Techinal Indicators

petero1298

I swing trade the S&P 500 e-minis.. Holding period around 1-4 weeks. Reference the time period from 1st August 2016 to 9 September 2016. Was there any technical indicator that might have given a early warning before the sudden and steep drop in the S&P 500 that occurred on the 9th of September?

Thanks in advance for your thoughts.
Cheers ... Peter

markd

I don't trade the e-minis, so keep that in mind. Hopefully, some one who does will answer, too.

E-minis are a short term instrument, so probably you should use intraday indicators. Unfortunately, intraday data goes back only a month on SC, so we can't look at the August period.

But on the daily chart, you can see that MACD Line crossed under its Signal in late July. Then the brief attempt to rally in early August failed to bring MACD Line back above Signal. That was a good indication of weakness, and something that shouldn't happen in an up trend that is going to continue.

Still the market stays up for weeks. To pinpoint a decline, you might look at buyer strength and weakness vs. seller strength and weakness on the individual bars. It takes practice and its easier to do in hindsight.

A rule of thumb that I like is, in an uptrend, higher volume must be confirmed by a new high price.

Aug 16 is the first violation of the at rule - a higher volume down bar.

A second rule of thumb is, if the trend is going to remain intact, buyers must respond to trend violations.

They do respond on Aug 17, closing the down bar up.

But the next higher volume bar, Aug 23 is not a new high, and sellers control the close by bringing to the low.

Then sellers make new lows on higher volume, more up trend violations that suggest the trend is changing.

Buyer response this time is weak Aug 29 to Sep 6. They cannot regain the initiative for several days. Sep 6 is an another up bar on higher volume that cannot make a new high.

Sep 8 is another higher volume bar that fails to make a new high even though, considering the size of the volume, a new high was in easy reach. That turns out to be the final warning.

petero1298

Hi markd
Thanks very much for your comments. I saw the MACD weakness very much the way you described.
And yes, the price action refused to go down for weeks after the initial MACD sell signal in late July.
Many people I knew were whipsawed mercilessly during this period.

I have never tried studying the individual price bars and its corresponding volume before. Thanks for sharing. I will certainly give your method a try.

PS:
I'd suggest 1st Aug 2016 - 14 Nov 2016 to be an extremely difficult period for trend following systems. It's now my go-to time period if I want to back-test any new indicator.

Thanks & Cheers ... Peter

markd

@petero1298 Hi Peter, these are some notes to myself about reading charts by the bar. They expand a little on the comments above. Hopefully, you will find something useful in them:

Higher volume must advance the trend - that is, make a new high close, or new high in an uptrend, and the opposite in a downtrend;

New trend prices on notably lower volume, especially after a previous leg high or low have been crossed implies a lack of interest in taking prices further in the trend direction.

For higher volume bars, range should be commensurate with volume and the open and close should be very near opposite ends of the bar (i.e. a long body). So, for instance higher volume and shorter or compressed range, or higher volume and wicks and/or tails indicate counter trend strength, suggesting the trend is more likely at least to stall and possibly reverse within a few more bars, unless the counter trend fails to follow through;

Closes should be mostly in the direction of the trend. So in an up trend, closes should be consistently above the mid-point or better. Closes below the mid-point shows seller strength. Vice versa for a down trend.

The trend must respond to counter trend strength, else the trend is at least uncertain - that is, if sellers show strength by breaking support in an up trend (for instance, a high volume low or close below the low of a higher volume bar that advanced the trend), buyers must respond quickly to that breach with volume and range to put price back above support; in a downtrend, sellers must respond in like fashion to buyers breaking above resistance;

The open, close, high and/or low of higher volume, wide range bars (including the gap, if any) often become support and/or resistance - for instance, in a down trend, the top of a long body, high volume bar that closed down often caps a counter trend rally.

In longer legs, the reactions often test an area where buyers and sellers fought for control in the prior leg. So, in an up leg you will often see a few strong days, then a couple or more retracement days, then the leg resumes. A reaction from the leg’s top will often return to the point where the leg resumed its progress to the top. Vice versa in down legs.

petero1298

Hi markd
Thanks again for your kind explanation and sharing. It makes sense, the way you explain it. I tend to give the individual price bars a fleeting glance ... and now that you mention it, I realize I'm ignoring a lot of potential clues.

I almost never use the Volume in my analysis. But your method of using Volume is logical and I could see myself learning how to use the Volume this way.

Thanks again for the different perspective in reading the charts.

Cheers ... Peter