Weekend Update

Sorry everyone, but between a cold and a crazy weekend, I just haven't had a chance to put much together. I'll get to everyone's questions tomorrow with a more thorough update.

The only thing I need to highlight is that divergence remains unrespected by the market. A move below Friday's low should create a washout type move with a possible intraday reversal. If not, then we likely are already at the beginning of wave 2 up with confirmation coming from an hourly close above the 34 SMA.

Be patient for the wave 2, it will come.

5 waves complete?

Well, it was interesting because I had a nice 5 complete waves on the hourly chart although my short term chart was showing one more low; however, I always defer to the higher timeframe chart, so I called it good. But the market wasn't ready and boy did it put in another strong move to new lows this morning. Then after trying to work itself out of a hole, the market fell apart at the close pushing the futures back to the lows of the day.

So, here is what I have:


5th wave is extending. This is my primary scenario as the market should have responded much better to the buy signals that were flashing all day on the hourly divergences. When these divergences are ignored by the market, it generally signals a 5th wave extention as divergences show up in the 5th wave. This would put us in wave 3 of minuette wave 3 of minute wave 1 tomorrow. It could be another doozy dropping to next key support in the 1040 area.


5 completed waves. This of course has the lows holding with immediate strength. Look for confirmation with a move above 1092 in the morning.

Wave 2 has started

Well, today's volatility nearly got me to my 1080 target, so it was a bit frustrating when some of my cover targets missed by near ticks on the ES, but that is how it goes sometimes. Nevertheless, we have a near perfect 5 wave pattern on the hourly chart, so now it is just a matter of building up a short position at the right spots.

So, here are high probability turning points for a wave 2 end:
- 1114/1116 (near the 50% fib retracement and key resistance)
- 1128/1131 (test of the breakdown area)

Certainly once we have a wave A and B, it will be a little easier to project the wave C termination point.

Someone asked me about my options strategy. Here is how I'll be positioning myself for what should be at least 2 weeks of solid selling once wave 3 picks up. As the finance sector should be one of the more vulnerable sectors, I'll overweight my strategy on Finance (FAZ); however Energy (ERY) and Technology (TYP) should also provide plenty of bang for the buck. 3x ETFs can be dangerous, but they should work well for 2 weeks in a wave 3 situation. I'll be putting half my position in Feb calls and the other half in March calls. I will buy 1/2 my position at 1114 unless we have already put in a wave A before then. I will buy the other half all the way up to 1128. Risk is 100% of the option price. Initial profit target is 300% of my cost basis.

Best to your trading!

Getting closer to a wave 1 bottom

Well, today touched a new low at the open, and then price worked its way up for another wave 4 correction (another 13 pts). That should us put us in wave 5 of minuette wave 3 for tomorrow. I'm still looking for at least a 1080 target in the cash index. Another move lower (minuette wave 3), bounce higher (minuette wave 4) and test of the lows (minuette 5) should complete our first minute wave 1 with divergences showing up on the hourly chart.

Still down...

Today's action qualifies for a flat wave 4 (we touched the .786 retracement for the double bottom) and so we still have a couple more 5s and 4s to go before we finish off this wave 3. I would like to point out the bounce was 13 pts as stated in my post yesterday. We should see some divergences build on the hourly chart before this first minuette wave 3 is complete.

I'm looking for the next low to be in the 1080-1085 range. We'll see if the market continues to cooperate ;-).

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.

Bear market resumes...

...with today's close below 1130, we now have in place all the makings of what looks like primary wave 3. While the market still needs to close the gap at 1070, that could quite easily happen next week.




Of course we'll need to see a completed impulsive minute wave 1 to really get excited, but right now it looks like it is the bear's market to give it away.

Key resistance: 1123 and then 1130
Key support: 1113 and then 1096

Another whipsaw or is this for real...

After wiping out all of yesterday's gains, the market has once again found the bulls and is pushing this market back up. Will be to new market highs (again) or will we get a confirmed break below 1130?

Only the market knows, but I can tell you I'll be piling on tomorrow as soon as I see the trend has moved down (simple ma crossover on a short-term chart) with a stop above the high, whatever that is. The next break should be significant and start the ball rolling towards 1000.




If we go to new highs, then the market is subdividing higher. I'll figure out that count if we get there. For now, here are the VIX and ATR charts I'm watching that are definitely giving us sell signals.

Key resistance tomorrow: 1139/1141 and 1144/1146
Key support tomorrow: 1130/1132 and then 1113

My head is spinning...

...and I think I'm going to throw up. Someone just make up their mind and pick a direction, please!!

Well, my key areas for resistance came and went with not much more than a 2 pt pull back before the upward resumed. On the 5 min chart it looks like we put in another completed 5 waves. If we are going to subdivide and go higher, then support should hold tomorrow in a wave 2/b. Or we could just reverse all of today's gains tomorrow ;-).

Key support tomorrow:
1141/1143
1135/1136

Key upside targets: 1160 and then 1168

Enjoy the trades...

Quick update

I just wanted to send out a quick update to say the futures did test my key resistance area while the US markets were closed, and they have tested the low put in on Friday. Should we move below the low during the US session, then our wave 2 will already be in...

If we move up this morning, then I'm still looking for 1141/1142 to hold on the SPX (1137/1138 equivalent on the ES).

Looking for a wave 2 top tomorrow...

Wow, Friday's move down was awesome to watch as the bulls just couldn't get it going any higher. Since we now have an impulsive move down that took out the prior low during a key timing window (200% of the wave W in time), then I'll go ahead and count this as a wave 1 (I'll leave in the /a for now as the bears still need to take it below 1110 and 1090 before we get confirmation. If this is indeed a wave 3 coming that should be no problem at all.

Key resistance comes in at 1141/42. I'll be looking to add Feb/Mar options tomorrow (FAZ calls, QID calls, xlf puts, iwm puts).

Best of luck!

Looking for more price consolidation tomorrow

We're at the point in the pattern where we should have our wave B that breaks the 15 min 34 SMA. Price should hold in the 1142-1144 area and provide a base to launch the final assault on 1160. For it to be considered broken, I would like to see 2 15 min bars with expanding range close below 1142, then we should test 1133 one last time before saying goodnight.

Remember we are in the key turing windows expecting to print a high sometime between this week and the first week of February.

How quickly the tide turns...

This market is really grinding me now. Well folks, while the market can do whatever it will, based on the price action we got and solid base that was formed in the 1133/1134 support area, we are looking at testing the upper side of the channel at SPX 1060. While a 5th wave can die anywhere in the neighborhood of the 786 retracement (market poked above it and closed beneath it today) to a double top to test of the upper channel, I'll be expecting the bulls just keep this churning.



While this looks like a normal 5 wave move on the hourly chart, the 5/15 min cash charts have overlapping waves all over the place, so while this doesn't look like a textbook ED, that is how I am counting it. This places odds on an overthrow in the 1160 area depending on the timeframe of when it gets there.



With the volatility the last couple of days the 10 day ATR did close above the 13 SMA. This may mean that we sell off starting tomorrow (unlikely) or that contraction in the market resumes and it drops below it until we get to the top. But it is an indicator to watch. Should we close down big tomorrow, I would throw in the towel for the bulls as the ATR would really jump along with the VIX, which is showing some signs of life.

Key resistance levels:
- 1150
- 1159/1160

Key support levels:
- 1139
- 1133/1134

I'm going to go ahead and say a close below 1130 and we have a confirmed trend change.

It should get very interesting from here...

Well the bulls found themselves too close to the edge and woke up on the wrong side this morning. Every attempt to fill the gap was unsuccessful and the market turned lower to pause at another very important edge. The problem is of course that the last cliff was a mere 20 ft drop. This next one is a couple miles to the next ledge (sitting around SPX 900).

The market displayed a clear 5 wave pattern to the downside. The question from here is do the bulls test the breakdown at 1147 or do they get trapped on the wrong side of the gap for the unforeseeable future (my preference is let them be trapped!). Of course this is still conjecture until we get further downside confirmation that the top is in, but hey I love conjecture ;-).

Key resistance levels: 1139 and then 1147
Key support levels: 1133 and then 1113

Best to your trading

ED is still alive...

With the market being rejected at 1150 (my upside critical level for the ED scenario), the ED scenario is still alive. We still need a confirmation with a break below today's low at 1142. We have the 34 hourly SMA coming up at 1139. But be aware that the market could still subdivide into a bigger ED with a move down somewhere between 1121 and 1128. It won't be until we get consecutive daily closes below 1113 that we will have a confirmed downtrend.

On the globex chart it looks like we may have a nice wave 3/C tomorrow. It could get interesting...

Tomorrow must close down or else...

My whole count of an ED is either confirmed or invalidated tomorrow at the close. An up close invalidates it and a down close confirms it. I didn't have as much time this weekend as I wanted to touch on some key turning dates that we are on, but here is what I have. There are two timing cycles that the market has pretty much stayed true to over the last several years. One is the 15 week cycle and the other is the 32 week cycle. Now we haven't had many pivots to even consider since the March bottom as the market has pretty much gone straight up. But the top two charts show the potential turning dates starting with last week and go through the first week of February.



The other interesting turn date is a time relationship with the A wave. This also fits nicely with a 3rd wave tomorrow instead of an ED with the turn date coming the last week of January with a price target in the 1160 range.




As for counts, there are two scenarios. Either we finish the ED and primary wave 2 tomorrow or we are in a wave 3 that has much more room to go. In the latter scenario, we are likely looking for a turn date in late January or early February. And even at that, we will need to watch closely how the market reacts to the next downturn. This market has gone nearly straight up further or more relentlessly than I ever imagined. But one thing I do know, the ups and downs of a market (or waves) are healthy and sharp action (or spike action) tends to go both ways. When the next move down comes it will be very sharp and dramatic because there are so many sell stops beneath the market they create an air pocket where the market will go into a freefall before stabilizing. It should get interesting.

Key resistance level is 1150. If we get close above that than the ED is off. Key support level is 1138. We close below that and the ED scenario should be confirmed along with the end of P2.

Mid day update

Just a quick note to show a potential ED on the cash chart. We need to consecutive 15 min closes below 1139 to confirm the break down.

Another possible 5 wave pattern completion coming

Today's fake out got me faked out, and it was painful. Well, the market never really pulled the plug staying above its 60 min 34 SMA the whole day. Looking over the charts again left me a bit confused as to any probable wave count, so I decided to look back at the globex chart to see I could make out a pattern that might be worth while, and here is what I got.



I'm guessing that we get a bit of volatility tomorrow morning when the unemployment reports comes out, which should give us our wave 4 and then another move higher to finish off wave 5. The channel target is around ES 1144 (~1148 in the cash index), but a wave 5 can terminate anywhere between the mid line and a small overthrow. Well it be the last or will the pattern continue to subdivide? I continue to watch the 34 SMA to have a completed wave structure. Until then, I watch resistance and support levels along with key trendlines.

BTW, the market has a historical tendency to rally into the employment report (so far on cue) and sell off afterwards (either same day or the following week), so maybe that fits with the pattern. In addition, there are a number of key fib/market timing windows starting to show up this week through the 1st week of February, so that could also play into things. I'll provide some of these charts in my weekend post.

Messy price action but where do we go from here?

Well, here are the realities. This is definitely looking like a C wave and we are looking close (if not already) to done. The hourly 34 SMA is rising and currently sitting at 1130. An hourly close below that should be our sell trigger although often the first wave will hit the SMA bounce in wave 2 and then drop through it for wave 3, so I wouldn't advise an immediate sell at that point, but maybe a trigger to start piling in some good Feb options.



This 5 min chart shows an ED that completed at today's high. But to be honest, the price action is all over the place that I place little confidence in this count, but should price drop tomorrow, then I'll keep it ;-).

5 waves complete?

The move off of Thursday's low was so quick in the cash index it has left the EW count a bit in the fog, so I decided to have some help from the 24 hr ES chart to see if something might be a bit more clear.




Taking a look at this chart it appears that we may have a completed 5 wave pattern in play. What would confirm it? Well, we would need a drop below 1130 SPX, and if that happens, then we likely have our final C wave in place. Of course, subdivisions is this bear market rally's hobby, so we still need a move below 1094 to confirm the direction. But we would have a ST change-in-trend that we should be able to milk for something and possibly a lot more.

What do we need for the bullish picture, a continuation move tomorrow (starting with a gap up would be nice). Price has stayed around here to long and there are already many divergences showing up. The bulls need a strong push (all day long) to the upside to clear those divergences and give them breathing room for a future retracement. Any gap up that fills would be bearish. Any gap down that doesn't fill would be 'ultra' bearish.

Key Support Levels: 1130/1133 and 1120/1122. A move below 1115 is the initial confirmation for a change in trend.

Key Resistance Levels: 1140/1142 and 1155/1158

Bulls need a strong day tomorrow or....

else we could have a massive down week. You see, the bulls used up a lot of energy taking the price straight up from Thursday's lows without any smaller retracements. Of course, a lot of that was likely a bit of a short squeeze, but the point is that the momentum readings as they sit right now would be supportive of a top if price rolls too far from here.



Take a look at the first move out of the triangle. We got a momentum high of 95 on the RSI(5) before getting an expanded 5th wave. If this is going to be a wave 3, then it must exceed the momentum readings of the previous wave. If this is just a final wave C to finish off a zigzag, then a weak finish would be consistent with the price action we've had during this bear market rally: namely a strong A wave and a weak C wave.



To look at the larger picture, here is our zigzag as currently labeled off of the March 09 low. Our first move (W Wave) compared to our current move (Y Wave) was much stronger in terms of price and time. You see, we're closely approaching 200% in terms of time while still short of 100% in terms of price. That is not a 3rd wave, but a typical holding on for dear life corrective wave.

That is why if the bull stops here to smell the roses, it may find itself in the slaughterhouse with the pigs...

Morning Update

With price rallying off Thursday's low, I went over the price action again to figure out what the bearish count would be should price rollover here, and this is what I came up with. Since the ED scenario violates EW rules, I needed a different scenario in case price died at a marginal new high.

Critical Week Coming

Happy New Year!! I hope everyone was able to enjoy some time with family and friends. While 2009 was horrible on my trading account (to be discussed in a future post), there were plenty of lessons learned for me in both my trading and my personal life. In the end I believe I am better for it and come into 2010 with a great level of optimism (not for our economy or our government) for me and my family. We have faith, hope, charity, health, and freedom, and I believe those are key ingredients to being able to achieve the financial rewards in this life that so many of us seek. Well enough of my soap box and on to the charts...





Friday's reversal is either the makings of a 3rd of 3rd of 3rd or the end of an double zigzag corrective pattern. Whichever it is, it should be pretty easy to spot next week. Santa's rally did take it on the chin though as this nice little chart zooms in on the last 5 trading days of 2009. Will Monday and Tuesday reverse the losses or compound them?





So let's look at some charts. On the bearish counts, the price action would be counted as seen above.



While we have a key level right below us, it shouldn't hold next week in this scenario. If price consolidates in this area (~1110/1113) and then breaks below it, the selling should be fierce. Our confirmation for a change in trend continues to be 1094. While that seems like an eternity away in our 8-10 pt range days that we've become accustomed to over the last 60+ days, it is important to remember that 30+ pt days were common place during the first bear wave. A resumption of the bear will also bring a resumption of the volatility. The 10 day ATR is hitting lows not seen since the all time top was coming up in 2007.



How do we count the price action should next week limit the losses (or be up) and the following week bring follow through to the upside? Well, here are a couple of scenarios for higher highs. The wave B triangle (above) is still my favorite count. I've also seen suggestions that we are in an ED wave C, which while possible doesn't follow the strict EW counting rules with the 3rd wave being shorter than the 1st wave (seen below).



So there you have it. Key support level next week is 1110/1113 with a change of trend confirmation at 1094.

Key resistance level next week is 1118, which if the bulls can get above that will likely be able to take this to new rally highs.