The Lawrence Chan Blog

When S&P was breaking its previous day low and flushed below 1600. Nikkei had a major stop run that cleared its 12800 downside target I mentioned a few days ago. The break of 12800 unlocked a wave of selling that dropped 400 points quickly and bounced back up with ES.

Right after this flush, a huge wave of buy programs were launched in Emini S&P to take it back up to 1615-1616 area. This sparked a strong short cover rally into the close.

This may mark the end of the selloff in Nikkei for now.

This is, however, not a buy setup for Nikkei as its 20% drop is in place. Nikkei will likely enter a long term bear market from here for at least a few years. It is okay to long on counter-trend basis when the opportunities present themselves but this low established today in Nikkei is not the long term bottom.

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I promised several members to write about specific trading techniques for forex. I have not forgotten about that. I have been working on them for some time. Just some more editing has to be done before I post them.

Tonight I will not be working on articles for sure as Nikkei is going wild at the moment.

Will keep you all posted. Later!

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Liberty Reserve (LR) was in the news all over the place last week. As of today it does not even appear on the front page any more. It is a classic example of minimal attention span from the general public on subjects deem not important to them.

In case you do not know what happened, here is a short summary.

Liberty Reserve is a company that conduct private currency exchange through its Liberty Reserve money. It invented its own currency and function as a middleman to enable money transfer everywhere in the world where there is internet access. It has been very successful until the authorities around the world started to scrutinize its practice.

The founder of Liberty Reserve was arrested in end of May 2013 on suspicion of money laundering. The website can no longer be accessed at this point.

You can read all about its alleged criminal activities and how bad it is in enabling the criminals to conduct transactions from the major news media outlets so I am not going to repeat it here. I like to point out two things that I do not see the news outlets failed to mention.

First, many individuals around the world has no other means to transfer money have been using LR as the service for connection to outside world. LR functions like Paypal with the exception that Paypal refuses to operate in many countries due to certain rules and regulations that a bank has to follow. These individuals are now burnt. Their money is now frozen and their rights are violated with no one to stand up for them.

Second, LR is one of the major sources where people deposit and withdraw money to and from Bitcoin exchange markets. Thus Bitcoin is affected badly as a direct consequence. Yet, Bitcoin has not traded much lower after the incident.

At this point, it seems that the various events happened lately to disrupt the growth of Bitcoin has not stopped the virtual currency from expanding its acceptance. Instead, it gives the much needed publicity to Bitcoin making more people aware of its uniqueness in a world of fiat currencies.

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Tick Divergence is a very useful setup for identifying short term tops and bottoms in Emini intraday. It works very well across many different market environments making it one of the must know trading techniques. Tick divergence provides a distinct edge that no other short term indicators can match.

Example Chart

Following is a chart with 1-minute Emini S&P in the top pane and NYSE Tick Index in the bottom pane.

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During real-time chat this morning, I called for Emini S&P to drop down to at least 1633 today if it traded below 1653 on 5-minute close basis. For some reason the call induced quite a number of emails why I knew a drop like this was coming. I also posted that once the drop has started one should not pick bottom and it turned out to be the correct approach because every temporary low during the last 2 trading hours are smashed through.

There are several reasons leading to this expectation. People who know me for a long time know that I look for this kind of moves all the time so it is not an exception. And there is no magic involved.

First, my breadth models suggest another sudden drop is coming. This put me on high alert for a potential quick and powerful drop once the necessary conditions are in place.

Second, as I put it in Time Map 2,  the combination so far in the week points to high probability that the previous week low will be tagged and that the week low will likely be printed on a Friday. As I mentioned at the end of the article, The Extremely Uneven Distribution Behaviour In Emini S&P 500 Regular Trading Session, the best play in Emini S&P currently are false breakouts.

Putting these clues together, I know a false breakout play to start the drop was the likely scenario.

1633 is the 100% expansion of the first trading day of the week. It is not a magic number. It is also right below previous week low. On intraday basis it is the closest S3 price level. Thus it is the point where sell stops should be triggered. From the chart, it is clear that after 1633 is breached, we have volume unlocked. 300,000 contracts traded from that point onward. Emini S&P closed at the low to finish the week in red.

Finally, it is good old chart reading with direct application of STOPD, I have the complete setup posted as an example here in Chart Lesson: Emini S&P May 31, 2013

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