Saturday, February 28, 2009

Wile E. Coyote Anyone?

You know the story. The roadrunner zooms by and Wile E. Coyote is hot on his trail. Next thing you know the poor coyote has gone off a cliff. He hangs there as if suspended for awhile before he realizes there is only one way this is going to end -- badly.

Well, the bulls have been fighting gravity for the last several weeks. They have now been pushed off the cliff with Friday's close. After our very brief (as in what 3 days?) double bottom bounce, we have now closed BENEATH the November lows. The last time the SPX closed here was 12 years ago?! So, in honor of this momentous occasion, I thought I would put up a long term chart of the SPX.

I think a picture like this just makes you sit back and wonder, how did we get here? Yes folks, the parabolic rise we have experienced from the late 80s was due to our gov't running the credit spigots overtime. And now we have come to realize that we can't make payments on this mountain of debt we have created. There is only one way out from this mountain of debt, and that is either through default or paying it off. Both are painful. Both are a reality. And no president and congress are going to solve this with 'stimulus', 'bail outs', or other spending activities that will eventually destroy our currency.

With that rant over, let's move on to the charts. I'm currently counting us somewhere in w3 of 5. Depending on how this last piece of w3 goes (we could subdivide some more), it will likely be over with a close above the hourly 8 SMA. Since we have yet to see selling accelerate, I'm expecting it to begin on Monday. However, the bulls have rarely rolled over so easily, so we won't be able to count the current wave complete until we get an hourly close above the 8 SMA, which I expect to occur around the 650 area. If that happens without selling capitulation, then we will likely have an extended wave 5 that will do the job.

Thursday, February 26, 2009

Our first key structural low broke near the close of today

With ES 751.25 being broken today (today's low was 750.25), that was our signal that this minor wave 4 is over. Since our larger wave 3 has yet to accelerate to the downside, I would expect our wave 5 of this wave 3 would do the job. If it doesn't, then it will occur in the larger wave 5.

My best guess for tomorrow would be a gap down without a fill. However, if we don't, then we'll likely subdivide this wave too. Look for rallies to die at 770 or below. Any strength should be erased in the first 90 minutes of trading the US session. The bulls best case scenario is that we just put in a flat b wave, and we're going to make one more attempt at 780. I'm not saying that it would happen, only that it is possible.

This wave 3 should touch or break the bottom trendline, see the 60 min chart, (the actual value is below my chart, sorry), but I would venture a guess in the 600-650 range.

Wednesday, February 25, 2009

This minor wave 4 'looks' over

Well, the move off of yesterday's high 'looked' so impulsive on the 1 min chart. But, if what looks to be an impulsive wave does not take out a prior high or low (in this case low), then it always becomes suspect. And it turns out that this is one of those cases. Well, looking at the pattern on the 5 min level (see above chart), we have all the makings of a finished wave 4 except one: a new momentum low. To achieve that we need to go below ES 751. If the pattern is indeed finished, then I count it done with a running triangle to finish wave C. At this point wave C = wave A*.786, which is a valid fib relationship. Also, you'll note that price stayed below 780, which is where I thought any rally would die. So...with fingers crossed...let's see if we can take out that low tomorrow morning and get some real selling going.

Now, if we break today's high, then the next major resistance line would be in the 785-790 area. So there is still a lot of work for the bulls to go before they can even think of declaring a double bottom. Taking out 741 will erase those dreams and should get some acceleration to the downside.

The two charts below are my updated 15min and 60min charts as it is always nice to look at the big picture. The fact that we broke out of the channel doesn't worry me yet, as a false breakout is very bearish, and that is where I'm placing my bets.

Tuesday, February 24, 2009

Still in the channel...

With today's w4 rally, we are now touching the upper trendline once again (see above). I suspect we'll make one more attempt at it tomorrow, but the indicators are already rolling over. Once the rejection of the trendline is in place (I don't expect any rally to actually stay above ES 780 if it even gets that far), the sell off should actually accelerate to the bottom trendline shown on the hourly chart (not the middle trendline that we touched yesterday).

Monday, February 23, 2009

Some nice selling today, but we're not even close...

From the opening bell, the sellers took over and pretty much owned the bulls the whole day. My low target of 785 did get hit during the European futures market (the high was 786). With a low at 741, it looks like the bulls are now playing a double bottom, but it won't hold. To many sellers left and not enough buyers to sustain anything. There is nothing in the pattern that requires further downside action tomorrow; however, we are in a 3rd wave, so there are certainly odds of more selling.

Here are my scenarios:
- If we can close above 755 on an hourly bar in the two hours of the US market, then we are likely in another wave 4 and will try and hit my targets of 770-790.
- If we can't do it, then selling should accelerate at least to the 720-725 area. We are getting oversold on a number of indicators; however, we haven't gotten enough oversold yet to get worried of a sustained rally. Besides, we're in a bear market. Oversold can become more oversold and so on and so forth.

Sunday, February 22, 2009

I expect some strength early in the week...

With options expiration week behind us, and a look at the current wave count, I'm expecting some early strength next week. If, however, we instantly break down below Friday's lows, then that would mean that the rally we had late on Friday wasn't an 'A' wave but it was in fact the entirety of our wave 4, and we will be testing the November lows in no time.

I still contend that the selling hasn't gotten started. Bulls continue to buy every dip in hopes of 'catching THE bottom'. It won't be until they give up hope that we can ever get close to an intermediate bottom. One that will provide the foundation we need for a multi-quarter bull market to the SPX 1000-1100 range.

Thursday, February 19, 2009

The grind continues...

Well, all I can say is that the bulls are digging themselves into a hole. They are still buying every dip and creating little short covering rallies that don't last. Take a look at this 5 min chart showing the action at the end of the day. Talk about not giving up! Unfortunately, without somekind of capitulation, we'll continue to get bull traps all the way down to 100!

So does the capitulation start tomorrow? The charts aren't entirely clear. We are oversold on a number of indicators. But, during a bear market, that could mean either we collapse or rally. Not much help there either. Tomorrow is option expiration day, which puts a trading range day at a high likelihood. I guess I'll put my chips on a range day with a sell off near the close and a nice gap down on Monday. (see above chart)

If any weakness in the morning is not reversed within the first 60 minutes, then we may just plunge (see chart below). Also, I'm looking for any rallies to be contained by ES 800.

Regardless of how it works out, we still have much more work to do on the downside before we can call this primary wave over.

Wednesday, February 18, 2009

Selling hasn't even started

Even though the DJI has already put in new bear market lows, even though the SPX is sitting below key support levels including the January low, even though internals have been horrible the last few days, we haven't even begun to see the selling. Here are two charts that prove this out:

This is a 15min chart. The pink lines show a normal parallel channel. This is not an impulsive channel because so far the price action is contained within the channel. Corrective waves are generally contained within parallel channels. Once we break this channel to the downside you'll know we are really getting going.

This is a 60 min chart with Andrew's pitchfork drawn on. Wave 3 should be touching or breaking the bottom support line of the fork before it is over. Once we get there, you'll know that we are likely at the end of wave 3.

We're getting to the point that the selling should kick in. It could be that the market makers are just trying to get us past option expiration week (Friday). We'll see.

Tuesday, February 17, 2009

These waves will be choppy, but down she goes...

Today was a bit anticlimactic since all the selling took place during the holiday/overnight sessions. All we got in the U.S. was a consolidation day BELOW key support areas. I am expecting a test ES 740 either tomorrow or Thursday.

Since our intermediate wave 3 has subdivided so much, we should expect the chop to continue as the market puts in a number of 4th waves to match up with the 2nd waves. We'll probably have massive down days intermingled with consolidation days like we had today, maybe even a rally or two to keep the bears honest. As for time, I expect our primary wave 1/A to be all over by mid-late March. One thing is for sure, until we get some real selling, we'll continue to push lower as no bull market can be sustained without it.

Saturday, February 14, 2009

If we're not there, we should be very, very close...

The markets on Friday didn't give much love to anyone as any movement in one direction was quickly reversed to other. I have two scenarios that I've outlined: one where we immediately drop on Tuesday (likely a gap down) while the other makes a run for 850. Before I get to them though, I would like to review the big picture (see above charts).

Since the low back in November, a support line has been created from these points:
- 11/21 low (my birthday fyi in case anyone wants to give me a present next year ;-)
- 1/20,1/21 lows
- 1/23 low
- 2/2 low
- 2/5 low
- 2/10, 2/11 lows

This trendline was broken with a gap down below it on 2/12, but with a mere 30 min left the PPT decided that a crash before the house/senate votes was unacceptable, so the market rallied hard and closed just above the trendline.

On 2/13, with all of that move to support it, the market was able to get a slightly higher high but ended up closing BELOW the trendline.

Some more facts, we have four key pivots to watch: 850, 832, 820, and 812. Since the 832 pivot broke on 2/10, the market has retested it from below 7 times on the 15 min chart. One time it was able to hold above it for an incredible 45 minutes.

Lastly, the 60 min MACD is about to rollover. This should only increase selling.

From the above data points, I'm very much leaning toward scenario 1 (see above chart), which is:

With the first 60 mins of trading (a gap down), we find ourselves below the 812 pivot. In this scenario, we have started the meltdown. All seat belts should be fastened. We should be looking at 740 before the end of the week.

My alternate scenario (see chart below):

The 820 pivot holds within the first 30 minutes of trading. We then make a run at 850 on either Tuesday or Wednesday. The 850 pivot holds and we begin the meltdown.

Now the problem we all face in both of these scenarios is option expiration week (this coming Friday). The Market Makers hate to see a plunge with so little time value left. They may be throwing all they have at the market to keep it treading water at least until Friday pm.

Thursday, February 12, 2009

We continue to build energy for a downside move

You know the drill. Rev the engine with the brake on so you can peel out. Well, that is what the market is doing now. With this kind of build up, when the brake finally comes off it should be 0-60 in about 2 seconds.

I have to admit, I was really disappointed to come home empty handed today. I thought the bull had been stalked well and killed. But I guess by the time I got up to it, the bull had found enough strength to run off. That's okay. Patience is required especially before the terminal moves. The bull is mortally wounded, and it may just fall tomorrow. We'll see what the market shows us tomorrow.

Looking at the market action, this picture came right to mind. The bulls drowning in the ocean of a poor economy and overpriced market. But as they are about to go under they put one last arm up in hopes of a gov't rescue. But no rescue comes, instead they get a tidal wave ;-).

Ok, now for the wave count. The best way of 'counting' the move so far is to label what we just went through as a wave 2 irregular flat. We're coming up on MAJOR resistance and should be stopped again. IF we get above 850 and stay there, THEN I'll be re-evaluating my positions. But not yet, as I don't think we get there.

Wednesday, February 11, 2009

Much patience is required to kill this bull...

What a day! The market behaved erratic at best. Highs were given up to test the lows, but just when you thought you had the bull on the ropes, the market rallies back to the highs. Where do we go from here?!!

Well, there are some pretty strong emotions at play here: hope and fear. Hope that the government will make all this bad stuff go away. Fear that whatever the gov't does won't work. With the market once again looking over a high cliff, the gov't hearings are akin to the psychologist trying to talk the man off the ledge of the skyscraper. I can almost hear him saying, "Come on it's going to be alright. No more foreclosures, no more credit defaults or bankruptcies. You'll wake up tomorrow and all of this will be gone. Now come down off that ledge!". Problem is, these problems aren't going away. The stock market knows it, but it wants to triple check, no (whats the word for 6x?) that this is the right decision. I hate to say it, but Mr. Market, it's the right decision!! Go ahead and jump!

Here's a picture of the 1min chart. My best guess at this is we put in a flat pattern. This is where the previous lows are tested and hold but the highs are tested and hold also. The next move would require a fail of the lows. If we break and hold yesterday's high, then the market will attempt to break 840 and then 850. If 850 is broken to the upside, then I'll have to re-evaluate my options.

Tuesday, February 10, 2009

Tomorrow should break the trendline

Its always nice when the market rewards you with something you were expecting. It seems rare enough, but today was just that. I said watch the 850 and 870 for the clues. Once we broke 850 today, there was a little pause and then the market had its foot to the floor as we accelerated to the downside.

We ended the day right on the trendline that has kept this market from falling off the cliff. It is now being tested for the 5th time. My experience is that trendlines usually fail on the 4th test. So, I'm expecting a failure tomorrow and another selloff.

Notice the RSI(5) readings. During wave 1 of 5, we hit an extreme low of 8.49 (during its respective wave 3). During wave 1 of 3 of 5, we hit an extreme low of 11.86. This is our first clue that we have started wave 3 of 3 of 5: our current low is already 10.68. It should get lower than 8.49 before this is over. That is a lot more selling in the near future. So, how does it unfold tomorrow? Here are my two best guesses:

#1: We gap below the trendline at the open (likely rally up to it and give it a kiss good-bye). We then drop down to the 810 area where we pause some more. When we break 800 the drop to 740 will be swift.

#2: We gap up tomorrow and rally to 830 area, where we reverse and break the trendline and move down.

Either way, its likely to get very ugly tomorrow. BTW, should we somehow get above 850, then all of this is likely on hold and we will likely move above 870. I'm not saying that I think it will happen, only that it shouldn't.

Monday, February 9, 2009

Any drop from here is likely fatal...

The bulls and bears played tug of war today. The bulls got a new high, but it was quickly given back. The bears strength in the afternoon gave way and the bulls pulled back. Where do we go from here?

The charts are looking like any move down from here is likely fatal to the bulls. It will be important that they don't lose any more ground. 850 would likely fail and that would cause all kinds of selling to 830, 810, 760, etc. Anyway, you get the picture. Instead, the bulls need to keep the press on and push this higher. Will it happen? I don't know. The market is playing this one close to the vest. I see hints of a sustained bear move, but then the bulls hold their ground. Look for those key areas: 850 support and 870 resistance. Whichever one gives first is the likely clue.

My preferred count (above) and my second count (below). Best to your trading!

Sunday, February 8, 2009

It's the Bull's Move...

With the major trendline holding last week, the bulls now have the ball. The question isn't will they win the game, but instead how long will it take for them to lose the ball and give possession back to the bears. With the stimulus bill on the table and bank bailout plan coming up on Monday, let's quickly remember the results of just two of the most recent gov't interventions/announcements:

- 9/18/2008: Stocks soared for the second consecutive day Friday to close out one of the most tumultuous weeks in the 216-year history of Wall Street as investors scrambled back into the markets on faith that the unprecedented moves by the government will shore up the financial system. (Results? Stocks hit their high at the open of the next day. Stocks hit new bear market lows by 9/29).

- 10/13/2008: Relief poured through the markets. The 11.6 percent gain in the broad Standard & Poor’s 500-stock index was that gauge’s best single-day gain since 1939. Stocks in Paris and Frankfurt had their best single-day gains ever, rising more than 11 percent. The Dow Jones industrial average, which closed at 9,387.61, up 11.1 percent, is now back to its level on Thursday. Only four times in its history has the Dow risen more percentage points in a day. Those gains came in 1929, 1931, 1932, and 1933. (Results? Stocks hit their high at the open of the following day and have been going down ever since. Gains were completely given back by 10/15)

So here's where I think we go from here. I'm giving two different scenarios major consideration:

- the first is the picture above. In this scenario upside is extremely limited, possibly a gap down Monday and failed test of Friday's high. We then drop to the 850 zone and test this key pivot. We fail the test, and we drop back to the trendline that has been tested successfully (4x already) and it fails. We then continue to drop like crazy. Being significantly, short, I'm of course in favor of this scenario.
- the second is the picture below. In this scenario we likely test the 850 zone too, maybe with more upside first or maybe immediately. But this zone holds, and we rally hard to the 880-900 zone depicted on the chart. We fail here and then go down.
- the third scenario is not shown. But it essentially means we are moving to new bear market highs in the 1000-1050 zone. This can't be a consideration until we break 940, which I don't see as very probable (possible maybe, but not probable). Good luck and hold on. Monday should offer some clearer direction.

Thursday, February 5, 2009

Well, I hope everyone else did better than I did today. I pretty much got spanked. The morning opened according to plan, so I never put any stops on my futures I was holding short. Boy did that hurt! I did cover half my position for a nice fat loss, but that is what happens when you don't follow your rules. I implore everyone to follow your rules. If you don't have any, then get some!

The chart up top is the big picture. On days like today, it is important to keep the big picture in front of you. We are trading in the direction of the overall trend, so don't let one day spook you. The blue horizontal lines highlight major support and resistance lines. Keep those in mind through out the day.

Now, to the charts. Today's rally made things very messy. So, I've put together a few different scenarios, so it is nice to have those in the back of your mind as the day unfolds tomorrow.

This chart is the most bearish case. Essentially, we turn down immediately and never look back.

This chart should be watched closely because in this instance we turn down but find support (likely in the 50%-61.8% fib retracement zones) and turn back higher. This would launch one mega short squeeze.

This chart is where we likely gap up possibly above the trendline only to quickly lose steam. It is highly unlikely we would stage a massive rally w/o a pullback first, but I've been wrong before. It is afterall, a game of probabilities and risk/reward setups. Under this scenario the move should be reversed within the first 60 minutes of the US trading hour (by 10:30EST).

So there you have it. If you're holding feb puts, and we don't immediately run a bearish case, then I would sell them before the end of the day.

Wednesday, February 4, 2009

Down She Goes!

Looks like our w2 subdivision made it to the 61.8% retracement line and died on the spot. It was further than I had thought, but it was certainly in the realm. Tomorrow, we'll likely have an unfilled gap down and possibly a test of ES 810 (and possibly a failure). We should be testing the bear market lows by Friday. Hold on.

Also, I've updated my wave count since 2007 (pic on the sidebar). In the end, here's what I was able to accumulate:

- aapl feb 80 puts @ .57
- aapl mar 75 puts @ 1.12
- gs mar 55 puts @ 2.31
- iwm feb 42 puts @ .88
- iwm mar 43 puts @ 2.37
- xlf mar 8 puts @ .66
- qid @ 55.03

I've been trading w/ futures, but I'm currently holding NQH9 short @ 1192

I realize most of these are sitting at losses, but they should be fat by the time this is over.

Tuesday, February 3, 2009

One more high tomorrow likely...

As much as we bears would like to see a massive gap down tomorrow morning, the chart still looks like it wants to test the 50% retracement level. This should happen in the a.m. and then we should get a reversal. Of course, we could gap down massively tomorrow morning, so it is definitely safe staying short.

Our first confirmation that we are in wave 3 of 3 of 5 is a break of ES 810. After that, it should be down, down, down. If I have labeled the charts right, then we should break that level sometime this week. So load up on puts tomorrow morning while you can.

Here's an update of the 60 min chart emphasizing the cliff that we are standing on.

Monday, February 2, 2009

Looks like we got our subdivision...

My count from Friday looks like it held. We got an ending pattern that fit just right. We should see a retrace at least to the 38.2% fib line, but I think we have a very high likelihood of hitting the 50%, which would be consistent with this move so far.

Besides the fact that ES 842 has been an hotly contested pivot, it is also the 50% retracement line and it is where wave c = wave a * 1.618, so we have a # of fib clusters hitting at the same point.

I'll be adding to my shorts at both ES 834 and 840. After this, we should break down something fierce. Note, we could go higher than these numbers, so if we do don't panic. The chart doesn't even have a hint of bullishness until we break ES 875, which is highly unlikely.

Here's the zoom'd out view using an hourly chart. You can see that once the trendline breaks it will be a quick drop to the Nov lows, which I don't expect to hold. After that, we should see a real selling climax!