel, this could be developed into the "Three Drives Pattern" with the next upside target of 120.15.  At the same time, it could also come back down to fill the gaps before heading higher.  We just need to watch the market closely to see which way to go.  As the OPX (Option Expiration) week typically is a bullish week, my bias is more toward the upside than the downside, which would give more probabilities of completing the three drives pattern.

SPY Bear Call Spread March 116/117

Here is one of the examples for March OPX play.  Once SPY reaches the price target of 115.94, you can sell March 116/117 credit spread as follows:

Risk = $60 (stop at $116.42)
Reward = $300 (exit at $113.40) 
Risk/Reward = 500%
Return on Investment = $300/$580 (max loss)

This trade could possibly be completed in three days (entry on Wednesday, Exit on Friday)

Alternatively, if you believe that SPY expires below the short strike price of $116, you can hold on to your position for a maximum profit of $420.

Three Peaks and Domed House Update

Another reason of the market's phenomenal move this week was the resolution of the "Three Peaks and Domed House" pattern. 

As discussed in my Oct 09 post, the INDU monthly chart is forming the Three Peaks and Domed House" pattern as follows:
 
INDU DAILY Chart

Likewise, as discussed in my last week's post, the INDU's daily chart is forming the"Three Peaks and Domed House" pattern as well,  Here is the INDU's daily chart.

INDU MONTHLY Chart

Now, watching this week's market price movement, I feel like I found an answer.  If both daily and monthly charts are forming the identical pattern, why can't we expect the same results in both cases? 

EUR/USD Three Drives Pattern

If there is any correlation between the Euro currency and the equity market – which doesn't seem to be the case at this moment, there could be a possible turning point once this pair reaches the other side of the channel and heading south once again.  I'm expecting a possible turning point toward the end of next week as it took 16 trading days of sideway consolidation back in Dec 09.  Does this currency pair trigger a selloff inot the OPX week?  Let's see……. 

Spring has come to Seattle and we see many cherry blossoms.  Have a wonderful weekend, everybody!

Well, that was a pretty good week for me (sorry, bears!).  Although the market went much higher than I originally anticipated, I had a very good trade overall and I'm pretty happy with it.

As you may know, I love geometric patterns and symmetry and I play with various scenarios and see which pattern fits into different scenarios.  Today I am going through some indices and possible chart patterns and see if these patterns are going to play out for the coming months.

Head and Shoulder Pattern

Here is Dow Jones Industrial developing a potential H&S pattern.  Remember three drives pattern (incomplete) back in Sep & Oct, which drove everybody nuts?  I'm delighted to say that they are back!  If you take the triangles from Sep & Oct, and apply it to the current price movement – Voila!  The price, angle, and time almost makes a perfect match! (assuming that it's going to drop down to the trend line to form a same pattern)  I could possibly see the repetition of the left side price pattern on the right side for the coming months. 

Gartley Pattern (possibly turning into Butterfly Pattern)

I have laid out this pattern with SPY a few weeks ago and this seems to be playing out nicely, and pretty much in line with INDU H&S pattern above – same price movement from a different point of view.  This pattern is still in tact and if SPY goes above 78.6% fib, this pattern could turn into a "Butterfly" pattern and  will be updated accordingly.

M Pattern

Here is a possible M pattern formation in IWM.  IWM is one of the strongest indices of them all, and I'm expecting IWM to come to retest the recent high and possibly goes higher in the current price movement.  Unless IWM breaks above the previous high and close above it, I would expect it to come back down to form an M pattern. 

Three Drives Pattern

Here is UUP developing a possible three drives pattern.  My expectation is UUP is coming to retest June 15's high.

SPX Open Interests

As illustrated above, my expectation of the general market for the coming months is pretty much a range-bound.  I don't expect the market to crash down to 600 or go to the moon.  So, whether you are a bull or bear, be sure to take a profit before it's gone. 

One of the strongest evidences that I have for my expectation is SPX open interests.

As an option trader, I keep a very close look at the open interests, and they can tell you many things. 

Although I forgot to take a snap shot of Feb SPX open interests, there were more than 150,000 open interests of both call and put options at a strike price of 1100 a day before OPX.  Believe it or not, Feb OPX settlement price was almost exactly at 1100 (if I remember it correctly, it was at 1101). 

(On a side note, when I saw SPX closing at 1106 a day before OPX, I was wondering how they (i.e., MM) were going to drop this tape as much as 6 points overnight (as SPX's settlement price is the opening price of OPX Friday), and Voila!  ES magically dropped more than 12 points and came back right at 1101 at the open to make both ends meed.  Speaking of market manipulation…..)

Now, if you go back to Oct of last year, SPX has been settled right around 1100 almost every month since Oct 2009, except for January 2010. 

Now, if you take a look at March open interests, you would be amazed to see how many open interests you can find at a strike price of 1100.

Altogether, there are as much as half a million open interests right at 1100, and that is telling me that we are going to be in this trading range for a while.

I hope everybody has a wonderful weekend.  To my surprise, we are getting a sunshine in a rainy Seattle this weekend!

My apologies for being absent for some time.  I had some family business to take care of, and I'm glad that I'm back!

SPY Gartley Pattern

Here is my market view of SPY.  We had a reversal candle on Friday, and I'm expecting a follow through on Monday (as we all know almost every single Monday is a big UP day).

Here is one of the price patterns coming to my mind.  Of course, we don't know how high the first leg will go up, so the price projection needs to be adjusted accordingly.  This pattern may or may not be working, as it's still too early to tell, but I will be watching this pattern very closely.

If you missed catching a falling knife on Friday, you still have a chance to make money in both directions, so let's wait for the right entry point.

(On a side note, I'm pretty sure that people who go long at the end of Friday and short on Wed every week would have made a pretty good money on the indices, as every Monday is a big up day and every Thursday is a big down day!!).

Going Long (Bull PUT Spread)

If Monday gaps open big, it may be too late to go long – but by all means, here is one of the examples of a bull put spread – SPY 106/107 (buy 107 put and sell 106 put) credit spread.  This type of spread becomes very effective ESPECIALLY in the last 2 weeks from OPX (Option Expiration) as you could take advantage of the time decay.  If you could pick the right direction, you could double your money without a big price move AS LONG AS the underlying stock stays above/below the short strike price.

In this example, as long as SPY stays above 107, you could double your money in two weeks. 

Going Short (Bear CALL Spread)

After SPY hits the first target of 109.83 (gap from Feb 3), you could take a short entry.  I'm expecting some kind of peak on Feb 16 (Feb 15 is a holiday), which is Tuesday on OPX.  You could either short it via March put option or Feb bear call spread.  If you are taking a bear call spread, please remember that you only have 4 days to make it work, so use a very tight stop (right above the gap fill).  If you could pick the right direction, you could literally double your money in 4 days!

Here is an example of 110/111 bear call spread (buy 111 call and sell 110 call options).  My expectation is for SPY to expire right around 108 in Feb OPX.

Combining them together (Iron Condor)

If you are sure that SPY will expire somewhere between 107 and 110 for Feb OPX, you could hold on and combine these two spreads together to maximize the profits.  Your entire risk would be $100 whereas the max profits would be $900 (you need to put them on at a different time.  The results would be different if you put them on all at once).

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Using Pivots

I have discussed using pivot points for good entry/exit points previously, and even if you have absolutely no idea which way the market is going, Friday's support was well expected and supported by both weekly and monthly S2 pivots.

Another price pattern coming to my mind at this point is IH&S, which would result in a double top and potentially forming M pattern afterwards.  Either Gartley or IH&S patterns, I believe the major indices are currently going through the correction period against the major move up from March 08 low, and there will be one more leg up after this correction is over.  This is even more clear if you take a look at a monthly chart. 

SPX Monthly Chart

Here is an update of the SPX monthly chart  As you can see, monthly candle is a single leg up (no lower high candle) up until Jan 10 and this is the first (possible) lower high candle since March 09.

EUR/USD Thee Drives Pattern

Here is the EUR/USD update.  This pair has completed a=c pattern at 1.3654 and ready to bounce.  I see a possible three drives pattern formation on this pair.

 
  
 Happy Superbowl Sunday everybody!