I re-entered a short position today at RTH close on the RTY/M2K futures. The decision to re-enter this trade (which we exited earlier this morning) was based on the combination of a potentially completed EW corrective pattern, a lack of proportionality in the initial decline, and technical indicators showing divergence under resistance levels. This is a speculative trade with a high probability of failure, but I strongly believe the initial decline is not yet complete. Even with the potential for a larger diagonal structure to give us a higher high, the analysis said it was a good probability set up to take a speculative short on this initial five wave pattern completing. Starting with the 15-minute RTY chart below, I’m showing you my interpretation of this initial decline off the highs. We have a clear 3 waves down and a potential fourth wave that is completing just as the regular session closes on the U.S. exchanges.
The reason I believe strongly that we could see follow through on this decline is because the initial five wave structure for the decline from yesterday's high is not complete. This decline really counts best as three waves and the proportionality appears to be off. We can assessed this by measuring a box from yesterday’s highs to the internal wave iv of wave (iii). This is usually the location where the decline is ~50% completed. Projecting a second box shows that we could see a decline in price to the area around 2040-2045 to give more complete proportions for this swing down. Another interesting observation for me is that price has come almost right up to and touched the same price level where these two boxes meet. This is a guideline in Elliott Wave counting which says that the fourth wave will often terminate in price within the vicinity of the fourth wave of one lesser degree. In this case it would be wave iv of (iii).
In addition, you’ll notice new lines drawn on this chart in
magenta. These are Fibonacci confluence zones drawn using the internal markers
of this initial move down. The measurement zones started at the truncated
bottom and terminated at the end of wave (ii), the strongest bar in the decline
that ends at (i), and the HOD from yesterday. You can see that price has come
up into one of these zones. The fact that price has hit a confluence zone with
a potentially completed EW pattern is a reason I’m interested in selling. Let’s
see what the indicators say.
The 1-hour chart shows the 14-period RSI coming up into the 45
period EMA. It seems to be acting as support so far, but I will admit I am
concerned that it is using the 45 period EMA as support instead of the 13
period SMA. This tells me that if we do see price turn down, it’s likely the
final wave before a larger correction. The composite index (middle oscillator)
shows price at an overhead resistance line (not entirely a reason to sell, but
reasonable). Finally, the detrended SMA has also reached the support line and
is showing a potential rejection. If I can get a confirming signal on the
15-minute and 5-minute charts I’ll go short here.
The 15-minute chart shows that the 14-period RSI could
continue higher. It’s already used the 45-period EMA as support once to keep
the bounce going. However, the composite index and the detrended SMA are
diverging with the RSI and that tells me that there may be some weakness on the
Bull’s side of the market. Not much else here other than to note that if this
signal is valid, I may need to go back and reassess where I place my overhead
resistance lines on the detrended SMA. Can the 5-minute chart give us any
confirmation?
On the 5-minute chart we can see divergence between price/RSI and both the detrended SMA and composite index. It’s not the strongest signal, but it is enough to convince me to take the trade. I set a buy limit right at the border of the confluence zone at 2066. My stop is set at 2073, above the confluence zone two zones up (I believe the confluence zone directly overhead may be part of a much wider confluence zone). Despite my calculator saying I can short 6 contracts with a price target of 2045 and a 3-to-1 R/R ratio, I decide to limit my risk and only short 4 contracts as this could go either way.
Shortly after placing the trade, price rapidly declined from
2066 to 2062. I’m up on this trade, but price has since turned up in what could
be an extension higher or simply a micro scale wave ii as part of this wave (v)
decline. The RSI on the 15-minute chart has bounced off the shorter moving
average (that’s not a bearish signal). While I may have the direction correct,
I may have entered my position too early. I have moved my stop to breakeven at
2065.2 and we will see what happens during the overnight futures session.
Update #3 (~8:15 a.m. May 9th, 2024): Got some more sleep and feel better. Got the notification around this time that I stopped out. May look to re-enter a singular short position right before the unemployment data drops. I was looking to cover 3 positions and leave a single one on with a stop at B/E on the chance we gap down from higher than anticipated unemployment this past week. Instead I stopped out on all 4. If I re-enter it will be just before the data drops with a stop at my original position of 2073.
Update #4 (8:28 a.m., May 9th, 2024): I re-entered the trade with a single short contract at 2061. Stops were set to my original B/E at 2073. Data drops in 2 minutes.
Update #5 (8:40 a.m., May 9th, 2024): Well....we did not gap down, but we also have not hit my stop yet. We did gap straight into a major confluence zone of resistance around 2070-2074. I shorted 2 contracts in this area, the 1-minute and 4-minute detrended oscillators show a double top formation. Stops were set at 2077 for this new trade. I still have the one I entered earlier as well. We'll see what happens at RTH open. If I have time this weekend, I'll write up my thoughts on why I decided to re-short from the gap up on the news.
Update #6 (9:45 a.m., May 9th, 2024): Moved all my stops to 2065. I probably moved them down too early, but if there is a bullish alternative, it is that we are completing the micro 'c' wave of (ii) to a new higher high. Price shouldn't come back to 2065 if so. If we remain in a bearish down trend to start a new wave, we should see a much larger decline in price from here on. As I am writing this my stops were hit. I'm flat on the market now, going to wait and reassess before jumping back in. A small winner, but still a winner.
Trade Summary
Short 4 M2K @ 2066
Close 3 M2K @ 2060.6 (banking 162 total ticks or $81)
Close 1 M2K @ 2060.5 (banking 55 total ticks or $27.50)
Short 1 M2K @ 2061
Short 2 M2K @ 2068.6
Close 3 M2K @ 2065 (banking 32 total ticks or $16)
Total: +249 ticks ($124.50)
Best,
DW
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