Saturday, January 23, 2010

Weekend Analysis

Well, after a brief consolidation, Friday's selling picked up and pushed the market down significantly. We very much have a subdividing wave 3 as expected, although I didn't expect 3 degrees of subdivision, but that appears to be what we have right now. While there is an outside chance that we had a wave 3 finish at Friday's open, a quick wave 4 and are experiencing a washout wave 5, the price action on the hourly chart does not support this view.

It looks like the base correction value in this wave is 10 pts. We've had three corrections of 8 (.786*10), 10, and 13 (1.382*10) pts. I'll be looking to see our wave 4s correlate to these values with a possible 20-21 pt correction coming in the last wave 4, possibly as a flat.

Are we done with the current micro wave 3? Certainly it is a possibility, but I'll let the market will lead the way. For quick trades I'll be looking at entry points at the 8 SMA on the 15 min chart, especially if we've already come at least 8 pts off of the low.

As exciting as it is to see a resumption of the primary trend, our really big money opportunity will come during the wave 2 and subsequent wave 3. I've already cashed in lots of my options that I bought earlier in the week for 100%+ gains. For the ones that I will buy during wave 2, I'll be looking for 3-5x that amount for a profit target as the VIX sky rockets (increasing the volatility premium) and out-of-the-money puts become in-the-money. In anticipating big moves I will likely be looking at FAZ and QID calls as those gains can really compound quickly when the market is impulsing in your direction.

Remember that wave 3s are so powerful because it is an alignment of price and fundamentals as the market all of sudden comes to the realization that current price is not in alignment with the fundamentals. Unfortunately the fundamentals have only gotten worse over the past 2 years. Bank leverage is still at dangerously high levels (when considering mark-to-fantasy accounting and off-balance sheet liabilities), the gov't debt has gone through the roof, the people will not stand for any more bank bailouts as executives continue to enrich themselves at taxpayer expense, the fed has already has interest rates at 0% and IS the market for purchasing fannie mae/freddie mac MBS, all while unemployment is at best stabilizing at a long-term rate of 10%.

The bright side of this of course is that our country needs a wake up call. Greed has taken over in all aspects of our country. A bear market in greed is what this country needs to become once again great.
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