Tuesday, June 30, 2009

Minor Wave B is over

With today's impulsive move off of the high and the break of the prior low pivot, I am nearly 90% certain that minor wave B is in, and we have started our minor wave C of intermediate wave B.

Let's examine the facts:

1. Rejection at the 34 SMA. This happens frequently enough that the first wave of a trend change gets rejected at the 34 SMA as it happened on today's hourly chart. The wave 2 should retrace enough to close above the 8 SMA, which it did today. The retracement also met the minimum expected: 38.2%.

2. The 10 day average true range is sitting at a spot that caused bulls problems throughout this bear market. The market is itching for a volatility breakout, and those are generally associated with downside action as fear is stronger than greed.

3. Over the last several months, the high or low of the month has been identified in the first trading week of the month, and often in the first 1 or 2 trading days of the month. This would fit nicely with tomorrow's high being the high for July as was very closely that of June noting a change in the monthly trend.

I look forward to seeing how wave C unfolds. My extreme low target for the week is 844 and that is where I will start to take profits and sell covered puts/calls depending on the security. 815 is my median target for wave C with the .786 retracement being my maximum target near 730.

There was nothing really scary about the move off of today's lows, but a break of the lows should come tomorrow and with it should go July's high.

Monday, June 29, 2009

At the crossroads

Well, our ray of hope did lead to a little sell off this morning, but price quickly reversed and went impulsively higher where it stayed in about a 4 pt range for nearly 5.5 hrs. Every time price hit the 927-928 zone (key areas of resistance as marked on the chart) it sold off until the 924-925 area where it was bought. Volume practically dried up during this time, and if you were sitting around watching the markets you very well may have fallen asleep.

These points of range contraction are indicative of inflexion points. In this specific case, either the market bursts higher or will become ST bearish. Since we are right at the bottom of the trendline channel, this would also fit nicely into that picture. I'm, of course, leaning bearish, but here are the key events I'm watching:

- A burst to 942 that holds for more than one hour. This will be bullish signal that says the highs are not in and we are going to move higher.
- A drop below 917 that holds for more than one hour. This will be a very bearish signal that says we will likely take out all immediate pivots in a significant move lower.
- A short burst above 924 that quickly reverses. This will be a very bearish signal that says we will likely take out all immediate pivots in a significant mvoe lower.

The month/quarter end tomorrow, let the market lead.

Friday, June 26, 2009

Chop chop and a ray of hope

As the end of month and quarter loom right around the corner, the market continued its corrective upward chop today. The one good thing that happened today is there is at least the sign of a potential pattern completion with today's high: an impulsive move down on the 1 min chart.

Now, 1 min impulsive moves aren't something that you can go out and mortgage the farm on. However, this impulsive move met my two criteria to making it worth noting:
(1) clear 5 waves
(2) take out the prior pivot high/low (depending on the direction)

This move met both criteria. Now while the move sports 5 waves, it is too soon to tell if the 5 waves are complete or just getting started. There can certainly be a gap down on Monday, but what I've shown here is that if the move ended right at the low point, then it could move up to a nice H&S pattern (I know its only a 1 min chart, but still it would be a good start).

We are also showing a nice possible double top on the 15 min charts (triple if you count the overnight session), so there is definitely sellers in this area waiting to unload on unsuspecting buyers.

So where do we go from here.

Possibly More Upside
The overhead area of 930 still looms. With end of month/quarter bullishness tendencies, I can't leave the possibility of a test of that zone out of the picture. To have a chance of getting there the market must open above 905 on Monday, although that guarantees nothing. Odds become significantly reduced that 930 will be reached with each of the levels outlined below being broken.

A Real Sell Off
During this whole rally, the bears have only managed minor corrections of approximately 53 points. This correction has already been the largest at 67 points. That fact alone should put the bulls on notice. This is also why the selling will really kick in with a break of 889.

My weekly low extreme target for next week is 844. The odds of getting there are significantly reduced w/o an open on Monday below 905. Should we open above that number, I'll be watching these key numbers for confirmation signals that the selling has begun:

Key Level #1 - Last Pivot Low: 913
Key Level #2 - Hourly 34 SMA: 906
Critical Level #1 - SPX 896
Critical Level #2 - SPX 889

After that we will have a confirmation below 879.

Thursday, June 25, 2009

Primary Wave B - Until Further Notice

Today opened with so much downside potential it was painful to see a lack of follow through. However, it did set the pattern straight, unless of course the market makes a new high. If this happens then the bearish pattern will have to start over.

If price immediately turned back from here, then there would be a technical opening for a primary wave 3 count as this move up would be a wave 2 to the .786 retracement. However, there are a number of other reasons why I don't like count:

- wave 2 would be longer than wave 1 in terms of time
- sharp retracements on a wave 2 are generally swift making the correction in terms of price but not time.
- this correction fits better into the price & time period of a minor wave B correction.
- at this point, price does not appear ready to turn back as we closed above a key resistance zone

With that said I will no longer entertain a primary wave 3 discussion until price breaks below 800.

Now, as to price targets for this wave B to end. We've certainly met my minimum requirements (>915), but because buyers stepped in to keep it up all day long, it would be hard pressed to say that the move is over. So here is what I have:

- key resistance zone over head in the 927-930 area.
- .618 retracement off our minor wave A @ 930-931.
- minute c=a*1.382 @ 926
- minute c=a*1.618 @ 931
- .786 retracement off our minor wave A @ 942 (this is the line in the sand)

If these targets are not met before price breaks the hourly 34 SMA, then minor wave B is likely over. A break of 896 will be our confirmation.

Wednesday, June 24, 2009

Tomorrow defines the pattern

With today's gap up and and ramp up, it appears I was a little too optimistic on my wave 4. Instead it was a smaller wave 4 and we are now either in the middle of a minor wave b correction or just finished a wave 2 correction at today's high. With that said we are at a crossroads on how we label the bear structure so far. Is it a correction or the start of primary wave 3? With the biggest correction we've seen so far and its clearly impulsive nature, I don't think we there is any doubt that we are at least in intermediate wave B, but how it starts out is very important.

The Primary Wave B Scenario
In this scenario we just completed our minor wave A at yesterday's low. We have now completed the a-b part of minor wave B and should follow it up with a wave c tomorrow. There are two major resistance areas that align themselves with a fib retracement. These areas sandwich the target zone: spx 915-930. With the extreme range for tomorrow being 930 and the normal high 924, look for some major upside if we open tomorrow near or higher than today's close.

The Primary Wave 3 Scenario
In this scenario we have completed a 1-2, 1-2 off of the high and will begin a 3 of 3 tomorrow. We will slice through 875 in this scenario. Look for a gap down below today's low to get the selling going.

Tuesday, June 23, 2009

Tomorrow's open will define the day

One of most reliable market traits is that the market will do what is necessary to cause pain to most people. Looking at the charts and putting things in the context of EW, I arrive at a few conclusions with respect to tomorrow's movement.

- Significant support exists at the 875-880 zone, where certainly there are a lot of buyers salivating over that area for an 'easy' win.

- A break of that level will create significant selling.

To me, this means that we are most likely to either: (a) never make it all the way to the zone (leaving those buyers with a missed opportunity) or (b) we will sell right through the zone (leaving those buyers with massive losses).

So how do we get there and how am I going to trade this market.

First off, there is a daily range level low at 884 tomorrow. This level would meet all the requirement for a wave 5. The market can either open near that level and rally off it or it can open near today's close and fall to it. Under this scenario we will have likely completed an A-B-C off of the high to complete our first minor wave A of our intermediate wave B. In this scenario, I would be looking for a minor wave B to reach to the 930 zone and no higher.

Should the market open near 884 and sell right through it within the first 30 min of the open, then that opens the possibility that our latest wave is actually a 3rd wave and we will sell right through the 875 zone reaching an extended low daily range target of 860. This fits nicely with the weekly low target of 855.

My plan is to take some profits at the open, sell some additional July covered calls on my QID position (July 40 calls). I will also use the opportunity to initiate ES long positions with an immediate stop below 870 but will sell out of the position and go short on any sign of a momentum drop.

Monday, June 22, 2009

More downside likely

In Friday's post I stated:

"If indeed, wave 3/c is going to get going on Monday, then I'm looking for a gap down below SPX 911 to really move price to the downside. If, instead, we open the day anywhere near Friday's close or higher, then the odds are in favor of the daily low not reaching below SPX 910."

Well, we opened very close to my 911 target and the selling kept going. The price action today was very indicative of a wave 3 with all rallies being sold. It's never safe to step in front of a wave 3 without something very solid behind you. The next strong support line is sitting at 875, so I think it is safe to say that there won't be any significant rallies until then.

How price reacts at the next juncture is important. If we're looking at an a-b-c structure, then wave parity is a strong forecaster of where price my turn. We do have 1:1 wave parity in the 875 zone, so that would be the logical place to buy. However, if primary wave 2 is over, then our stop at 875 will only be to consolidate and then we'll blow right through it. This will likely be our first indicator that the lows will be tested. If we do rally off of 875, then we'll be in a perfect position to complete a head and shoulder pattern with a rally back to 925.

My plan is to start taking profits at 875, sell some covered calls, and be ready for a reversal on my day trades.

Saturday, June 20, 2009

All corrective targets have been met

Whether or not the corrective move off of this week's low is over or not will be played out by the market. However, we have met all of my price and time targets for this wave 2/b. You can see from my chart that price was rejected nicely off of the key resistance zone. While the rejection appears to have an impulsive look to it at this point, it will be the follow through that proves the pattern correct.

If indeed, wave 3/c is going to get going on Monday, then I'm looking for a gap down below SPX 911 to really move price to the downside. If, instead, we open the day anywhere near Friday's close or higher, then the odds are in favor of the daily low not reaching below SPX 910. Any continued upside on Monday should be contained by SPX 932.

With a continuation to the downside on Monday, then my immediate price target for this week will be SPX 875, at a minimum, and a bigger target of SPX 850. The next wave down will be our biggest clue if this is the start of primary wave 3 or just a major wave B correction within primary wave 2.

Have a great weekend!

Thursday, June 18, 2009

I think we still have some upside left

Today's high came in right at the edge of my target zone. Certainly there could be some arguments made for an end of wave 2/B at today's high, but the move off of the high just doesn't sport an impulsive move (at least yet), so I think we may work our way higher during options expiration day. I wouldn't be surprised to have us close near tomorrow's open to give a daily doji pattern with a gap down on Monday.

Wednesday, June 17, 2009

Expecting a bounce tomorrow

With today's move off of the bottom, it looks like we have started our wave 2 (or b) off of the high. The move down sports a very nice 5 wave move down, which means that there should be much more to come. I'm looking for any rally to be contained in the SPX 920-940 zone. This will be the area that I will be looking to add to my short position.

Should we break today's lows tomorrow, then look for support to come in at 890 and then 875.

Tuesday, June 16, 2009

Breakdown confirmed

With today's continuation to the downside, we got our breakdown confirmation we were looking for. So far the move is sporting a nice 5 wave pattern. Where wave 5 ends is anybody's guess, however, I like to use wave parity relationships with wave 1 and strong support and resistance lines to identify probable turning points. We're starting see divergences show up on the hourly chart, which is another good indicator that wave 5 is upon us. Now if the market doesn't respect the divergences tomorrow morning, then we could easily fall to SPX 890 in an extended wave 5. This is especially true because the divergences are occuring around a strong support zone that should push the market back up.

The breakdown looks good

We're still early on in this process, but so far the patterns have a very good hint of bearishness about them. We've taken out the monthly lows on an intraday basis. We still don't have 5 waves down on a 60 min chart, so that is what I'm watching for right now. I won't be surprised of an undersided test of the broken trendline today. A significant close below yesterday's lows should be our confirmation.

Friday, June 12, 2009

No easy answer today

Today did not give us the clear confirmation that I was hoping for. Even the move off of the highs doesn't show a picture perfect impulsive on the 5 or 15 min chart. The only thing that looks encouraging is the move off of today's lows. It sports all the look of a bear flag zigzag with a=c almost to the point and sitting right on the 50% retracement fib. Once we break out it should be huge!! Needless to say I'm leaning on a downside breakout.

Have a great weekend!

Thursday, June 11, 2009

A complete pattern?

Ok, I have some great charts to look at tonight. We have what very well could be a completed pattern with today's high.

First I want to start with some analysis of the waves off of the bottom. I have the chart above followed by the analysis.

Minor Wave W
You'll notice that the first wave off of the bottom was a triple zigzag. This is easy to identify when looking at the corrections off of the bottom: two corrections lasting 4 days and avg. 50 points each.

Minor Wave X
This was our largest correction of the rally in terms of price/time. While the price correction was about the same as the others (~50 points), it lasted 14 days in stead of 4. This was a flat correction (3-3-5), which is why we got a picture perfect 5 wave move to finish off the pattern. If you recall, I pointed this pattern out at the time. Unfortunately, it was a finishing pattern instead of the start of our wave B.

Minor Wave Y
This wave consists of a zigzag (3-3-5) move off of the flat, which got us to the top of our range (950 area). Then we consolidated for 7-8 days in a b wave triangle. We finally (at least it appears now) finished off the triangle with today's high in a crisp 5 wave move giving us a nice 3-3-5 pattern. So far the price action is 'acting' just as it should off of a triangle: a sharp breakout followed by a sharp reversal. The pattern will need to be confirmed tomorrow.

Intermediate Wave A
These three waves: minor waves W-X-Y make up a double zigzag (3-3-3) pattern. From here (assuming I got the degrees of trend correct) we will correct in intermediate Wave B over the next approximately 4 weeks. What gives me such a high level of confidence of a significant correction here instead of a minor one? Well, it is simply the fact that we are up against long-term resistance lines. A break down here would also confirm a false breakout, which would be sold heavily by all the program traders. A break of 930 almost certainly guarantees a move to 875, which would almost certainly break. At that point we would already have our largest correction to date (>50 points). This would be your first clue that the correction is unlike the others.

Intermediate Wave B
I've mentioned it before, but the reason I do not feel confident primary wave 2 is over is because the correction has been too small in terms of price and time. Obviously a new low would prove me wrong ;-). I am looking for a minimum 50% retracement here to SPX 815. Certainly we could go lower.

The Bull Pattern
Since EW is all about probabilities, what would the price action need to do if I'm wrong. Well quite simply, tomorrow would be a w3 up and blow past today's high and close near the high of the day. We should know after the first 1-2hrs of trading where we are.

Wednesday, June 10, 2009

Consolidation or topping?

Certainly there could be cases made for both, so I won't go into either of those today. What I do see are some very important things to watch for.

The bulls have much more to prove. Not only do they need to push to new highs tomorrow morning, but they need to hold new highs into the close. Anything less will 'reset' the pattern to the downside and increase the odds of an impulsive move down. The fact that the breakout has yet to be confirmed (no 2 up bars in a row closing in their upper 2/3rds) increases the likelihood of a breakdown. A solid breakout should have put the SPX 30-50 points higher by now.

In order for there to be a continuation move off of today's downthrust, the bears need to hold the bulls to the SPX 943-946 zone. Even though we got back to back impulsive moves there were only two of them and they appear to be a fully qualified a-b-c move. Since this is a 'B' wave we can certainly kick it off with a corrective pattern so nothing is lost yet. If the bears can't hold that zone, then new rally highs are likely. If bears hold the zone, then a break of SPX 930 should be enough to push us to new lows and begin the chain reaction breakout to the downside that I've been watching.

Tuesday, June 9, 2009

A hohum range day...

Not much to write about in today's action: a ten point range. I think we are all aware that we are hitting up against significant long term resistance trends at this level. On the posted hourly chart, you can see that every time the hourly chart has touched the 34 SMA it has put in a higher low then previous break. This draws significance to yesterday's low (ES 925.5) because if we break that tomorrow, significant selling should come into the market. This would then set a chain reaction of a failed breakout of the previous triangle and bring to bear a full intermediate wave B.

There are two reasons why I don't think primary wave 2 is over:
- the time duration for a primary wave has been too short (~3mo compared to the nearly 18 month primary wave 1)
- the move off the high (so far) does not have an impulsive look to it; therefore, it is unlikely the start of primary wave 3.

But don't get me wrong, this wave B should scare the pants off the bulls at some point and lay the ground work for a more sustained move to the 1000 zone later this year.

Monday, June 8, 2009

No bearish confirmation today

Even with a gap down, the bears ran out of steam by the end of the morning session. Unfortunately, the move off of the highs does not have a high confidence impulsive look to it, which we will need to have any belief that we will reach new lows.

Today's lows will be key for the future though. If they break tomorrow morning, then we should at least get our very large 'B wave' correction. If not, we should see new rally highs by tomorrow morning. Any selling that happens needs to be contained to today's lows (at least on a closing basis) for the bullish scenario to play out (a move to 1000). Should price get rejected at a new high and immediately break today's low (and stay down), then that would be a very bearish signal. Until then, we continue to have a series of higher highs and higher lows off of our break out.

Sunday, June 7, 2009

Initial target hit, let the market lead the way...

Well, some excitement while I was away. I certainly enjoyed the time off and look forward to another exciting week. It looks like we are once again at a key inflextion point in the market, and Mon/Tues should be provide us with the clues to where we go from here.

When I left I put an initial target of 955 on the table. We nearly got there on Friday and sold off hard. There are so many divergences setting up along with multi week trend lines coming into play at these figures that if we close below 920 from here, then I don't think the market will be able to recover. This would need to be confirmed with a quick break of 875. We should then to continue to move down to new bear market lows.

From an EW perspective, it would fit nicely with the triangle formation I talked about before I left (both with time and price).

However, if the market closes above 955, then I think 1000 is the next target. We should get an answer tomorrow or Tuesday at the latest.