Tuesday, March 31, 2009

We should have one more marginal low before the next rally

Well, today jumped all around until we got some kind of trend going until the last hour knocked the bull off its feet. I think that is as good as sign as any that our wave C down has started. I'm looking for a minimum target of 745-760 before we get any more bullish.

I did update my labeling of the ED to 1-2-3-4-5 instead of a-b-c-d-e, which is the technically correct way to label it. Thanks to one of my readers for pointing that out.

Monday, March 30, 2009

Price collapsed, but likely more upside tomorrow

Well, the market sold off starting Sunday p.m. and when the U.S. session opened Monday, price had already had quite a run. We spent most of the day back and forth with some lower lows that were finally reversed the last hour of trading. Futures seem strong since the close, so if we close above SPX 791 on an hourly basis, then we are likely done w/ our first wave a and are starting a wave b. I would expect price to have trouble around 800 and trying to get above the 34 SMA on the hourly chart, which will probably land in the same area by the time price gets there.

I ended up labeling this whole move as simple zigzag with our c wave being an ED. With this labeling C ended up being .786*A, which is a nice EW relationship. I just couldn't get an impulsive move out of the whole thing w/o breaking my rules.

One thing that is hard when you are first doing Elliott Waves is getting the subdivisions right. I'm starting out assuming we have a simple a-b-c to the 740-760 area, which is why I labeled my first wave a at that degree. If things subdivide, then I'll likely drop these waves down a degree and go from there.

Friday, March 27, 2009

If price doesn't collapse, then we are likely in an ED

We closed right below the trendline, but price has yet to look impulsive. Unless we immediately start a selloff Monday morning, we are likely in an ending diagonal structure. This is where the last wave, instead of being 5-3-5-3-5, is a 3-3-3-3-3 making each move higher (in this case) being smaller (in terms of price) than the previous move. EDs are prone to immediate and sudden reversals, so it is nice to be aware of possible EDs as they can provide very profitable trades. Options can provide big payoffs especially if use front month slightly out of the money options as the risk is small but the reward can easily be 3-5x if not more.

I'm currently flat but I'll be looking at the SPX 840 level to open up short positions.

Thursday, March 26, 2009

We are nearing the final stages of this 1st bull leg

Well, my preference for scenario #1 worked out; however, price was anything but powerful. Momentum is struggling to stay afloat and rest assured that once it falls the bears will push hard for a resumption of the overall trend. The move should be powerful enough to give the bulls some worry and some bears thoughts of new lows. However, the odds of a new low this soon is not high. Instead, primary wave 2 will likely try the patience of both bulls and bears as rallies die and are reborn on both sides.

As seen in the hourly chart, the bulls have not been able to push price above the median line. If they can get enough strength up, they might have a chance for another short covering rally to the top of the channel. My belief in their ability to do this is losing quickly. As far as price structure is concerned we have met all the requirements from an EW perspective for this wave. Now it is just a matter of when.

As for tomorrow, if we don't get out of the small price channel soon (shown on the 5/15 min charts), then we will likely break down. If we can break out and stay out, then we will have a chance at the top channel before end of month.

Wednesday, March 25, 2009

The waters are once again unclear

Well, today looked good up until the last 30 min of trading when the market reversed and the trendline held on the close. There are two most likely scenarios I'll be watching for tomorrow:

- scenario #1: We finally break through our overhead resistance and make a run for the top of the channel. This would put us in the 860 range to end this first larger A wave. (top chart)

- scenario #2: We immediately start down with our 'c wave' to finish off this larger B wave, breaking the trendline and sending the indices down. I have become less a believer in this scenario watching the futures strengthen in the overnight session. (bottom chart).

Hopefully tomorrow will make things more clear.

Tuesday, March 24, 2009

Our first B wave has started

With a test of yesterday's high, a failure, and a close below the median line (see top chart) and the hourly 8SMA, we have the technical signals that would warrant our first real move down since this rally began. So, the next question is what level will the market hold.

Past experience says we should test the breakout of the trendline. My EW knowledge says we should retrace a minimum of 38.2% of the rally. Looking at support and resistance lines, we have strong support in the 740 zone. We also have a 50% fib retracement at 744. The trendline looks like it could be tested anywhere between 740-760 depending on how long it takes to get there. Also, we can penetrate a trendline, but we should only spend 2-3 hourly bars below it before we bounce back up. Should this zone not hold a move back down, then my next best guess would the 700 area. The 78.6% retracement sits at 700 and we also have strong support in that area.

Now, as for charting this last move, I have been really puzzled by the more than apparent 3 wave move off of 940. I have also been puzzled by the apparent 3 wave move off of the 11/4 high. Well, now that we have hind sight I've relabeled the whole move off of the 10/27 low a wave 4 triangle. This fits the EW general rule of alternation between waves 2&4, and 'solves' a number of the charting mysteries that was before me. So, with that said, we'll move on to finding where primary wave 2 might end.

EW states that corrective waves often get stopped at the smaller degree 4th wave of the previous wave. If the previous wave subdivided, then the next wave 4 will also provide an area of strong resistance. So what does this mean.
- Our previous wave 4 of the primary wave 1 was a triangle. That means that the apex of the triangle will provide strong resistance to our primary wave 2. The apex was at 874, so that is where I think our first a-b-c will end. Our next wave 4 high was at 1041, so that is where I think our primary wave 2 will end (if not before). 38.2% retracement from the Nov 07 highs is 1012, so that is also an area that will provide strong resistance.

How long will it take? Well, our corrective waves thus far have taken about 50% of the time of the previous wave to correct. With the first bear leg taking 16 months (Nov07-Feb09), then that gives us a target of 8 months. Since we may likely correct to only 38.2% of the whole move, then I have a 4-8 month target.

Good luck, the next months may prove difficult for all but the very best of us. Let's work hard and keep our trading rules so that we're all counted as such.

Monday, March 23, 2009

Primary Wave 1 Is Now Officially Over

With today's gap up and strength the rest of the day on the Treasury's latest bout of wasteful tax dollar spending, one thing is clear: Primary wave 1 is over. That means that we likely have 2-4 months of choppy bullish action. Bears shouldn't completely fret, as the low will have to be tested before long. Nothing goes straight down and nothing goes straight up. However, there is still some possible upside on the target, and with today's action acting as the engine, we should be able to get there tomorrow.

As for my Primary Wave 2 target, I'm looking for a minimum target at the 38.2% retracement, which is the 940 SPX area. There is already heavy resistance there, but if we get there too fast, then we will likely go higher in a double zigzag fashion.

As for my target on the retracement of this first A wave...I would venture a guess that the SPX 740 area will hold on a closing basis.

Friday, March 20, 2009

Some nice weakness today, Monday should see more

The overnight action was negative, but the market had retraced those losses by the open and tried to keep option owners guessing. We eventually sold off, had a nice bounce, and then sold off into the close. Overall, a very nice day for the bears. We're coming up on a critical junction for the bull/bear case. Here's where I'm putting my money:

- I favor the bear case most (just because we haven't seen a 5th wave).
- A close above the 8SMA on the 60min SPX chart before we break 749, means that the
bears somehow missed wave 5 or we're in a larger corrective pattern. In any event, we should see an immediate retest of the rally highs. A failure, and then a swift down move to test the lows. 713 will likely hold on a closing basis, and we'll be ready for a massive wave C up.
- Should 749 break before a close above the 8SMA, then the bulls don't have what it takes. We will likely test 734 before an end to the 1st wave of selling, have a bounce up to the trendline with another failure, and be looking at the March lows in no time.

So that's it for now. Have a great weekend.

Thursday, March 19, 2009

At a minimum, we should have volatility tomorrow

With a double top this morning, the market finally started to give up some of its gains, but not too much. The downside action has hardly been awe inspiring. With price on the spx now overlapping our w1 (even if it was ever so slightly), I think odds are building that this wave will end up being impulsive. But the bulls don't have it yet. We still need a down up move to call it five waves. The 38.2% retracement on this w3 sits right on support at the 753 area, which was our previous 4th wave of a smaller degree. This is where I'll exit my shorts and possibly enter a swing trade up to at least a marginal new high before we put in our massive wave 2 retracement. If this is indeed some part of a corrective wave, then 753 won't hold much support and will be broken after a small bounce.

We see that this move was rejected off the trendline (see above chart). This is a sign that we should at least get some good downside tomorrow.

Here we have our two counts. Both require some more downside tomorrow morning. The bullish (above) and the bearish (below).

Wednesday, March 18, 2009

When perplexed, get back to basics

Perplexed. I guess that would be the right word. This rally has gone up more quickly and higher than I (and I'm sure I'm not alone) would have guessed. When the EW puzzle becomes cloudy, it is important to get back to TA basics. So that is where I'm going tonight.

Signs that a low is in:
- A close above the weekly 8 SMA, which hasn't happened since the end of intermediate wave 3 (see top chart).
- the nasdaq clearly out in front and already far into the price range of w1.
- the financials showing signs of life

Signs that a low is not in:
- a rejection (assuming we go down from here) off of the trendline (see above chart)
- pervasive amounts of bullishness still existed at the low (putt/call ratio, lack of fear based on the vix)
- market has moved up based on gov't action (in the past gov't action has NEVER put a low in the market - only a rally)
- volume never spiked at the low
- a clear 3 wave move off of the w4 high on the daily chart
- selling never accelerated into the low even though we had plenty of breadth

So, what I do know is we'll have a correction. According to the McClellan Oscillator (see below) it will be a brutal one. I think we at least need to test the 713 pivot before we can have any confidence that a multi-week or multi-month bull market is upon us.

As for the near term. We have a channel that action has stayed between (blue lines). We have the original support line (hot pink line) that was broken and now price has rallied to touch the underside (bearish sign). We have the 30 min SMA sitting at 786. A double close below it probably spells the end of the channel and the beginning of the correction. Staying below 780 for any prolonged period (2 hourly bars) of time would also be a failed breakout and would create even more selling.

Tuesday, March 17, 2009

It stopped at 750...I've changed my counts...

Ok, so in last night's post I stated, "So tomorrow we should be testing SPX 743. In fact, I would be surprised if we didn't test it during the Asia/European sessions. We should test it before we get any double close above the 15min 8SMA, otherwise the bears have no strength and it will likely hold for another test of today's high.". Sure enough, the low was 750 and we put in a new rally high today. The only thing is that just went from an impulsive wave to a corrective. The only way for it to get back to impulsive to run straight through the 780 overhead resistance far enough for us to get some more big runs in. Since that will likely not happen, I went through and decided to change my counts. After all, the market is like a puzzle with everyday bringing another piece. I think the picture looks clearest with this new count. So here's what I changed:

- I originally had a 1-2, 1-2 count for the corrective action that occurred from 1/20 to 2/9. Now, I'm counting that a wave 2 flat.
- Now, if we count that as a flat, then that makes our wave 3 clean with a finish at the 667 low. I realize wave 1 is the longest, but that breaks no EW rule. The only rule is that wave 3 cannot be the shortest.
- In addition, this gives us an ending diagonal for the 5th of 5 of 3, which explains the choppy 3 wave look at the end.
- Now, since wave 2 is now a flat, we should get a zigzag or a double zigzag for wave 4. Which is how I'm counting it now that we got one more high today. If we top near 780 (a possible one more high tomorrow), then that would end perfectly with our fib relationships as w=y at 779 and the 'c wave' of y = the a wave *.50 at 780.

You add in the dangerously high reading of the mccellan oscillator, the massive bullish sentiment, the extreme overbought conditions (for this downtrend), the massive divergences on the 15min chart and soon to be 60 min chart, and you have the recipe for bull soup.

We believers in one more low also have one more hurdle, the fed day tomorrow. Generally, this has been a bullish day, but it is not 100% certain. I'm not sure the last one we had after such a run up, so it should be interesting.

Here is what I'm looking for:

- A double close below the 8SMA on the 60 min bars. Currently sitting at 763 and rising. This should lead to a move below 750, which would be very bearish.
- Once we work through 743, which shouldn't provide as much resistance now that 750 is in place, we will attack 713.
- 713 is now the key pillar to the bull case. If the bears break it, we should break the bulls and go to test the lows. If not, then the low (for now is likely in) and the b wave will not be as strong as it could have been.

Monday, March 16, 2009

The channel's broken, where will it stop

Well, we got our double close below the 8SMA on the 15min chart. A little while later and we were breaking the channel. The tech stocks gave it up early while the financials (except GS) were keeping the SPX afloat. But it all came apart as all the gains were given up and we got our reversal day.

So tomorrow we should be testing SPX 743. In fact, I would be surprised if we didn't test it during the Asia/European sessions. We should test it before we get any double close above the 15min 8SMA, otherwise the bears have no strength and it will likely hold for another test of today's high.

However, 743 will fall because the real battle is brewing in the 707-720 area. This is where the 50% and 61.8% fib retracements lie. And right in the middle is strong support at 713. If we did in fact finish w4, then the bulls will fail here. If we somehow are already in primary w2, then the bears will fail here (or at least will not have the strength to take out the bulls 2nd line of defense in the 692-700 zone.

Still short, will likely cover some positions in this zone for a wait and see. If the bounce is weak, I'll reshort.

Saturday, March 14, 2009

The channel is about to break

Ok, relooking over the charts I saw my mistake. I had counted my wave 4 as an a-b-c with the 'c' wave being a failed wave as it almost but not quite took out the previous low. Based on how high the wave had already gone, it made most sense to me to count it this way. Well, after Friday's action, that failed wave c was actually a small wave 2. Friday put in the other wave 4 of that larger wave. From here we will either get one more marginal price high on Monday or we will get a failed small 5th wave. In the end it doesn't really matter because price momentum is waning and once the channel breaks to the downside one of two scenarios will happen:

#1 we'll get a deep retracement (61.8%+) but it will hold. Prices are likely to touch the 686-702 range on the SPX intraday, but we will likely close above 702 for the day. This would be significantly bullish. Primary wave 1 would likely be over, and I'll have to revisit my counts. The selloff should get there 1-3 days max.

#2 my count will be correct and we'll start the last leg of this primary wave. It will either be a weak wave 5 meaning a double bottom ending in the zone 640-675 area or it will be a capitulation sell off to the 550-600 area. What I expect is that it will attempt a double bottom first. If the bounce off the bottom is weak and we end up coming below it, then the panic selling will start. The selloff to the double bottom should get there 2-4 days max. Anything else is bullish.

Here are my confirmation signals that this wave up is over:
- double close below 15min 8SMA
- break of SPX 743

Thursday, March 12, 2009

Today was painful, but tomorrow is a new day

Well, so much for the 734 area containing the uptrend. Once the market broke that resistance there was nothing holding it back. All I can say is that we must be very close to our reversal, as we have reached the same overbought status as our previous wave 2s and the next day begun new downtrends. Rallies were generally retraced in 3-4 days, so we could be sitting back at 666 come next Friday. That would be a big welcome to my account ;-). Volume continues to be unimpressive. If the big boys are jumping in it isn't showing up in the volume.

However, the market is in charge, and it first must give us some confirmation that we haven't missed something in the charts. Our first clue will be two consecutive closes below the 8SMA on the 15 min chart. This should instigate a break of the channel. Our second clue will be to take out our previous w4 low at SPX 713. Then comes our key area I talked about before SPX 699 (I was previously using ESH9, but I've moved to the next contract ESM9 and the numbers aren't the same). Any continuation of the recent rally must hold this level on an hourly close.

One thing is clear, however. The move off of our w4 high is a clear 3 wave move. If we some how hold the pullback, then that would make this a much more complex wave structure. I would much rather not go there.

The Question was asked: why 696?

I received a question on how I picked the 696 number as THE number. Well, looking over the past market pivots on the hourly chart (see above), you'll notice that the market turned around many times in the range of 695-703. I wanted to pick a number that was in the bottom of the range (to be more conservative).

Wednesday, March 11, 2009

Wave 4 could be over...tomorrow will be our clue

The bulls ran out of steam today and were never able to get above my 734 containment call. Since we ran instantly higher today, I've moved my irregular flat forecast to my #1 position and my triangle forecast to #2. After looking over the pivots, I believe a close below 700, especially below 696 could be a major death blow to this rally, so that is what I will watch for tomorrow. Two other times this year we've had big rallies stall with a doji/falling star candle, and both times the next day was a gap down and the start of another down leg. Will tomorrow make it 3rd? I've certainly positioned my portfolio for it, but in the end it will be the market that makes the call. On the bullside, a close above 734 could create some serious problems for the intermediate time frame for the bears. We closed below key support today (724), so that is another plus side for the bears.

I've also redrawn the channel to an EW channel: connecting waves 2&4 and using that to project wave 5 off of wave 3. Because wave 3 has been so timid, we could break the target to the downside in a massive capitulation day, but it is not required, so I will elect to get more conservative as we approach the line. But first things first, 696, may it fall tomorrow.

Tuesday, March 10, 2009

Wave 4 has begun...how will it end?

Well, the gap up this morning never looked back. In fact, most of the gain today was made in the first 60 min of the U.S. session. The rest of the day the market kept to a small range and then closed at the session highs. So, now that wave 4 has officially begun, how will it go.

As a primer, corrective waves include:
- zigzags (3-3-5 or 5-3-5)
- triangles (3-3-3-3-3)
- flats (3-3-5)
- combination waves (essentially any of the above waves strung together with an 'x' wave in between.

Also, wave 4s generally tend to be shallow: retracing between 23.6% to 38.2% of the 3rd wave. In addition, wave 4s and wave 2s tend to alternate. So if wave 2 was a zigzag, then wave 4 will not. And finally, triangles only appear in the wave 4 position (not the wave 2 position).

Our finish for wave 3 was messy, and I have two options on how it ended. Depending on how it ended plays into each of the most likely wave 4 scenarios. Since wave 2 was a zigzag, my best guess is that wave 4 would be a triangle or flat. My preference is for scenario 1:

Scenario 1 (above)
Wave 3 ended with an ending diagonal, and wave 4 will likely be a triangle contained at the high of 734, but more likely 725 (and possibly at today's high). We would have finished wave a of the triangle today or tomorrow morning at the latest. We would likely finish the triangle sometime between the end of this week and next.

Scenario 2
Wave 3 ended on 3/3 and we are now finishing off an irregular flat (wave B is longer than wave A). In this scenario, wave 4 should finish off tomorrow am and might reach as high as 734 but likely will be contained by 725. We should also quickly breach 672 tomorrow or Wednesday at the latest if this is the correct scenario.

Our confirmation that wave 4 has ended is a break of 672 as that is the key pivot for this wave.

Finally, I have a close up of the 5 min chart (below) showing our latest action. As you can see it is pretty fast and furious - an obvious sign of short covering. Volume has not shown any signs that we have hit any kind of a bottom. I show a likely spot for wave b to end if scenario 1 is going to play out.

Monday, March 9, 2009

Have we been here before?

Well, the nasdaq continued its downtrend by wiping out all the early gains. The financials decided to take a day off and kept the S&P500 above yesterday's lows. I see only two likely scenarios from here:

1: We tread water for the rest of the week (see top chart) and then plunge possibly starting on Friday. At this point, ES can't spend more than an hourly bar below 676 otherwise we will likely plunge immediately. I just don't see any upside rallies likely taking hold, so at best I think we tread water in a w4 triangle. This would set us up for a quick plunge and then a quick reversal as it goes with triangles.

2: We breakdown starting tomorrow (see bottom chart) as the Nasdaq acts as an anchor around the market's proverbial neck. This should push us to the 600 area very soon.

Sunday, March 8, 2009

Do you feel confused? Well, so is the market...

With the rally late on Friday extending as much as it did, it sure makes tomorrow's forecast that much more difficult. In times like these, it is important to go through the facts:

- we're in a downtrend and that won't end until we get some kind of capitulation on high volume (volume on Friday was not impressive)
- Since Feb 9th, every rally has been sold
- the daily SMA is still sitting at 715 and will be taken out during our upcoming w4 (if this is it)
- we are deeply oversold (likely the key reason why shorts decided to take profits off the table late Friday)
- the nasdaq finally began to outperform the spx to the downside on Friday for the first time in over a month
- significant resistance is at 700, 725, 740, and 780
- key retracement levels for a w4 are 715 and 745

So, depending on your trading instruments you have to manage risk differently. For example, out-of-the-money puts that expire in two weeks may need to be sold if the downtrend doesn't continue Monday, but short positions (especially ones that aren't significantly leveraged) could be held comfortably knowing the bottom is still lower.

Now, to the charts...

I'm not sure if I would lean one way or the other as to which chart is my preferred count. I hate 1-2, 1-2, 1-2 counts because at some point you realize that you were wrong more times than not. So here are the scenarios:

#1 The bottom drops out of the market next week. Key confirmation points:
- Friday's low is broken to the down side within the first 2 hours of Monday's session
- We close at the low on Monday
In this scenarios, the bulls finally give in. We should see SPX 600 this week.

#2 We have started our w4 bounce. Key confirmation points:
- When we get our retest of Friday's low (very likely to come) the retest holds. I would count any retest as price moving to the 670 area and holding
- We close above the daily 8 SMA
In this scenario, we will likely chop back and forth. We likey will test our 700 area get rejected, and hold Friday's low. This would be our first clue that 700 will not hold again and we will move the 725 resistance. This wave will likely be a triangle.

Thursday, March 5, 2009

The grind continues...

Bulls couldn't string it together and my call for a minor w2 instead of a larger w4 turned out to be correct. We broke down previous support and then came back up above it at the close. I'm still expecting a major breakdown day (about 10% in one day), and every day seems to be one day closer. Could be tomorrow? Only the market will tell.

For tomorrow I'm expecting a gap down, possibly below today's lows. Should we hold the 680 area overnight, then I expect any rally to be shut down at 690. If the market does manage to put in a reversal, it should be short lived. Since I'm sitting on a significant march put position, I'll be looking to start the profit taking hopefully tomorrow around 650 or lower.

The chart below is showing some additional channel lines that could provide resistance on the downside. As you can see, there is still a lot of downside to go.

Wednesday, March 4, 2009

We're near a crossroads

So the question of the day is...Is w5 of 3 subdividing or are have we started a larger w4 correction. We won't know for sure w/o some more data points. My preferred count (see above chart) right now is that w5 of 3 is subdividing. In this scenario we put in a w2 high in the afternoon, and we are starting w3. This should be pretty easy to spot tomorrow morning as we should be below 700 in the first 60 min of the US session.

The alternate count (see above chart) will be most easy to spot if 704 holds in the first 30 min tomorrow. If not, then as long as 699 holds within the first 60 min, then we will likely be in w4. There will be no guarantees though until we either break today's high or yesterday's low.

Now, if we are in a w4, then we should prepare ourselves for either a triangle or zigzag (or even a double zigzag). Because our w3 has been so shallow compared to w1, I would expect any retracement to also be shallow: 23.6% - 38.2% range, but we could mark 4-5 days completing this correction with today being day 1.