SPX Sends Signal To Lighten Up On Long Exposure

I did not blog for a while and want to apologize to everyone who checked my blog during the last months and did not find any updates. There were several reasons I could not find the time for posting.

First, the September- November period is the busiest time of the year for our small business. Second, I spend many hours preparing to the level 3 exam in the CMT program. Third, I took time to work on some aspects of my trading approach. I experimented a lot with 2-box reversal charts in particular. I absolutely love what I see so far. Though 3-box and 1-box reversal charts are the most popular charts in the Point and Figure analysis, I found that the 2-box reversal charting method suites my trading style very well and has some advantages over 3-box charts.

First of all, 2-box reversal charts are more sensitive. It allows to control risk better in the short-term keeping the asymmetric filter intact at the same time.

Vertical price counts on a 2-box reversal chart are shorter in general than on a 3-box reversal chart. It creates more price levels which deserve attention and may be hidden on a 3-box reversal chart. One of characteristics of 1-box reversal charts I like especially is horizontal count calculation from congestion areas. This calculation is more suitable for 2-box reversal charts than for 3-box reversal charts and can provide good results.

Objective trend lines are more sensitive on 2-box reversal charts than on 3-box reversal charts and have substantially less false breaches than on 1-box reversal charts.

It doesn’t mean that 2-box charts are superior to 1-box or 3-box charts, all of them have their advantages. I have found that this construction method is just more suitable for my trading style and time horizon. Nevertheless, I keep analyzing all kind of P&F charts to keep different perspectives.

So, let’s take a look at the SPX recent price action on the medium horizon 8x2 60 min P&F chart.

We see that since the October interim bottom at 1648 the price built three X columns interrupted with 2-box columns of Os until it reached 1808. Every consecutive column of Xs was shorter and on lower volume than a previous one. The pattern became clear when the price reversed in a column of Os from the 1808 top in December and fell to 1792 (yellow box). At that moment a trader received a message that the bullish pressure had been weakening and those with long positions should be on alert. The price plotted one more O and reversed in a new X column only to be rejected from resistance and decline in a new column of Os (orange box). The pattern of shorter X columns on lower volume got its continuation; in addition a new pattern of longer O columns on higher volume appeared. We observed the increasing supply but there was still a probability that this lateral move resolves to the upside. Today, however, the price has fallen to 1776 generating a Triple Bottom sell signal (pink box). It is not a signal to open short positions as the SPX is still in the uptrend on this time frame but it is definitely a signal to consider lightening up on long exposure. The vertical and horizontal counts from the November-December top point to 1760 as a current potential destination target for this decline.

In conclusion I want you to look at the SPX 3-box reversal chart with the same box size and note how much more information is revealed on the SPX 2-box reversal chart.

Disclaimer: I express only my personal opinion on the market and do not provide any trading or financial advice (see Disclaimer on my site).