Red Option Technical Update

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Technical Report 060719
by: Jim Ellis, TimeFrameInvestor.com

At the end of last week we began seeing warnings on the daily charts that the downward move was becoming oversold and over extended. However, there remained a downward potential on the different time frames which kept the prices at the lows, even setting a new low yesterday morning.

That afternoon rally yesterday created the best prospects for a bounce to develop that we had seen yet. Today that turned into quite a bounce as the indexes began the day with strength and just took off running to give us quite a one day bounce as the indexes ended the day at/near the highs of the day, along with taking back quite a bit of the recent decline on the djx, spx and rut.

The SPX retraced approximately 2/3 of the recent downward move. This represents a possible resistance level, one that also aligns with the lows and close from a week ago.

The bounce today was quite a strong move, creating a green candle, green trend and an up arrow. Not shown this evening is the short term chart, but I am sure as you can imagine, the morning spike created extremely overbought conditions very quickly.

This creates a bit of a conflict. We have strength showing up on the daily chart, but we have a short term chart that is overbought, and the price hitting resistance. While there is the possibility we could see follow thru to this move, it also opens up the possibility that this is nothing more than a "one day wonder".

IF the price can hold up and start to move above the highs from today it will confirm the strength on the daily charts and show an upward potential, with the possibility of retesting the highs from the end of June. On the spx 1270 to 1280 is the area where there would be considerable resistance, with minor resistance at 1265.

It is the overbought and weakening short term charts, along with the resistance from this retracement and history levels marked on the daily charts that has caught my interest, along with the fact that while there was quite a fight at the lows, each index set a lower low, even the rut that set a slightly lower low. All of this taken together points to the potential that a daily chart lower high could form, which would present favorable conditions for us. What we will want to be aggressively look for tomorrow is indications that there is not going to be any follow thru to this bounce, showing it was just a "one day wonder".

The biggest object of using the Time Frame Charts is in looking for situations that present favorable conditions for a new position, whether it is a longer term position that involves selling premium or a shorter term swing trade. One of the hardest things to accept is that not every move made by the price will present favorable conditions for a new position. At the beginning of this week I was talking about the conditions for selling a put spread, that while we had many warnings that made it a very tempting proposition, the different charts were still showing a downward potential which made the risk factor moderate to high. For some this risk was acceptable, but for others it was not. There is nothing wrong with having a low tolerance for risk, it will reduce the number of trades entered, but the ones entered will have a higher probability of being successful. This is just part of the risk/reward tradeoff.

For a new swing trade the levels were listed that would confirm the bounce was underway. This move today was so fast that the window of opportunity was very small to act upon. There are times when this happens, and if the opportunity blows past so quickly that you can't take advantage of it, then the best thing to do is accept it and look for the next opportunity that will be presented. I am sure that by now you know I loathe chasing after a move, as it is one of the most reckless trading decisions a person can make. Many times when you chase you will succeed in catching the price, if not at, very near the end of the move.
Jim. www.TimeFrameInvestor.com
IP Right belongs to Red Option

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Technical Report 060727
by: Jim Ellis, TimeFrameInvestor.com
This morning the indexes once again tried to move up to continue the daily chart bounce, but the prices just could not hold up and fell back this afternoon.

For the past few days I have been talking about the resistance that the prices have been approaching and testing, along with the warnings we have been seeing on the short term charts that have been indicating that the bounce is coming to an end.

This has been quite a fight that has been taking place between the strength we had been seeing on the daily charts against the warnings on the short term charts. When the initial morning strength started falling apart today we received some strong short term indications that the bounce is over.

"There still remains some risk that this daily chart bounce could continue, but with it already faltering and the overall indecision that we saw today is an early indication that the bounce could already be coming to an end. We will want to watch the short term charts closely tomorrow, as the early trading will likely let us know if that short term top has formed."
The SPX started the day with that brief spike up to 1275, but then fell right back to the 1270 area. For most of the morning the price kept trying to move up above yesterday's highs, but the short term chart kept showing weakness, and then this afternoon the price began turning down, falling below 1270 and 1268. This removed the strength from the daily chart candle, and is showing the spx daily chart is stopping just below the resistance of the previous highs.

With the upward move ending we will now be looking for a downtrend to develop on the short term chart, as an intraday lower high would present a second opportunity for a downward move towards the recent lows to get underway.

Because of the different time frames we were seeing the potential that this bounce was going to falter, and today we saw some very strong indications that this is precisely what is transpiring. We now will defensively watch the resistance that has stopped this daily chart bounce, as a move thru this resistance would change the facts.
Jim. www.TimeFrameInvestor.com
IP Right belongs to Red Option

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Market Plot
July 31, 2006
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Commentary:
A rebound in the tech arena helped the Nasdaq to snap its three-week losing streak, but institutional buying interest was once again suspiciously absent. The Semiconductor Index ($SOX), which has dropped more than 25% since May 5, finally registered a solid bounce of 3% last Friday and pulled the major indices along with it. The Nasdaq Composite rallied 1.9%, while the S&P 500 and Dow Jones Industrial Average gained 1.2% and 1.1% respectively. The small-cap Russell 2000 advanced 2.1% and the S&P Midcap 400 closed 1.6% higher. Friday's gains also enabled the indices to finish at their highest levels of the week. The Nasdaq turned in a substantial weekly gain of 3.7% and the S&P 500 kept pace with a 3.1% advance.

Looking purely at last week's percentage gains in the market, one would understandably assume that stocks have recently been performing well. However, one major problem is that the market has yet to confirm its gains with higher volume. In Friday's session, total volume in the Nasdaq declined by 14%, while turnover in the NYSE was 7% lighter than the previous day's level. We don't mean to keep harping on it, but the lack of volume on the "up" days should be a primary area of concern for the bulls. Within the past week, there have been two large gains in the broad market. On July 24, the S&P 500 rallied 1.6%, then followed it up with a 1.2% gain on July 28. However, volume declined on both days. This is of paramount importance because the stock market has never reversed from a primary downtrend without first having an "accumulation day," defined by higher prices and higher volume. With institutions accounting for more nearly 75% of the market's average daily ! volume, rallies simply cannot last if they are driven purely by retail buying.

In the July 28 issue of Market Plot, we mentioned that the $SOX index may be trying to put in a bottom, but it was still below resistance of its primary downtrend line. Its subsequent three percent gain later that day helped confirm our thought about a short-term bottom, but also caused the index to close right at resistance of its downtrend line. Going into today's session, this is one index you want to pay attention to. If the $SOX manages to break out above its multi-month downtrend line, it will undoubtedly force the bears to cover their short positions. In turn, it could lead to a broad-based rally that may finally generate a substantial rise in turnover. Conversely, failure to break out above that downtrend line could just as easily lead to a resumption of the primary trend. Remember that the semiconductor index tends to lead the market in both directions because it is so heavily weighted within the Nasdaq, which usually leads the other indices. The upda! ted chart of the $SOX below shows the close proximity of the index to its primary downtrend line:

Last week, our attention was also focused on key resistance of the 1,280 level in the S&P 500. We mentioned that a breakout above that level would mark the first significant "higher high" in the S&P since the downtrend began on May 10. Since the index closed at 1,278 on Friday, odds are good that we will see a test of that level within the next one to two days. On July 18, the S&P 500 set a "higher low," which was the first step at setting up the index to form a "higher high." The daily chart below illustrates Friday's close just below the 1,280 resistance:

As earnings season begins to wind down, we can look forward to technical patterns being more likely to follow-through. Much of the volatility over the past two weeks has been driven largely by knee-jerk reactions to earnings surprises, but we will soon see the market's real reaction to the raft of earnings that have been released. For now, our bias remains bearish in the intermediate-term, but neutral in the short-term. The major indices remain in a downtrend, plain and simple. Until that changes and is confirmed by higher volume, we have no reason to fight the trend. With last week's attempt at a broad-based breakout, this may not be the best time to initiate new short positions, but we certainly would not aggressively begin buying stocks and ETFs either. If you feel the need to be long the market, focus on sectors such as Pharmaceuticals, Utilities, and Gold/Silver Mining, each of which have been showing decent relative strength. Regular subscribers will se! e below that we are actually targeting one of the mining ETFs for potential long entry today.
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Open ETF positions:

Long LQD (Positions may be closed out intraday and are not part of this daily newsletter. Open positions provided as a courtesy to REDoption subscribers. Please see the disclaimer below for more info.)

Edited by Deron Wagner
Founder and Head Trader
Morpheus Capital, LP
morpheustrading.com
IP Right belongs to Red Option

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Market Plot
August 2, 2006
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Commentary:
Traders kicked off August in a bearish mood, as the broad market sold off on higher volume yesterday. Each of the major indices gapped down below their previous day's lows, then promptly fell further throughout the first hour of trading. Stocks then oscillated in a sideways range throughout most of the session until a modest wave of buying in the final thirty minutes lifted the indices off their lows. Still, the Nasdaq Composite lost 1.4% and the small-cap Russell 2000 slid 1.5%. Both the S&P 500 and Dow Jones Industrial Average showed relative strength, as each index closed only 0.5% lower. The S&P Midcap 400 shed 0.8%. Despite the closing losses, the buying interest into the close helped the broad market to recoup a large portion of its intraday losses, and also enabled each of the major indices to finish near the middle of their intraday ranges.

Total volume in the NYSE increased by 6% yesterday, while volume in the Nasdaq was 2% higher than the previous day's level. The broad-based losses combined with the higher volume caused both the S&P 500 and Nasdaq Composite to register a "distribution day" that was indicative of institutional selling. It was the second such day of higher volume losses within the past four sessions. If you have been paying attention to our daily volume analysis of the broad market, yesterday's higher turnover should not have come as a surprise. Considering that volume has been light and decreasing on most of the market's "up" days in recent weeks, it makes sense that volume would accelerate on many of the "down" days. This bearish price to volume ratio "under the hood" of the stock market shows that hedge funds, mutual funds, and other institutions remain biased on the sell side. Only a sudden shift to higher volume "up" days and lighter volume "down" days would indicate the return t! o a positive sentiment. Market internals were also firmly negative yesterday, particularly in the Nasdaq. Declining volume in the Nasdaq exceeded advancing volume by a margin of 7 to 1. The NYSE ratio was negative by 2 to 1.

Only a few industry sectors finished in higher territory yesterday, but those that did made substantial moves. The biggest gainer of the major sectors we follow was the Gold and Silver Sector Index ($XAU), which zoomed 2.5% higher and broke out above resistance of a seven-week downtrend line:


In the August 1 issue of Market Plot, we illustrated the bullish setup in the iShares Silver Trust (SLV). As anticipated, SLV broke out and rallied more than 3%, alongside of yesterday's strength in the $XAU index. We notified subscribers beforehand that we planned to buy SLV on a rally above the $115.05 level, which happened shortly after the open, so we are now long SLV with a marked-to-market gain of approximately 2.5 points. The iShares Gold Trust (GLD) similarly rallied 2% yesterday, but we bought the silver ETF instead because it is showing more relative strength than gold. Taking an updated look at the daily chart of SLV below, you will notice there is little overhead resistance until the prior high of $133.60 that was set on May 30. That area of resistance is our profit target on the trade:


Along with gold and silver, the DJ Utilities Average ($DJU) also outperformed the market yesterday. After four days of sideways consolidation in a tight range, the $DJU rallied 1.1% and closed at a fresh 52-week high. The Utilities HOLDR (UTH) has a very similar chart pattern to the $DJU and also closed at a new 52-week high. Notice how higher volume also confirmed the move. UTH traded more than double its average daily volume yesterday:


One reason for the broad market's weakness yesterday is that the Semiconductor Index ($SOX) reversed after rallying into resistance of its primary downtrend line. Recall that we were focused on whether or not the $SOX would break out above its multi-month downtrend line, but so far it has not. The $SOX downtrend remains intact for now, but a swift reversal back above that downtrend line would likely give the overall market a bullish shot in the arm. Notice how the downtrend line in the $SOX perfectly acted as resistance yesterday:


Based on the bearish "head and shoulders" pattern in the iShares Russell 2000 (IWM) that we recently illustrated, we entered a new short position in IWM yesterday. If it follows through with a break below the "neckline" at the 66.50 area, it should lead to substantial downward momentum, but we have a protective stop just above the high of the right shoulder (and the 200-day MA) in case the pattern fails. By the way, remember that the new ProShares family of ETFs enable you to take a bearish position on the broad market without being required to sell short. The ProShares Short QQQ (PSQ), for example, actually gained 1.7% while the Nasdaq 100 Index lost 1.6%. These new ETFs are a great way to take bearish positions in your non-marginable retirement accounts that do not allow you to sell short. A complete list of the ProShares ETFs can be found on the "specialty ETFs" section of our ETF Roundup guide.


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Open ETF positions:

Long SLV, LQD, short IWM (Positions may be closed out intraday and are not part of this daily newsletter. Open positions provided as a courtesy to REDoption subscribers. Please see the disclaimer below for more info.)


Edited by Deron Wagner
Founder and Head Trader

Morpheus Capital, LP
morpheustrading.com
IP Right belongs to Red Option

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Technical Report 060803
by: Jim Ellis, TimeFrameInvestor.com
The day began with quite a bit of weakness on the open, but the prices snapped back from the early losses, and then started clawing their way to the recent highs.

I have lost track of how many days I have commented that the shorter term charts have not been presenting favorable, but instead moderate risk characteristics. The complete lack of short term follow thru has been terrible, as a move in neither direction has been able to develop.

The only redeeming factor about this lethargic market action has the erosion of premium that has been sold.

"we will want to defensively watch the resistance of 112.50 on the djx as a move above this resistance would signify an upward move on the daily chart."
The djx "peeked" above the resistance today, but was not able to hold above that resistance, with the djx falling back to end the day just barely below 112.50.

This evening I showed the past 2 highs on the djx daily chart, from the end of May and beginning of July to show that this is a pretty strong resistance area.

What is interesting is that the short term chart became overbought so quickly and prevented the price from holding above that resistance. Also we are only seeing a blue candle on the daily chart, not the strong green one. This shows the resistance is still stopping the price from making an upward move. This resistance is being thoroughly tested, and we will need to watch closely to see if the prices can break above and hold above this resistance to show an upward move would be underway.
With how the shorter term charts have been unable to form a directional move this week I don't feel that today gave us a clear indication that the price will move higher, however, it did increase the risk that an upward move could develop.

It has been quite some time since we have seen conditions like this on the shorter term charts, where there is not a good risk/reward profile to act upon, along with the way the prices have just stagnated in a such a tight range.

A big part of this stagnation is the uncertainty about the Jobs report that is going to be released tomorrow morning. Many traders are looking for the jobs report tomorrow as an indication of whether the fed will stop raising rates, or if there will be yet another rate increase at next weeks meeting. A weak jobs report would be "good" for those that are looking for an end to the rate increases as it would take some inflation pressure off of the fed. But if the report is strong, then it shows inflation pressure and people feel the fed will likely raise rates.

For the past few months we have seen repeated rallies each time people feel that the fed is at the end of the rate increase cycle. Perhaps tomorrow will be more of the same if the jobs report is weak. However, there is the risk that the end of the rate increases has been priced in and it could be a "sell the news" event. One other thing to consider, if people get a weak jobs report like they want to see, what ramifications does this have about a slowing economy and what impact would it have on future earnings? There is also the possibility that the job report will be stronger than expected, showing inflation risks which would likely mean another rate increase next week.

This shows the problem with trying to determine just how a report will come out, and how people will react to it. The way the prices moved up today shows there are plenty of people that are "betting" that the report will be just right where the fed can end the rate increases. But the strength today was not enough to give us a good signal that this viewpoint will be what happens. We are seeing an increased risk that this could play out, but right now the resistance is still having an impact and the risk is also quite high that the report won't be well received, whether is it too strong, or too many feel a weak report will have a bad impact on future earnings. For short term swing trades we are right at a pivot point where the price could go either way. It still presents a moderate risk/reward profile either way though, and we would want to be careful with a shorter term directional position.

For the longer term we focus on selling premium. A week ago I was talking about a likely sideways move on the weekly charts as the daily chart bounce began to falter. Since then we have seen the prices stalling and stagnating, which is one of the things that you want to see when you sell premium.
Jim. www.TimeFrameInvestor.com
IP Right belongs to Red Option

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Market Plot
August 7, 2006
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Commentary:
The broad market began the day with a strong opening gap up last Friday, but confluence of the Nasdaq Composite's primary downtrend line and its 50-day moving average caused stocks to trend lower throughout the remainder of the session. Within a few minutes of the market's opening, the Nasdaq was showing a gain of 1.3%, but the index finished the day 0.4% lower. The S&P 500 and Dow Jones Industrial Average similarly reversed early gains, as each index lost less than 0.1%. Both the small-cap Russell 2000 and S&P Midcap 400 indices fell 0.4%. The opening strength caused our short position in the iShares Russell 2000 (IWM) to trade within five cents of stopping out, but it finished the day lower and could now resume its primary downtrend from here. The iShares Silver Trust (SLV) moved several points higher, causing our long position in SLV to show a marked to market gain of nearly 9 points since our August 1 entry.

Total volume in the Nasdaq increased by 1%, but volume in the NYSE was 5% below the previous day's level. The loss on higher volume technically caused the Nasdaq to register another bearish "distribution day," but the percentage increase in the Nasdaq was inconsequential. Further, turnover in both exchanges came in below their 50-day average levels. August is typically a month in which many traders and investors take a vacation, so it is common to see a decline in both volume and volatility during this time of the year.

Perhaps the biggest factor that caused the market to reverse its gains last Friday morning was the convergence of resistance on the Nasdaq Composite. Not only did the Nasdaq run into resistance of its 3-month downtrend line, but it also failed to break out above its 50-day moving average. We have circled this multiple area of resistance on the daily chart of the Nasdaq below:

Initially, it looked as if the S&P 500 was finally going to break out and close above its 1,280 resistance level, but the Nasdaq's weakness acted as an anchor on the other indices. This resulted in bearish candlestick pattern being created on the daily chart of the S&P 500. The long "wick" or "tail" on Friday's candlestick has created overhead supply from the bulls who bought the gap up in anticipation of further gains. Therefore, it will now take a lot more work for the S&P to get back above last Friday's high. We circled this bearish pattern on the chart below:

The S&P's third failed breakout attempt at the 1,280 level, combined with the Nasdaq's bearish reversal at its resistance, does not bode well for the market. However, the one positive is that the Semiconductor Index ($SOX) closed last week above its August 3 low. This means the $SOX is still above prior resistance of its downtrend line, which should now act as the new support level. Remember that the overall broad market tends to follow the $SOX, so watch that index closely in the coming week. If the $SOX blows off last Friday's weakness and quickly regains strength, it would mandate a bit of caution on the short side of the market, at least in the near-term. But until then, we must assume that the primary downtrends in the major indices remain intact. If long, stay focused on the Pharmaceutical Sector ($DRG), one of the few industries showing great relative strength. The DJ Utilities Index ($DJU) is consolidating at its high as well. On the short side, just about! every other industry sector provides a positive risk/reward ratio for short selling. As always, be sure to trade what you see, not what you think!
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Open ETF positions:

Long SLV, LQD, short IWM (Positions may be closed out intraday and are not part of this daily newsletter. Open positions provided as a courtesy to REDoption subscribers. Please see the disclaimer below for more info.)

Edited by Deron Wagner
Founder and Head Trader
IP Right belongs to Red Option

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Market Plot
August 15, 2006

Commentary:
The major indices leapt higher out of the starting gates yesterday morning, but as we often see in a weak market, stocks rolled over in the afternoon. The broad market still closed higher, but each of the indices gave back most of their gains and finished near their intraday lows. Both the S&P 500 and Dow Jones Industrial Average eked out gains of 0.1%, while moderate strength in the Networking and Semiconductor sectors helped the Nasdaq Composite advance 0.6%. The small-cap Russell 2000 similarly closed 0.4% higher, but the S&P Midcap 400 only managed a gain of less than 0.1%. At their mid-day highs, both the Nasdaq and Russell indices were printing 1.7% higher, but the stock market's afternoon downtrend erased most of those gains.

Total volume in the NYSE was 6% higher than the previous day's level, while volume in the Nasdaq increased by only 1%. Technically, the market's broad-based gains on higher volume registered as a bullish "accumulation day" for both the S&P and Nasdaq, but the intraday action was rather negative and certainly not indicative of institutional buying. The positive is that turnover did not increase during the afternoon selloff, but it didn't decline either. Volume levels in both exchanges finished the day about the same percentages higher than where they were when stocks were at their intraday highs. Again, we expect turnover to remain light throughout the rest of the month, as the summer doldrums don't really end until after the Labor Day holiday.

In healthy markets, buying a breakout to a new 52-week high is one of the most simple and profitable trading strategies. However, breakouts to new highs in a weak market have a very high rate of failure. When the breakouts do fail, they trap the bulls who bought the breakouts, which typically leads to rapid downward price action. In fact, one of our favorite techniques in a bear market is short selling stocks and ETFs that break out to new highs, but immediately fail and fall back down to the bottom of their prior trading ranges. Momentum accelerates, which usually results in further downward price action and a break of the primary uptrend lines. The key to all this, of course, is making sure the breakout has actually failed before attempting to sell short. Obviously, selling short a stock or ETF that has just broken out to a new high without first waiting for confirmation of the price failure is suicidal. One such ETF that meets our criteria for a failed breakout ! is the iShares DJ Real Estate Index (IYR). On the daily chart below, notice how IYR gapped up and broke out to a new high on August 4, but promptly fell back into its prior range two days later:

Since failing its breakout, IYR has been consolidating near the low of its range. If it breaks below the August 11 low, it will also correspond to a break of its 50-day moving average. That is the point at which we would consider initiating a new short position in IYR. A logical protective stop price would be 50 cents to 1 point over the 20-day moving average. Taking a longer-term look at the technical picture of IYR, we also like that a double top has formed on the weekly chart. Resistance of the prior high from March of 2006 was one of the major reasons this month's breakout attempt has failed:

Yesterday's action caused both the S&P 500 and Nasdaq Composite to form bearish "inverted hammer" candlestick patterns on their daily charts. This pattern occurs when an index rallies at some point during the day, but subsequently sells off and closes near its lowest level of the session. Such price action tells us there was indecision and a tug-of-war between the bulls and bears, but the bears took control in the end. Similar bearish formations have occurred with the S&P 500 on three other days since the beginning of the month. Notice also how the 200-day moving average once again held the S&P down:

The Nasdaq Composite tested resistance of its primary downtrend line for the third time within the past two weeks, but once again failed to break out. Its "inverted hammer" candlestick formed after failing to overcome the downtrend line:

The bears had the upper hand yesterday, but don't forget that the broad market remains choppy and range-bound in the short-term. As long as the major indices remain below their respective downtrend lines, the overall odds favor the short side of the market. However, we are laying low and focusing on managing existing positions rather than entering new ones. As mentioned in yesterday's newsletter, this is a good time to develop your plan of attack and watchlist for both sides of the market so that you are prepared when traders return back to business in a few weeks.

Open ETF positions:
Long PPH, SDS, short IWM (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

Edited by Deron Wagner
Founder and Head Trade

Morpheus Capital, LP
morpheustrading.com

IP Right belongs to Red Option.

[chiu]

Technical Report 060814
by: Jim Ellis, TimeFrameInvestor.com
On the news of the cease fire between Israel and Hezbollah the markets began the day with an initial surge on the open. The prices pulled back and then had a mid day rally to move above the initial highs from the open, which had an impact on the shorter term as the prices moved above Thursday afternoon highs.. Following this mid day rally the prices started slipping and fell back to end the day back below that Thursday afternoon high. While the action today did have some impact on the shorter term, it did not change our longer term perspective.

This weekend I pointed out the possible double bottom on the NDX short term chart. This morning the price initially spiked above the 1500 level which was the intraday highs from Thursday afternoon but fell back below this level. The mid day rally that moved the price up thru this level was showing buyers were starting to take control as a higher high formed. This mid day rally spiked up come close to the recent highs that we saw over the past 2 weeks. This move invalidated the short term downward potential that we had been following as we did not get the downward follow thru.

On the NDX daily chart I drew a box to show the congestion zone the price is trapped in. While we still have weakness in the price and trend which points towards a greater prospect for the price to move down from this congestion zone, the inability of the price to do so, and the move on the short term chart has made the short term a high risk situation where we need to see the price break out of this congestion to show a directional move would be starting and lower the risk for a swing trade.

This week I want to begin to examine the topic of strategy, and how we can use the Time Frame charts to formulate a plan.

This evening I wanted to start this discussion with the statement that trading is not a game, it is a business and to treat it as anything but a business is to ask for trouble. While trading is a serious business there are aspects of it that can be compared to playing a game. There are many games that involve strategy, where you have to constantly analyze the situation and make plans for what you are going to do going forward. As the game progresses it may be necessary to change your plans as the other player or fate may throw obstacles in your path. Consider a game of chess. If you play the game without looking ahead you are probably going to get beaten by mediocre players. It is when you look at the move your opponent is going to make and plan ahead to counter that move before it is even made that you begin to master the game. Quite often this involves planning ahead multiple moves.

Trading is similar to this, as the changes in the price are the "moves". When you enter a position you are making a move based on what you expect to happen in the future. This future may be just a few minutes, or it could be days, weeks or even months. The fact is that it is what happens in the future that will determine if you make or lose money on the trade.
When you but a stock or call you are saying that you expect the price to move up. This is the only way you make a profit with this "long" position, the price must move up. When you sell a stock or buy a put you are expecting the price to move down, which it must do to make a profit. This is what makes directional trading so difficult, there is only one thing the price can do to make a profit, it the price moves sideways or goes the other way you are not making money, instead you are losing it.

Many times I have spoke about the problem with using a following strategy for directional positions. By the time you have assurances that the price is making a directional move it is too late to take advantage of the move. The risk of waiting too long is that if it is not a strong move you will enter as it ends. This is also one flaw of waiting for large volume spikes before entering a trade. That volume increase tells you that "everyone" is taking a position and if you wait to see that sign before you enter the you need to ask yourself "if everyone is already getting this position, who is going to be left to continue the move?" When you look ahead and identify conditions that show a move is likely, you can be "early to the party" and have a position before the move begins as it is in the early stage of the development of a move.

The advantage of selling premium is that when you sell a call spread you are saying the price will NOT move up. It doesn't matter if it moves sideways or falls, as long as it does not move up past a certain level you make money. The same applies to sell a put spread, you are saying that you expect the price to NOT move down past a certain level, a sideways move or increase in price will make it a profitable position.

Just like a directional trade, when you sell premium you can wait too long for too much confirmation and miss good opportunities. Also if you wait too long you will have problems finding enough premium to sell to make it worth while.

There is a fine line between being early and being too early. We have all head the saying that you don't want to pick a top or a bottom. In some aspects this is true as emotion can carry a move further than expected. It is when you use the different time frames that you begin identifying conditions that will give you the indication of when a move is ending.

This week I will be continuing this discussion by examining how the different time frames can be used to show what is likely, or in some cases what is not likely, and how the use of the different time frames can be used to make a plan for what the markets are likely to do, and how to identify conditions that we look for that present favorable conditions.
Jim. www.TimeFrameInvestor.com
IP Right belongs to Red Option

[chiu]

Technical Report 061025
by: Jim Ellis, TimeFrameInvestor.com
For most of the day the prices were basically just treading water as traders were unwilling to make a move ahead of the Fed announcement. Once the announcement was made there was the initial "Knee Jerk" reaction with a buying spike, followed by the prices falling back and a fake towards moving lower. Once all of this settled down the prices spent the last part of the day moving back towards the highs with the spx setting a noticeable new high today.

"The spx daily chart is showing strength and is also showing overbought pressure. This does not create favorable conditions for a position that looks for a continued upward move as it shows this move is over extended."
The spx daily chart is also showing strength and with today's move it has graduated to extremely overbought pressure. Just because a time frame is overbought does not mean that the upward move MUST end right away. The overbought conditions are a warning that tell us that the move is over extended and the risk is high that it is likely to end soon, which is why we do not have a good risk/reward situation to enter a new "long" position.

The fact is that the price is setting new highs, so we do not want to be "short", as there is the possibility that this move could continue even longer. But to expect the price to continue this move would be betting on a long shot, and would carry a very high risk. What will present the best conditions for a new position is when this move ends, until then we have to be patient and give this time to play out, and just remember that the more overbought this becomes, the "uglier" it is likely to be when it does fall apart.
Jim. www.TimeFrameInvestor.com