Friday, October 30, 2009

Amazing...again... about volatility! I hate relabeling waves, but now I have to do it again. Because of yesterday's strength, I thought it a given we would have a pullback and at least a higher high. When I left for work the market was sitting right in my target zone for a pullback. Once it broke through that, price went over a waterfall!

Now, if you have been watching how I label waves for awhile, you'll know that I keep larger wave structures framed by the hourly 34 SMA. As I thought we would break it for sure (we pratically kissed it at the close yesterday), that is what drove me to relabel it from a w4 to a w2. While I didn't like the count, those are the rules. Now, after today's action you'll notice that we did not break the hourly, which puts the wave structure back to where we started.

Now it all gets to price targets and possible extentions to determine where this wave might end. I like to use 2 different fib methods: 5:1 wave ratios and the 1.382 extention of the 5th wave using the wave 4 price pivot (which is 1033 btw even though I didn't put it on the chart). Based on both of these targets, we may have bottomed at today's close or may have an exhaustion move on Monday (1020-1030 area). Any move down more than that, and we are likely extending wave 5 and will sell off all week.

The more important development is that we have an impulsive wave structure coming off a perfect area for primary wave 2 to end. So far so good, but we can't declare primary wave 3 for certain until we at least break our X wave low at 870. Once this first wave finishes, we should see a wave 2 make it back to our wave 4 area around 1067. This will be the point to buy December dated puts or use leveraged etfs to take advantage of the following wave 3, which will be a very nice move to the downside.

Happy Halloween!

Thursday, October 29, 2009


So much for a pause bar. The market gapped open and no retest was to be found. The million dollar question is what caused the tremendous rise? If you said the GDP numbers you might be right, but probably for a reason you weren't thinking. You see, the rise today was in direction correlation in the selloff of the US$. The US$ likely sold off for two reasons: (1) it was very overbought and due for a pullback and (2) the upside in GDP likely created a selloff in the US$ as the liquidity would increase with the expansion of the economy vs. the opposite when the economy is contracting. So there you have it.

As for the count, well, there was no way to label today's price action as a wave 4 as it was much too strong. I've put up a scenario that shows that we finished wave 1 and are starting wave 2, which we would expect to be swift and sharp (today's price action would certainly qualify under both). We are coming up on overhead resistance tomorrow, so we should see a wave b pull back before we go higher. If this market gets a strong close above 1076 then we are likely going to retest the highs or extend. If we drop below today's low, then wave 2 will be complete, and we should see several weeks of selling.

Wednesday, October 28, 2009

It is looking like Primary Wave 3 has started...

Today's move was the selloff I talked about yesterday. A failed bullish setup and a broken trendline brought the sellers in droves. Looking at the above chart, it appears that we are ready to finish our wave 3 tomorrow, and since we are right on key support, it looks like a perfect place for the market to mount a 15-20 point rally for wave 4 along with a possible triangle or flat pattern. I expect the most likely scenario is for an exhaustion gap down tomorrow to finish the pattern. Should we gap up, then for a test of the lows before wave 4 would officially begin.

These two charts are showing some good targets for this first wave 1 to complete. The daily RSI is hitting the area where the bulls have bought the market before, but we need at least a pause day to put the brakes on the RSI as right now there is no divergence or slowing of the chart. Unlike the last moves down, I expect to see divergence on the daily chart before our first wave is completed.

Tuesday, October 27, 2009

Almost to 1057 but not quite...

Today's low only got to 1061 (although several times). The bulls were there each time to turn the bears away. Today's chart shows we have prime buying signals:

- perfect divergence on the hourly macd (see how the red line's 2nd pivot is above the blue line when price makes a double bottom?), which is a very high percentage signal
- we are sitting right on support
- we are in an oversold area of the RSI where the bulls have typically bought the index.

Now that I have said that, here is what we can expect:

If the bulls take it above today's high (1072) tomorrow, then expect a likely retest of the highs.

If the bears take it below today's low (1060) tomorrow, expect a range expansion move to the downside and very likely the start of primary wave 3 has begun.

I personally am leaning towards a massive selloff tomorrow from the get go (or even a gap down). Why? Because it would trap a large number of bulls and a lot of bears would have missed the entry point. Should this be the case, we will likely have persistent selling all the way to 1000 with small (10-15 pt) rallies that get killed quickly. This would be consistent with a change of trend.

Monday, October 26, 2009

Bears to your battle stations...

Attention all bears, the bulls are on the ropes and they are tired. This is the critical week and tomorrow / Wednesday will define it. We have broken below the failed breakout bar. We are approaching the uptrend line. Will it hold or is primary wave 3 upon us. The uptrend line intersects tomorrow at around 1057. I am very confident that we will break 1057 tomorrow; however, will the bears tire out and the bulls retake the high ground? That is what the bulls have done every time the bears thought they could take over. It happened on 10/2 when the bears broke the trendline (well it was a different trendline but almost the same). It happened in early July when the bulls were in danger of a massive downsweep with a confirmed head and shoulders pattern.

As for the EW count, here are a couple of charts. I think the count currently works best with a failed 5th wave last week.

Best to your trading!

Saturday, October 24, 2009

Weekend Analysis

Well the last several days has been a whipsaw of emotions for bulls and bears alike. In the back of my mind I knew we had been here before, so I took some time to look at the last major top (labeled W on my daily chart). What did I find? Well the top chart defines it: a failed breakout after 9 days of distribution. I define a successful breakout as a close above the 38.2% extention of the breakout wave. You can see that although price penetrated the extention it failed to close above it. That was one of our major signs that a decent top was in. Of course, the correction failed to hit any of my targets and was a source of significant financial pain as the bulls held a critical level.

Today, the bulls are in a very tight spot. Back then, I was projecting a B wave that failed to hit my minimum target (mainly the 38.2% retracement). This time I'm projecting the beginning of primary wave 3, but of course a triple zigzag (or another X wave) could still be in the cards, but we have met every requirement for a primary wave 2 top: sentiment, price retracement, and time retracement.

However, you can see the last major top took 9 days of distribution with a failed daily bar penetration of the extention target. We may still have this in our future next week, so pay attention. We are currently in day 7 of the consolidation (if we don't close below Friday's close on Monday), so we may have another week of distribution at play. Any daily close above 1103 should put one of the higher targets in play (min 1130), so all we can do is watch and let the price action dictate our position.

I'm not going to worry about the squiggles of this last week. Let's focus on the most important closes right now: above 1103 or below 1074.

Thursday, October 22, 2009

The bulls march on...

Today is a perfect example of why confirmation is so important. You can get all excited about a particular market direction, but without confirmation you may find yourself being a bagholder. We obviously are no longer on our march toward 1050 as selling dried up near yesterday's globex lows and the bulls took over. As of right now this is the only bullish wave count I could come up with marking the last several sessions as a running flat wave 4 correction. While it is interesting that selling came in at the 78.6% retracement near the end of the day, it didn't have any follow through, and price quickly overcame that level during the asia session. Should we open below today's high and never eclipse it, then we should have a very swift move down tomorrow. But for some reason, I think the bulls are done with us yet.

I've outlined on one of the charts where the most obvious price extentions intersect with key trend lines. These are:
- 1106/1107
- 1114
- 1126/1130

I would put the least amount of weight on the 1114 area as it seems that we are either going to die at a slight new high or move vertical in a blow off top.

Wednesday, October 21, 2009

An outside reversal day, tomorrow should confirm it

Hmmm where to start. The overnight market brought the indices to new lows before the market opened, but at the open the bulls took over and pushed the market to new rally highs. After a few hours of distribution, the bulls gave up the ghost and the market cratered.

We are at a VERY important junction. Why? Well, besides having a completed EW count and perfect market sentiment for a primary wave 2 top, we also are about to lose the channel that has defined this bear market rally since March at the same time as not being able to confirm a breakout of the 9/23 top. If primary wave 3 has indeed started, we should see an impulsive move on the daily chart that takes us to the 875 area before any significant counter trend rallies form.

For the bulls? Well, they need to immediately push the market up and close it above today's high. That would signal significantly more strength ahead.

As for a high reward option play, it would be to wait for continued weakness into 1050, and then buy Dec/Jan puts into the countertrend rally with a stop above the highs. Key areas to buy puts would be starting with the 38.2% retracement all the way up to the 78.6% retracement of the move down.

Tuesday, October 20, 2009

Tomorrow should see significant selling

Well, the market was unable to capitalize on Apple's good fortunes and the market actually took out (although briefly) Monday's low. Wednesdays are the highest rated days for range expansion and tomorrow it should be to the downside. So far it appears that we have an impulsive move up. Any upside tomorrow should be capped in the morning at 1097, although with the current moves, I wouldn't expect it to get that high. As we approach critical levels this week, I'm anxious to see the market make a clear impulsive move to the downside on the hourly charts, but I'll continue to be patient if I must.

Monday, October 19, 2009

Tomorrow defines the week

While the overnight session took the market below Friday's low, the futures opened up near Friday's close and almost immediately started to move higher. AAPL's amazing earnings should push the market to new highs tomorrow; but the big question will be if it will hold. A close above today's high should push significant strength into the market and carry it up the rest of the week. A reversal tomorrow, on the other hand, would be a major sign of significant distribution, and we'll see selling the remainder of the week. Of course significant selling at this point could push the market right of the cliff, so it should be an exciting day tomorrow.

Sunday, October 18, 2009

It's good to be back...

Thanks for all the great comments as I left for NY. My wife and I had a great time celebrating our 16 years of marriage, and we were gone long enough to miss being home with the kids, so it must have been the right length ;-)!

I've spent some considerable time catching up on the charts, and the price charts are getting quite messy. It is during these times I like to step back and consider where we are in things.

So this is what I came up with:
- a massively overbought stockmarket (even monthly chart is overbought)
- a corrective move that is losing momentum
- a couple of different counts that show the market in the last leg before a significant (if not impulsive) correction
- an overly bullish sentiment w/o the fundamentals to back them up
- quarterly earnings that were able to beat earnings estimate on mostly lower revenues and still down YoY
- key pivots likely being put in either last week or this week that could coincide with a 34 week fibonacci turn date (+/- 1 week) as we begin week 33.

All this tells me to be cautious about the upside potential from here. The key support areas continue to be the daily 34 SMA (currently at 1050) and the rising trendline off of the March 2009 bottom. A confirmed break of the SMA should be a leading indicator of a break of the trendline.

Watch the charts and the USD. Don't get aggressive on the short side until we see a confirmed pivot break.

Wednesday, October 7, 2009

A personal note...

Today my sweet wife and I are off to New York to celebrate 16 years of wonderful marriage (9/4 is our actual date). My dad and step mom have bravely come to our home to watch our eight children (ages 2-15) for the 8 days we'll be gone. So no market commentary from me during this time as our itinerary is packed.

Keep a close eye on the USD as that will likely signal the end before anything else.

Best to your trading,


Tuesday, October 6, 2009

An expanding triangle?

With the bullish move yesterday came a relook of the charts. What jumped out at me are the increasingly volatile corrections that keep being bought like there is no more tomorrow. Please take a look at exhibit A:

Notice how each selloff has been more intense than the previous one? These waves have been overlapping and consist of three waves. It appears that one more move higher is in the cards. There are a number of wave relationships that intersect in the 1075-1085 area, so it will be interesting to see what happens at that level.

Should price break below 1020, then a much more bearish count will have to be considered with a likely primary wave 2 top already in place.

Monday, October 5, 2009

What a difference a day makes...

Price continued to bounce today as suspected, but the bounce went further and is approaching the zone where it is no longer a bounce but a move to new rally highs. Price should stay below 1045 for the bearish count (unless this is subdividing into another 1-2, but that won't be considered until we get a wave 3 the bears can be proud of). The move off the lows, however, is hardly awe inspiring and so far resembles nothing more than a bear flag unless price can find its sprinting legs tomorrow and get going.

Until then, I'll continue to watch for price confirmation. No need to get aggressive on the short side until the bulls confirm that there are no more buyers.

Friday, October 2, 2009

So far so good (for the bears)

We're getting very close to our confirmation targets with today's close. I expect this first move down to end in the 980 area in the coming days possibly spilling into the following week. How we get there will be important to the pattern though, and will be our signal to start shorting all bounces.

Enjoy the weekend!

Has the tide changed?

Yesterday's breakdown saw the indices sell off more than they other correction since the first W wave was put in at the 6/11 high. In fact at the close last night, the corrections were of equal size, but when you add in this morning's weakness, it will top it.

So we are sitting on move down that is acting more impulsive than our intermediate X wave that lasted from 6/11 to 7/8. Are we putting in another X wave or has the top been put in? Certainly time will tell as the puzzle will get clearer with each passing day. The move off of the top is not a clear cut impulsive move (so far), but could be rectified with some zigzag at the bottom. I expect the market to be testing 1000 very soon.

What I'm watching? Well, first the 15 min 34 SMA for signs that the current wave (my green labeled 3) in progress is over. Certainly any move above 1070 will make the current wave another X wave and we'll be moving to much higher prices.