Maintaining a constructive mindset during the current rally is incredibly difficult for traders overly concerned with volume and structure. And while regular readers are well aware of my affinity for volume profile when it comes to analyzing the health and structure of a market, following a few moving averages is one of the easiest ways to limit and determine one's risk, especially when it comes to grabbing a hold of a short-term trend.
At the present time, short-term traders wanting to remain long (or long biased, if a day timeframe participant) should consider trading against an eight-day or 10-day exponential moving average (EMA). And as long as the E-Mini S&P 500 futures (Es) continue to close above a short-term moving average (I am currently using an eight-day EMA), the odds will likely favor buying the dip (over selling the rip).
As far as Tuesday's regular session Es auction is concerned, day and generally short time-framed participants are expected to remain biased toward the buy side, as long as value remains above 2121.75/2122.75. All trading above that area keeps our focus on new life-of-contract highs.
Failure to attract bids toward the low-2120s exposes us to a potential slide toward 2113.50. But in the event such an intraday decline were to occur, I'd still expect most traders to be more interested in buying the dip (toward 2113.50) than selling short a subsequent rip. Only a continued shift in value beneath 2113.50 begins to reverse the currently bullish short-term momentum.
1. Back on Wednesday May 13, 2015 we discussed the possibility that Peabody Energy (BTU) might be gearing up for a bounce from multi-year lows. Our trigger level for any such bounce was a move above $4.75, but that clearly failed to occur. Moreover, the beaten-down coal producer plummeted on Monday to new multi-year lows. Suffice it to say price failed to confirm the multi-month bullish divergence in the Relative Strength Index (RSI). And that is why we look for divergences, but defer to price when initiating a trade.
2. Vale (VALE), a stock I receive frequent requests for opinions on, has been aggressively sold since we last reviewed it on May 6. When we last reviewed VALE I suggested trailing the stock with an eight-day exponential moving average (EMA). As you can see, the stock has struggled to find a bottom since breaking that reference point on May 7.
The bottom line is, all short and intermediate timeframe moving averages are either in free-fall, or turning lower. And as far as the higher timeframe moving averages are concerned, they too are beginning to resume their downtrends. Anyone itching to buying VALE should, at a minimum, consider waiting for the stock to either test its uptrend line (roughly $6.50), or recapture its 50-day EMA.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS.