Today he will be focusing on the VIX and Foreign Markets.
VIX
The $VIX showed some signs of life by spiking through some overhead resistance with big engulfing candlestick.
Focus on Foreign Markets
I mentioned multiple times in the past month over at Slope of Hope that I was closely watching currency shifts during the months of July and August as the topping process unfolded in the domestic markets. Here are a couple of charts related to my observations.
The first chart highlights the relationship between the Yen/Euro pair and the World Markets … it is clearly an inverse relationship. After Monday, it is easy to see that we finally have another flight to safety move developing in the Yen. Because of this, I am seeing an opportunity developing to short many foreign focused ETF’s (see list below) over the next few days and weeks, solely based on the charting landscape noted above. Technically, any rise by the Yen I generally consider beneficial to shorting the foreign ETF’s. A continued decrease in commodities may also help move this short trade move along.
A Trade Set Up
A viable short trade of the currently shared landscape of the foreign ETF’s (e.g., all of them gapped down today) is a chart pattern which Alan Farley calls a “Hole in the Wall”. It is described well here (so I am not going to repeat much detail about it).
From HARDRIGHTEDGE.COM(Great site if you haven't checked it out)
When planning new gapper trades, the Hole in the Wall should be your first stop. Edwards and Magee briefly mentioned them in their classic Technical Analysis of Stock Trends. In the section on trend theory, they discuss an Island Reversal's important second gap (the one that "completes" the Island). E/M refer to this move as a counter trend Breakaway gap although it doesn't follow the rules they themselves provide on the subject.
While the Hole can mimic a Breakaway gap, it also contains unique properties. The counter trend shock triggers predictable price movement the trader can exploit for quick swing long entries and short sales.
E/M identified gaps by their physical momentum properties and forecasting value. Breakaway, Continuation and Exhaustion gaps defined clear focal points of price action that were seen over and over again in dynamically trending issues. But beyond these few formations, the authors dismissed the balance of gapping throughout the market universe as having no forecasting value. This is simply not true.
While classic definitions were once adequate, their work on the subject now lacks depth for the active trader. And unfortunately, the current trade dogma asserts that everything there is to know about gaps has been written.
The forecasting value of gap behavior goes well beyond the E/M world. The study of Gap Echos alone yields tremendous new insight on entry and exit strategies. And characteristic gaps as significant as the Big Three have always existed for the trader to identify and use.
The “Hole in the Wall” is based on a shock event (much like Monday’s tape). Notice that this particular gap-based set up pattern is structured as a bearish trade AFTER a bullish run up. It is denoted by the gap down (and the subsequent hole or window formed) on the chart. From my personal experience, fibonacci measurements placed within the “hole” often reveal critical post-shock price levels, low risk entry points, and even stop points. As an example, I rarely place a stop any higher than the top of the window.
I have provided a focus on China (FXI) as a chart example above. You will need to conduct your own research of the ETF which you choose – including measuring the gap area, drawing your own fib’s on intra-day charts, and selecting stop prices and entry. I am merely providing what I see as a viable trading idea. Finally, other ETF’s focused on world markets include IFN (India), EEM (emerging markets), EDC (3X leverage), EEB (BRIC focus), BRF (Brazil), and IDX (Indonesia).
Good luck with your trade!
