May 8th

Return - $17.99

Not a very eventful day as I mostly sat on my hands. I'm waiting for the bearish wave to end and today's market behaviour looked somewhat bullish considering we closed almost break even after being down more than a percent earlier in the day. Only one trade was made today and the only notable thing about it was that I sold within 2 cents from the high of the day. Otherwise, it was par for the course.

Charts

Check out the chart of TZA below. Today's reversal with the long upper wick is quite bearish on its own merit. Further compounding the problem, we have a declining resistance line. The first two blue circles created the trend line, the third confirmed that it is reliable and the fourth (today's) represents that the trend line is being respected. Overall, we have three bearish technical clues (1) trend line resistance , (2) the bearish candles, and (3) the two days in a row of price rejection on the trendline. The price also tagged the upper Bollinger band on the daily before reversing.

The next path is down meaning that indices will reverse to the upside. After having digested the less than stellar news from Europe from the weekend, there are fewer obstacles blocking the upside. One thing may be a surprise bond yield increase overnight or more political statements from talking heads. I place the probability that TZA will move to 18.50 by week's end at least 60%. I'll follow up on this at the end of the week.

Also, here's an example of a successful triangle pattern like the one above, but on today's minute chart. Once it broke to the downside of the triangle, at 20.05 at 2 pm it fell until price stabilized at 19.60s. The pattern told me to either enter into the inverse of this ETF or to otherwise stay out until the pattern shows its hand. Thus, we can trust the pattern from the previous chart above to be reliable.

Russell 2000

Next is the Russell 2000 with a Raff channel with lines drawn at +/- 1 and +/- 0.5. It's very clean in the way it follows patterns and easy to chart and that's what I like about it. There's very huge support in the highlighted box in the left chart, dating back from the start of 2011 where I count 17 months worth of pattern. Pretty significant stuff. It gave out last summer, turned resistance in late October but now it seems to be support once again

I've outlined where I think we could retrace to on the chart to the right. This can take as little as 4 days or by the end of the week since it's happened three times now. However, it is also realistic to anticipate 2 weeks of congestion, similar to the price pattern from April 10 to 27. Of course, this can all blow up if something happens in Europe again and we break the lower part of the support channel I drew. One scenario I see is that we retrace the losses, and then push back lower again due to European turmoil. See the summary below. 

Observations / Summary:

1. February 1 to 3 (3 trading days)
2. March 6 to March 13 (6 trading days)
3. April 23 to April 27 (5 trading days) 
4. Else, if you count the congestion from April 10 to April 27  (14 trading days)

• Note how Russell has been making lower lows and highs after each major move showing its weakness