Wednesday, July 1, 2009

Wave Update

With today's rise breaking yesterday's high, it was obvious to everyone that the market was once again serving up humble pie (to yours truly). I would love to say that wave B was over at today's high, but without confirmation, I can't get too optimistic. What I thought was the key pivot break yesterday and impulsive move appears to once again be the 2nd half of a flat correction. The move today, which accelerated quickly but then just as fast ran out of steam, was like a rocket that had landed in the river and simply drifted over the waterfall.

Some interesting points about today's price action:
- price fizzled out right at the .618 retracement of my minor wave A
- price once again could not break through the heavy resistance at spx 930
- price has been unable to break out of the rising channel, but now may be in a nice position to break the channel to the downside tomorrow
- Tuesday's low is now the critical pivot. If it breaks it will represent a solid break of the channel and the hourly 34 SMA, which held price up last time (as it now sits at 921)
- I mentioned in yesterday's post that the first two days of the trading month have often been the high or the low of the month. If price turns down here, then once again we could have a solid monthly high put in on day 1.

So all I have are levels to watch. I will be adding to short positions on a break of spx 913.


  1. Rich, newbie question - Why would you not short once there is a break of resistance at 918.5. Do you use support and resistance in your trading?

  2. Rich,

    thanks for your posts - being a relative newbie I find them easy to understand and you have a simplified way of looking at the waves.

    I wonder if you would discuss how you use front month options and trend following in your trading - as mentioned in your profile?


  3. art - I certainly use trendlines, but what I have found is that the horizontal support lines are much more important to the price patterns then the diagonal ones. That is why I use them for key levels. In this case, I have been heavily short for a long time, so no need to get over zealous at the trendline break, but in this case it would have been a great after hours short

  4. Mike, essentially it is this:
    1. identify the overall trend (right now we are in a countertrend rally)
    2. use EW to find good entry points (i.e. an impulsive wave down, start position @ 50% retracement all the way up)
    3. use options with 4-6 wks of expiration on them (certainly if you can get front month with 4wks that is best)
    4. buy strike prices based on your targets.

    I haven't done so well since the beginning of the year because of two reasons:
    (1) my targets for the March low were never triggered (off by less than 10 es points), and I had the overall wave pattern wrong, so once we started the rally I never got a clean exit
    (2) this countertrend rally has given very little back and so while I identified key turning points they never amounted to much leaving all my targets never to be hit.

    Such is the game. But the market can only play hard to get for so long before it pays the piper. Position sizing is key to staying in the game w/ options. Keep your size to 5% or less of equity. Take profits quickly (sell half on a double or a third on a triple depending on your targets). Practice in simulation until you get it down.

  5. Thanks Rich - I missed the Primary 2 turn expecting another leg down - however, I'm learning very quickly that forecasting the market and managing profitable trades are two very different skill sets.

    Again, enjoy your posts very much.

    Have a great holiday.


  6. Rich, thank you for sharing your option trading strategy.