Merry Christmas!

This is my last post of the year until wave E tops or we get a breakout above the December highs. Honestly, I need a break from the markets and 4 days will be a blessing. There really is nothing to do until next week anyway. Even if markets break below the December 12 lows on Friday, the volume won't be there to confirm it and we will have to wait for another failed rally or test to confirm.

I continue to see a number of breadth indicators that are at bullish extremes indicating that a reversal is nigh. The bulls failed to break it out when they had the chance and I think now that any break out will be a false one.

I want to remind everyone that if you haven't completed your 2009 trading plan, it is time to get started. Don't expect it to be perfect and don't expect that it will prevent you from having losses, but having a plan and sticking to it will save you so much money and anxiety, it is well worth the time to do it now.

I continue to believe that there are hundreds, if not thousands, of proven methods to make money in the markets, but it is difficult for most people to have the patience necessary to wait out the slow periods and drawdowns to see the rewards. You may have to stick with something for three to four years before you really see the benefits, and that is a lifetime for many people. Look back at the last four years. In your mind, it is as if it were yesterday. So too, will the next four years be to you four years from now. If you act with discipline and consistency, you will be amazed at what you can accomplish over the next four years. Don't believe for a minute that one bad day, week, month or year will change that. Regardless of the past, commit to those actions today that will improve your life and trading in every way. This year is over and a new year of opportunity awaits. Let's make the most of it.

Nearing A Sell Signal

The markets are barely hanging by a thread. The bullish potential wanes with each passing day. As best as I can tell, the markets are in wave b of D down. Wave b has a couple of wiggles to go and then markets should fall to the December lows, after which we should see a surprising rally that does not surpass the December highs in wave E up. This last rally will fool a lot of people. On the other hand, if it does break out above the December highs next week it would be bullish for early January.

I have been pouring over my cycles data and I believe now that I can say confidently that November 21 was the 10 month cycle low. (This was my originally calculated date, that I later modified to November 26 and December 6.) Based on this I am projecting the end of primary wave 1 to be near the end of January. It calculates out to February 5, but I suspect it may come a little early since this is a 5th wave. That would be the bottom of the 11 week cycle. The mid-point of the 11 week cycle falls on December 29, so we should be nearing the end of this sideways movement.

As far as 2009 is concerned, you can check out the DJIA Post-Election Year chart at www.seasonalcharts.com. It shows a bottom in February followed by a substantial rally, which is exactly what I expect to happen. It is also followed by a substantial decline, which may be understated.

The indexes are only 1 to 2 days away from a macd sell signal. I will discuss trading tactics once wave E is near completion.

I had a shock today when I opened my platform and saw the QID down 12%. My stop was hit of course, but I did not know what happened until I called my broker and found out that Proshares declared a dividend today unannounced. I knew that this was coming from prior years, but in the past it as only a point or two. I think proshares owes it to those who trade these products to announce a dividend date in advance with amount of the expected dividend like any other stock. That way people can be prepared. Fortunately, I haven't lost anything but a commission as I reentered the position with new targets and stops. I will receive the dividend on tuesday which will offset today's loss. I will be putting a note up on the wall in large font for next year so that I can be prepared ahead of time.

Bullish Potential Still Exists, But Waning Rapidly

Back in 2006 I posted a question to Elliottwave International regarding the correlation between individual wave patterns and index pattern and direction. At that time I observed that the majority of Dow components had bullish elliottwave patterns. To me it seemed logical that if the majority of stocks in the Dow are going up, the index is going to go up on balance. However, the response that I got back was surprising. The answer was that the pattern of the index was independent of the patterns of the stocks comprising the index. Now, I realize that sometimes relationships can be counterintuitive, but to me this answer seemed nonsensical. Well, of course the indexes exploded higher for another year and a half.

So what about now? The top ten weighted stocks in the Dow Industrials are, in order, IBM, XOM, CVX, MCD, PG, JNJ, MMM, WMT, UTX and KO. Looking at the patterns in these stocks, I count (5) neutral and (5) bearish patterns. For the next 2 to 3 days, I see that (5) could rally, (3) look flat and (1) looks like it could continue to fall. My conclusion is that any breakout should it occur is likely to fail quickly, which may seem to contradict my previous post on the Santa Claus rally. However, the weight of the evidence seems to lean in the bearish direction.

Today's action would seem to confirm the near term bearish direction, but the December 12 lows are still intact and a rally could still happen. Given the above, perhaps the most likely outcome is a 1 to 3 day rally over the rest of this week that does not take out the December 16/17 highs followed by further decline in wave D.

I am still prepared to buy a breakout, and should it occur on volume, it could be surprisingly strong as the bollinger bands are clamping down. This tightening of the bollinger bands can be resolved in one of three ways: 1) an immediate breakout in either direction, 2) a false breakout followed by a strong move in the other direction and 3) continued sideways action for 4 to 6 days followed by a breakout. Generally, if a breakout of this type is going to work it should not close back within the 1.0BB for several days and the lows should stay above the 20dema.

Each passing day gives us more information about what the next move will be, but it may not be confirmed until next week. My hunch is that there will be some selling initially tomorrow, but that it will close up followed by updays on Wednesday and Friday, and then next week we will see selling into year end. Always remember that ultimately price and trend determine position, not predictions.

Rising Summation Index

I was looking at the McClellan Summation Index both for the NYSE and Nasdaq this week and wondering what the implications are that the summation indexes are rising rapidly. This can be really confusing and it might lead many people to believe that the rally is stronger than it really is.

The summation index can be very useful in that devergences between it and the indexes usually precede reversals and reversals without confirmation from the summation index will usually fail. However, a rising summation index does not mean the market must continue to go up, nor does a falling summation index mean that the market must continue to go down.

For example, the summation index fell from late April 2007 to mid August 2007, but the markets continued higher until mid July. The falling summation index did precede the sharp sell off from July to August 2007 and the summation index reversed coincident with the markets. In this case this was a clue the market advance into July was on weak underpinnings and a sharp reversal was likely.

On the other hand, I looked back 10 years for market behavior (using the QQQQ) after the 12dema crossed the 26dema, i.e. the macd crossed above 0. In all but 5 cases in 10 years the markets continued higher for at least a few days after that event. In most cases, the market continued higher for weeks to months, which is a strong reason for not ignoring such signals. But what about the 5 cases when the market reversed 0 to 3 days after the cross? The summation index continued higher for 2 to 3 weeks in each case.

The conclusion is that if the summation index diverges from the market, we should be on guard for sudden reversals, but the market can reverse without a signal from the summation index. Traders should not be complacent just because the summation index is moving with the market. I am not certain of the reason for this behavior, but in the 5 cases above, and in the current case I suspect it is because the weakest laggards are being bought because they appear "cheap" which keeps the summation index rising while the leaders are being sold. It takes time for the "buy cheap stocks" mentality to dissapate after a bottom even as the markets are rolling over.

To follow up on Friday's post, if the markets do break out Monday, the rally should be anywhere from 3 to 11 days based on the length of wave a, which puts the end of the rally at December 24 to January 7.

Santa Claus Is Coming To Town - Probably

Today's action has introduced a new twist into the analysis of the probable direction of the market. While the Dow closed down today the other indexes did not follow suit. The Qs closed in a very tight range completing a b wave triangle from the 12/9 high. The triangle in the Qs is almost textbook on the 60min chart, so this means that the markets must move down almost immediately Monday morning and not breakout above today's high or we will see much higher markets. The Dow has traced out a slightly different and larger ascending b wave.

This is a tradeable move as I see it, and I will be going long on the breakout above Friday's high with a tight stop. Targets are 31.97, 33.97 & 35.44 for the Qs; 9182, 9654 & 9932 for the Dow. That's right, almost 10,000 for the Dow is a possibility.

I want to remind you that I have been positioned long and short, so I will be tightening stops on shorts and taking profits on longs on a breakout.

This does not mean that the bear market is over by any means as the b wave triangles confirm a 3 wave move no matter which way the breakout occurs in this case. If it is up, then we have wave c of C, or wave C of (A). If it is down then, we have wave a or c of D depending on how you look at it.

I must admit that I am a little upset with myself. It really didn't dawn on me what I had done until this week. Back on November 14, I went long the Qs via the QLD and was stopped out on November 19. On November 21, the markets reversed again and we had a positive divergence macd buy signal on November 25/26. I did not realize it at the time, but I can see now that I passed on that trade because I had just been stopped out for a loss. My decision to go short again was sound based on the reversal on 12/1 and potential breakdown and so now I have another loss, which is ok. We will have losses, the key is to take the next trade and I didn't take the macd trade. I had planned for it for months, even giving the cycle turn date on this blog, so I should have taken it.

This is a hard business because it requires a level of self discipline that most people just can't imagine, and the point is that now we have another valid trade setup, and I will take it because it is there. If I lose money, then so be it. That is what account risk management is for.

Take a moment to look at the system tracker. The VLE system had 7 losing trades in a row, and is still up over 20% for the year. Discipline requires that we take the next trade that is in our trading plan even if it feels painful, because the ultimate result will be positive (for a valid strategy).

Overall Bearish Day

Dave, my prefered count is as you indicated in your comment, wave A up on 11/4, wave B down on 11/21 and completing wave C up now.

If tomorrow closes below today's low then wave D down is underway. If tomorrow closes above today's high, then we wave at least one more little push higher.

I, too feel that the indexes are not in nearly as good a shape as everyone seems to think. Go back and look at the rallies off of the 9/01, 10/02 and 3/03 bottoms. Now, those were rallies. This thing feels like an overloaded single engine prop plane trying to get off the ground before the end of runway, but we must not get complacent as I do recall a couple of instances were powerful rallies seemed to emerge out of thin air.

One reason that I think we are rolling over is the Eliades New Trin index (see Market Harmonics link) has hit as all time high and is rolling over which is very bearish, while the Options Buyers Sentiment Gauge has remained relatively bearish. In other words, the small speculators and the public have gotten bullish very quickly, while the large speculators ahve remained bearish. This is one time when I do not want to be on the side of the small speculators. Also, the COTs Timer site went bearish the SP500 this week based on the commitment of trader's reports.

I think the markets will limp along until the end of the year, but I still expect selling to materialize near the end of December.

Another interesting fact that has come up is that the Dow is now forming a squeeze on a 2 day chart. This is where the 1.5 SD Bollinger bands are inside the 20 period Keltner channels indicating the possibility of an explosive move. I expect the squeeze to set up on the daily chart over the next week. By my calculations, this squeeze projects the Dow to move around 1500 points above or below the December bollinger band range, down to 6500 or up to 11000. I do not expect latter.

Bullish Or Bearish Triangle?

The Qs have been consolidating sideways in what appears to be a triangle. Given that we are probably in a larger triangle, which is made up of a number of corrective moves in both directions, there is no way to be certain which way they will break out. However, the likelihood is that Qs will breakout to the upside as long as they remain above yesterday's lows of 29.82. If yesterday's low is breached, then the high of the rally is probably in. The Dow must hold 8682 to keep the uptrend alive.

As I write this the markets are close to breaking down. The semiconductor index is rolling over which is a tell.

As I see it there are 3 possible outcomes: 1) either yesterday's afternoon high was a truncated 5th wave and wave C up is complete, 2) a small degree 4th wave triangle is nearing completion which will lead to a quick thrust up to complete wave C, probably tomorrow, or 3) a b wave triangle is underway which will lead to a slightly higher high, probably Monday. In the latter two cases, the 50dema in the Qs should contain the rally. If it does not, then we are likely headed to 34.

It is interesting to see the VIX falling with little upside response from the markets, but I think that as long as the VIX remains above the January high of 37.57, the trend in the VIX is up and we will likey see another spike 60. I don't expect we will match the October highs on the next decline.

QCOR has just completed wave A of a large correction. It may be a buy on a successful test of today's lows in January.

A Few More Days

The markets are likely headed higher from here. Today would have been a great day to reverse and head lower, but that didn't happen. Instead we had a pause day. The 25dema is close to crossing up the 50dema, but we will likely see a pullback when that happens since the 50dema is currently resistance. It looks like the Qs are headed to 31.50 to 32. The Dow looks to be headed to 9275. Any breakout above those levels would indicate a much larger than expected rally is underway.

AAPL spells trouble ahead. AAPL is forming a bearish descending running triangle, which has just completed wave d down. Wave e up should not move above 103.60. Look to short a break below 88.02 after wave e completes with a downside target of 65. However, since this is a 5th wave and the market will be headed down in a 5th wave, early profit taking would be prudent. RIMM is set to move down with AAPL. A move above 45.36 would change the outlook on RIMM.

I expect the financials and the transports to lead to the downside as they are lagging in this rally. Watch for moves below the 12/12 lows for a heads up on market direction.

Another market to watch for a heads up is the US Dollar Index. The stock markets have been rallying as the dollar has fallen. A reversal in dollar, which may be imminent would also be a sign that the rally has topped.

There may be very little action until the end of the year, so don't get chopped up. Wider stops than usual will be required until the trend reasserts itself. I heard today that there may be another wave of hedge fund redemptions due to the Madoff scandal, but that they won't hit until after 12/31/08 for tax reasons.

What's a bear to do?

While the indexes continue to grind higher, the Transports and the Financials are lagging. Having broken the uptrend line from the November 12 low, they merely rose to test the underside of the line today. The VIX is still hanging on, but will likely invalidate the triangle pattern, which argues against any immediate strong downside action. However, none of the indexes bested their December highs today except the NYSE Comp. The volume was surprisingly below average given the overall hoopla around the Fed's action. Nevertheless it appears the markets will be heading higher if only for a few days.

But the question that must be asked is this. What will it take to get a confirmed uptrend signal in this market? From a technical point of view anything less than a move above the November 4 high is a countertrend rally, until we get a pullback on the weekly charts with a higher low and a move above that new swing high, and we are a long way from that regardless of moving averages and momentum indicators. However, if we did see the 20 or 25dema cross up the 50dema followed by a pullback and follow-through, that would also be enough to confirm the uptrend. Still, we are a long way from that as well.

Patience is key here. I will not be adding new positions until I see a confirmation one way or another, but don't believe for a second that just because the Fed is throwing everything but the kitchen sink at this market that it can't go down, at least one more time.

One amazing thing I want to report is that I have been using the 3 week rule to trail a stop on the second half of my stock short positions, and so far I have only been stopped out of DTV. I managed to cover the first half of DTV around 18 and exited the second half for a small profit. Although I have given back some gains, I am still in my remaining stock short positions. I am now only 40% short in the portion of my account allocated to invidual stocks while I am 60% long. Hopefully, I will be able to take some profits on the long positions by the end of the year. There are a lot more sophisticated volatility based stop systems, but I don't see that the more complicated is better than the simple 3 week stop.

The Transports Lead To The Downside

(click to enlarge chart)

The Dow Transports and the S&P Financials have closed solidly below the uptrend line from the 11/21 low. It seems likely that the Dow Industrials, S&P 500 and Nasdaq Composite and 100 will follow suit. The VIX continues to hang in there amazingly. So what can we expect from here. If the indexes close above the 12/8 and 12/9 highs, then the rally will extend to the 50demas, but at the moment it appears that the Dow is headed to 8000 or below and the Qs are headed to 27 or below to complete wave D of the intermediate 4th wave triangle.

Elliot Wave International says that the upper trendline of the triangle will be too steep to be a valid triangle and therefore another pattern is developing, possibly an ending diagonal triangle if the market goes down tomorrow. I don't agree with this assessment. I think that this is most likely a triangle, and the reason is that I am seeing a lot of triangles developing in large cap stocks. The triangle makes the most sense as I think the mutual funds and institutional investors and the government are going to do everything possible to hold this market up until the end of the year, and the triangle allows that to happen. Then, the final wave of selling can begin on January 2.

The alternate view is that wave 3 of (5) is setting up, which is even more bearish, but I don't think this could be right as the decline from the 12/8 and 12/9 highs looks very corrective, which fits with a wave D interpretation.

I am still looking for a macd sell or a break of last weeks low to get more bearish. I will expect this to occur on increasing volume and wait for a retest to add to short positions. A failure of the retest would be the ideal entry point. Anything else could be a fakeout breakdown.

If the market was going to break out, I think it would have already done so as there has been ample opportunity over the last week for the generals to push it up and they haven't. Everyone knows what the Fed is going to do tomorrow. The only surprise will be if they only lower interest rates 1/4 pt instead of a 1/2 pt. Such a surprise would indeed be negative for stocks given the expectations.

So, don't lose your patience. It is not surprising to see a slow grind sideways to work off the oversold condition generated in October. The rally from the March 17 low took 44trading days. We are currently at 34 trading days from the October 27 low and 10 trading days will take us to December 30.

In Suspense

Well, early this morning it looked like the markets were ready to turn down, but by the end of the day everything was positive, except for the Transports, which closed decisively negative for the week. More importantly, the Transports broke the uptrend line from the 11/21 low and penetrated the 12/5 swing low. The VIX remains atop the upsloping trendline on the bottom of the triangle.

There's little to add. Until the markets roll over to confirm the triangle pattern or breakout to continue the rally there is not much to do. I am partially long and partially short, as a few stocks are acting well, but the indexes remain in monthly downtrends. We can look to any number of signals to indicate the weekly downtrend has resumed: 1) A break below this week's lows on volume (28.47 in the Qs), 2) a high volume reversal day, 3) a macd sell signal (approaching), 4) a solid close below a 10 to 13dema, 5) a close below the mid-point of the range of the last 10 to 14 days (28.84 in the Qs for 14 days), etc. I will be using the macd and this week's lows to confirm the resumption of the trend.

During the next three weeks I will be re-evaluating my methods and strategies to develop my plan for 2009. I will be making some changes. This year I have primarily used three ETF pairs to trade the indexes: QLD/QID, UWM/TWM and UYG/SKF. Next year I will be adding the USD/SSG. I am expecting some large moves in the semi-conductor index and the Nasdaq 100 is no longer just a technology index. While the above markets are highly correlated overall, my purpose in using 4 pairs is to allow me to use different trend following strategies on each pair. In addition, I will use two strategies on each pair as well as a method for taking partial profits. This will allow for asymmetric entries and exits, reduce drawdowns and eliminate most discretionary trades. While overall I have done very well with discretionary trades because I am fairly consistent in my approach, I want to reduce discretionary trading for one main reason: stress relief. Even when things are going well, I tend to get caught up in over analyzing outcomes when I am in a discretionary trade. I have also systematized all of the strategies that I use for invidual stock trades to further eliminate descretionary trades there as well. The discretion will be in final selection of stocks to trade, as opposed to entries and exits and trend determination.

I share this with you to encourage you to start now in making a successful plan for 2009. I believe 2009 may be an even better year for traders than 2008 has been. The next 3 years may offer an opportunity for traders to make 10 years of profits (or more), an opportunity that doesn't come around very often.

I am anticipating an explosive rally off of a climax selloff to come in January. The rally should last well into the summer and retrace 50% to 62% of the decline from the October 2007 highs. That rally alone will offer the opportunity to make as much profit as the entire decline has. For example, if the Dow bottoms around 7000, a 62% retracement will also yield a 62% gain vs a 50% gain for the shortside from the highs. At that point, I anticipate we will see another decline of the same magnitude as the current one into a 4 year cycle low in 2010, which should yield another 60% opportunity. That works out to almost 300% without using margin, or 900% using double leveraged ETFs. Of course, discipline in risk management will be key as drawdowns are inevitable.

Plan ahead for this exciting time and remember to keep it simple.

Tomorrow Will Tell

I think the markets have run out of steam here. I went long the DDM off of a nice setup on the 60min chart, but it rolled over an hour later for a small loss. I took the trade primarily as a hedge against my QID position, in case the markets broke out, which it appeared they were ready to do. Amazingly, the VIX held firm and did not break the wave c low of the triangle. Currently the futures are down another 2%+-, so we may see a large down day tomorrow. There is trendline support, but I don't think it is likely to hold.

Several markets are near reversal points, including the Euro and the Yen which also points to a reversal in stocks.

I don't know if it was in jest, but the comment on the relation between the Gann lines I showed on the Qs and heliocentric positions of the planets is interesting. I dare not talk about it too much, but I have investigated these matters. I don't want to put people off, as most view such things as irrational and unscientific. But consider this: last year the Dow bottomed on 11/26/97, topped on 11/30/07, bottomed on 12/4/07 and topped on 12/11/07. This year the Dow bottomed on 11/21/08, topped on 11/28/08, bottomed on 12/1/08 and topped? on 12/8/08. Accounting for weekends, that is an exact duplication of last year's movements with negative 3 day shift. If the pattern holds, we should see a bottom on Monday 12/15/08, a top on Monday 12/22/08 (to complete wave E of the triangle) followed by a strong down move to 1/16/09 for a bottom. At that point the triangle in the Dow will be 39 days long. The typical length of the thrust is 1/3 of the length of the triangle which would be 13 days, putting a bottom at 1/12/09. Of course, this is all interesting for context and possible turn dates, but I will not be 100% short until I see some valid sell signals.

Interesting View Of The QQQQs

Thanks Dave for the clarification on the "short" QID position. Yes, I am short the Qs via the QID, and I agree that there is no more room left for the VIX to move down. If we don't see an increase in volatility tomorrow, the markets may be ready to break out to the next downsloping channel line as shown in the above chart.

I have read some of WD Gann's books and although I don't agree with all of his methods, some of his ideas deserve merit. His idea that markets tend to move along fixed lines until they jump to the next level or angle seems to be a valid observation. I find it difficult to implement however. But look at the lines drawn above. Is it just total coincidence that the line through the two lower lows from the first wave down in 2007 is exactly parallel to the line through the three lower lows in October and November of this year, as well as the three lower highs from the same period which also hit the June high? I can't explain it, but I think these lines are the dominant force in the downtrend until it reverses. One possible outcome that I see happening is a breakout above the current trendline after which the market slides down the upper side of that line to new lows, and then finally breaks out above the highest line to signal an end to primary wave 1 down.

Triangle In The VIX

A triangle has formed in the VIX representing a possible 4th wave in a 5 wave impulse from the May low. As long as the VIX remains above the wave c low, the implication is that we will see a short but explosive selloff once the downtrend resumes. If wave e is labeled correctly above , then the selloff may begin as soon as tomorrow. On the other hand, if wave d needs more work, then it may be another two weeks before the downtrend continues. Currently, the triangle is 31 days in length which gives us an estimated 10 days for the 5th wave thrust. Once wave 5 completes, we can expect a significant intermediate term rally in the stock indexes lasting several months that retraces as much as 62% of the decline from the October 2007 high.

Once the triangle in the indexes is near completion, I will discuss ways to trade it. I am still short the QID and will add other index short positions once wave c up in the indexes is complete as evidenced by a fall below the low of the prior week or a macd sell signal.

Today's rally in the Qs reversed almost exactly at the downsloping trendline connecting the highs of 10/14 and 11/4 so any significant breakout above today's high may mean that this rally is going higher and the triangle interpretation is invalid. The action over the next two days is key.

New 10 Year Relative Strength Low In SOX

The semiconductor index just made a new 10 year relative strength low yesterday. That is perhaps the most telling sign that this is a bear market rally!

3 Wave Rally Nears Completion

Markets closed decisively above last week's highs but the volume lagged on the QQQQ and the IWM while volume expanded on the major indexes. QQQQ relative strength is still lagging, which is a bad sign. Overall the current rally appears to be a double zigzag upward correction from the November 21 low. It may have ended today, but most likely we will see one more down-up sequence to complete it. The Dow finished just shy of the 50dema and the Qs finished just shy of the .618 retracement from the Nov 4 high. Both of those facts point to one more attempt at a rally high. If I had to guess, I would say it happens Wednesday after a down day tomorrow.

Today's open handed the bears one of those gotcha moments. Your exit level has been exceeded, but the market has gapped up well beyond the exit level. So what do you do? I think consistency is the most important trait to develop here. Always do it the same way and your results will be more consistent. In these situations, I choose to give the market an hour to see what happens. Sometimes it is clear that the market is running away and I go ahead and exit, but today was not clear at all. Yes, the Qs closed up 3.94%, but they only closed up .53 from the open and on lower volume. I saw that the volume was running light so I decided to hold my QID position. In an earlier post I recommended using wide stops. In this case my stop was 2 ATRs below the recent swing low (QID), so my stop has not yet been hit. My choice to exit on a breakout would have reduced my original loss expectation. However, I am still in and within my original trade parameters.

So far we have had few market long signals to suggest that this rally is for real. The Cabot Tides indicators are still short. The markets are still below the high of the low month and volume has been below average. Another interesting fact that John Carter of tradethemarkets.com has pointed out several times is that the Yen/Dollar is a great leading indicator for market action. The chart above shows that the rally in the Yen/Dollar is clearly 3 waves and it may already be breaking down in 5 waves.

My long positions helped cushion the blow from today's rally and I continue to look for a reversal in the next two days. If the markets continue higher I will exit short and look to go long on a pullback to the breakout level.

A Note On The Cycle Low

Since earlier this year, I have been projecting the low of the 10 month cycle to fall on or around 11/26 to 12/5. ( I had said 12/6, but today is not a trading day.) Yesterday marked the exact date for the 10 month cycle low from the 1/23 low. However, we saw the markets close near the highs of the week after last week's rally. One interesting phenomenon that often occurs with cycle lows and highs is that they can form a double bottom or double top with the intervening high or low occuring at the cycle low or high.

This occurred in July when the market bottomed near the mid-point of the 10 month cycle. It may be happening now on a smaller scale as we may be seeing a minor high occurring between the two lows of a double bottom. If this is the case, then we should see another low in 4 to 6 days. From the 11/21 low, we have 4 days up, 3 days down, 3 days up and by symmetry we may expect 4 days down to a new low around December 11 to 12, or if we make a minor new high on Monday, then we could expect 12 days down to a new low around December 24. The latter projection is exceptionally late, but the usual year-end rally may not occur this year.

Based on this possible outcome, I will remain short the indexes unless the markets rally on exception volume above the 11/26 high. I usually wait for the first hour of trading and multiply the first hour's volume by 5. This usually gives the end of day volume for the day within 10%. Compare this to the previous days volume and the average volume to determine if it supports the breakout. A projected end of day volume more than 10% less than the prior day's volume on a breakout makes the breakout suspect.

Is This Rally For Real?

The bulls have pushed the markets to the edge of the envelope for the bears. Any sustained move above last week's highs of 29.36 in the Qs and 8831 in the Dow would be cause to exit short positions. However, the 50dema looms just above that level in the Dow and may lead to a reversal on any breakout.

I must say that it is hard to believe in this rally. The intraday pattern suggests that today's high was the top of a countertrend rally against the 12/1 decline. The advance/decline ratio has deteriorated on every advance since it began back on 11/21. The McClellan Oscillator is at an extreme high level associated with tops. If the markets had already broken out, a coincident high reading in the McClellan Oscillator would be bullish, but since they haven't it would normally be bearish. On the other hand the Summation Index is rising and the Options Buyers Sentiment Gauge is at an extreme bearish reading, both of which are bullish.

The bottom line is that should we get a breakout above last week's high next week, I will exiting my index short positions and reversing to go long the Qs for a move to the 50dema. This period reminds me of February 2008. I got chopped up a couple of times then too before the real rally materialized. We can't expect to win every trade. As long as we are trading the trend, we will be rewarded in the long run. For now, the trend is still down, but a reversal could be a hand.

Make Or Break Time

(Click To Enlarge)

The stock indexes continued higher today after yesterday's follow-through day, so do this mean the rally will continue? I still think the balance of risk is to the downside. ( I apologize for the poor image quality of the above chart. One of my goals for 2009 is to provide better charts.) The above chart shows an interesting interpretation that has only become evident today. It is possible that the Dow complete Minor wave 5 of Intermediate wave (3) on 10/27 as a truncated 5th wave and has been tracing out a running triangle for wave (4) since then. At this point, we would be in wave E or wave b of D. We can estimate wave (5) to complete around 6420 if this view is correct.

We are at a make or break point with regard to the near term bearish viewpoint. The indexes should begin to decline fairly soon tomorrow or we are probably in wave C of (4) up to new rally highs around the 50dema. The rally over the last two days seems to be an upward correction with overlapping waves forming a double zigzag. If the Dow moves above 8680 and the Qs move above 26.84 tomorrow, then in all likelihood wave C up is underway.

Another reason to suspect that won't be the case is that the rally from the early afternoon low appears to clearly be 3 waves with an intervening b wave triangle, which again supports the view that this is an upward correction.

The bottom line is that we will know tomorrow if wave C up to the 50dema is underway, or if we are headed to new lows. If it is wave C, I will be exiting my index short positions and waiting for a new opportunity.

I added two new stock long positions today. QCOR broke out to new highs today. RIMM recovered from its early morning breakdown. However, ADBE and DTV are down after hours. This is certainly a bifurcated market.

Was Today A Follow-Through Day?

Today's action met the IBD criteria for a follow-through off of the 11/21 low as the Nasdaq Composite was up 3.7% on higher volume than yesterday. I would not be surprised to see it called that way in tomorrow's edition. However, looking at the intraday chart the rally appeared to be an upward flat correction in the form of a 3-3-5 wave count which completed wave c near the close. I could be wrong of course. An alternate view is that the upward correction is a double zigzag with one more down up sequence to complete. I suspect there will be some additional upside tomorrow morning, but none of the indexes advanced more than 50% of yesterday's decline, so I find it hard to get too excited about the long side (in the indexes) yet.

I was filled today on two index short positions on today's retracement. I guess I will know in a day or two if they work out. You can only trade what you see, and what I see is a market in a downtrend that had a nice bounce today. Follow-through tomorrow on increasing volume would be cause to reconsider.

An additional interesting pattern emerged today as the VIX appears to be forming a triangle, which could be a continuation pattern, or wave b of a correction. Either case suggests that the VIX will move higher in the future indicating further selling ahead as well.

Retest Of The Lows Underway

The week before Thanksgiving I offered two possible scenarios for market action over the last two weeks. It appears that the latter of those two scenarios is now playing out: "number two, we trade sideways to slightly up next week followed by selling into December 6+/- to put in the final low". The part I missed was that the market traded up dramatically instead of sideways to slightly up. However, today's action made up for that. The only problem is that I have so far failed to get an entry in any index short positions. Perhaps the extreme gap this morning was a clue. In any case I will be looking to short any retracement, preferably 50% of the decline from Friday's high for a retest of the November lows.

I believe the Nasdaq 100 (QQQQ) will go beyond the lows possibly as low as 23. Also, the current pattern suggests that it may take two more lows before we get a sustainable rally. I anticipate based on the pattern that we will see a low around December 5 to 9 followed by a 3 to 4 day rally and then another low during the week of December 15. The reason for this is that the decline in the Qs from November 4 to November 21 counts best as wave i of an ending diagonal triangle. So we are likely just beginning wave iii of 5.

Although I am still looking to get short the indexes, I was able to add a new stock short position today and I have orders for four more that could get filled in the next two days. I was still carrying four 1/2 short positions from November, so overall I did not experience much of a drawdown today. My long positions are holding up as I expect they will since we are likely approaching a bottom, and I continue to look for long opportunties during December.

A balance of longs and shorts should work well in this environment.

The Case For A Renewal Of The Downtrend

(Click To Enlarge Chart)

Over the month of November I have regularly presented the case for a bottom within the time window from November 26 to December 6. However, it would prudent to look at the alternate possibility that the decline that began in August is still in force. One excellent confirming indicator of the overall markets trend is the relative strength of the Nasdaq 100. The bottom panel of the above chart shows the QQQQ relative strength measured against the Wilshire 5000 index with a 10 period sma(green) and a 50 period sma(black). Uptrends in the broader markets have consistently occurred with the 10sma of the QQQQ RS greater than the 50sma. Notice how prior to the March to June rally the 10sma was trending upward and crossed above the 50sma when the Qs broke out. The RS itself was above the 10sma at that time as well. The reverse was true in September as the market was breaking down. Currently, with a highly heralded 5 day rally, the QQQQ RS is heading toward its October/November lows while the 10sma is trending down and below the 50sma. This does not support a continuation of the current rally. Perhaps we will see a retest of the November lows , or perhaps we will see a greater acceleration in the downtrend, but unless the Qs rally hard next week to move into a leadership role, I suspect the rally will falter.

In addition, we see that the RSI5 is nearly at 100 while the RSI14 has not moved above 50. The RSI14 will need to move above 50 to confirm this rally has legs. Finally, the McClellan Oscillator (not shown), has moved back up to its second highest level of the last two years. Having done so after only 5 days of rally on declining volume is certainly a negative. The indexes are approaching resistance at the 25dema, and I would consider any reversal on higher volume as a possible short opportunity for a retest of the November lows.

The following look like interesting short candidates: AAPL, BRCM, FAST, IACI, JOYG, MICC, PCAR, RIMM.

While I look to take advantage of a possible decline next week, I am still nibbling on the long side on leading stocks that could break out if we do get a Santa Claus rally. QCOR, PETS, EBS are doing well and I also like ISYS and SQNM.

As a side note, I did not see a lot of traffic at the stores for this crucial "Black Friday" sales day. I did not see a lot of traffic anywhere. My wife said she did not see any really good deals on the items she was looking for and felt like the sales ads were misleading. Perhaps there were deals on things we were not interested in, but her view on these things has usually been right in the past. I expect the results from today will be worse than expected which will be another negative for next week.

Happy Thanksgiving!

The rally continued today but the advance occurred on lighter volume. Given the holiday, that may or may not be meaningful. It is beginning to look like the rally is close to completing 3 waves up from last week's low. This could be a part of a larger upward corrective rally at the beginning of wave (4) or it could be a countertrend rally in the continuing decline. As mentioned before, we will need to see the quality of the next decline to determine the most probable outcome. Fibonacci resistance is dead ahead at the .618 retracement from the 11/4 high at 8812 in the Dow and 30.59 in the Qs. Beyond that the next major resistance is the 50dema. This will be the first test of the 50dema since the August highs and will likely be a least a short term sell.

According to my understanding of IBDs rules, today's rally did not qualify as a follow-through day. Due to the declining volume I have not taken a long position in the indexes. Perhaps Friday's reversal was enough of a signal, but there were not enough indications for me to justify it at the time. Should we see a pullback on lighter volume or a retest of last week's lows, I will be taking a position with an initial target of the 50dema. If that level is surpassed, the 200dema is not out of the question. The typical seasonal pattern suggests we may see some sort of pullback next week.

I continue to suspect that trading over the next few weeks will be the most difficult trading environment that we have seen in several years. We are not likely to see sustained trends on the daily and weekly charts, which will cause a great many whipsaws for traders. Caution and protection of capital are most important at this time. There is no point is giving back gains from the extraordinary decline that we have just experienced by unproductive trading in a choppy market. Smaller positions should be considered. If a larger intermediate untrend is about to unfold there will be time to get on board, but for now there are few indications that could be the case. For now the monthly and weekly trends are still down and the trades should be weighted in that direction. We can begin to alter that view once the high of the low month has been cleared on volume. For the Qs that is 34.01 and for the Dow it is 9653.95.

Again, the action next week will give us important information to evaluate the strength of this rally.

Have a Happy Thanksgiving and enjoy the time off.

MACD Buy Signal

A MACD buy signal has now been signaled on the major indexes due to a positive divergence. However, caution is advised as volume has been declining during this rally and a pullback, at least, is expected before further advances.

Rally Underway

Today's rally in the Dow completed 5 waves up from Friday's low on the intraday charts indicating that we should see some follow-through after a pullback. However, I do not see 5 waves up in the Qs and we did not get a confirmed macd buy signal today so caution is advised. The quality of the pullback from today's high may provide some insight. At this point I think it is too early to declare that last Friday's low was the low of wave (3). I still think there is a possibility that we could see a retest after Thanksgiving.

One piece of evidence that supports that the low is in is the breakdown in the QQV and the VIX today. However, it is possible that we could see a lower low even as the volatility declines.

I will continue to look for long opportunities in individual stocks as we move into December.

Of interest: EBS, LHCG, PETS, DV, CEPH.

Advisors Throwing In The Towel

I was not at all surprised to see a rally today. As I said yesterday, I was sure a rally would come after being stopped out. But this should not be a surprise given what has happened in the last week. Many traders have probably jumped in to try and pick a bottom given the bullish divergences setting up. After these same traders were stopped out by yesterday's decline below the SP500 low of October 2002, there was little selling pressure today. What is most interesting is that a number of advisors that have been saying that the market was building a bottom have now thrown in the towel and turned bearish. We see predictions of Dow 6000 and SP500 at 600 just ahead. I agree that eventually these levels will be seen, but not near term. To me this capitulation by the bullish holdouts is a bullish sign, particularly since we are within days of my calculated cycle low date of 11/26.

At this point I see two scenarios playing out next week. Number one is that we trade up on Monday and down into Wednesday mid-day to put in the final low of wave (3), or number two, we trade sideways to slightly up next week followed by selling into December 6+/- to put in the final low. If we get a follow-through day without another low, then the low is already in as of yesterday. Given the typically bullish bias surrounding Thanksgiving I will be looking to take another long position on any new low on Wednesday. If we do not see a new low, I will wait for a new low after Dec 1, or a follow-through day or macd buy signal to enter a new long position. I will then add to any long position on subsequent trend following buy signals such as the 3 Week Rule or Monthly-Weekly-Daily Rules shown in the System Tracker.

What I am not expecting is another extraordinary sell-off ala October. If it happens, then so be it, but the time is running out.

S&P Closes Below 2002 Low

It is hard to believe that in a little over 12 months the entire 5 year rally from 2002 to 2007 has been wiped out. I have been confident this day was coming, but still it has been amazing to witness it. However, we should not lose perspective on what this may mean in the coming weeks. As John Carter of TradeTheMarkets.com is fond of saying, "The first test is a fade, the second test is a go with". In other words, this test of the 2002 lows is more likely to lead to a substantial rally than continued decline. (Particularly since I was stopped out of my long index positions today.)

I have been continually scaling out of short positions over the last two weeks and am mostly in cash while I wait for leading stocks to break out in the coming rally. This is a time for patience, not chasing a trend that is in its last stages. Think about it, the Dow could easily hit its 2002 low tomorrow which is just 355 points away.

Low In Sight

I don't know how much lower the markets will go, but I think the end of this decline is in sight. I am not adding new short positions at this time, but continuing to exit existing positions on new lows. I have a little room left before my stops are hit in my index long positions from last Friday's close. There is a good chance we will see a bounce tomorrow into options expiration Friday. I will not exit these long positions unless my stops are hit, as the risk for a surprise rally, in my opinion is significant.

The recent index long positions I entered were clearly countertrend, and based solely on the expectation of a continuation of last Thursday's rally. I was not alone in this view as Mike Paulenoff was also looking for a continuation. (See Mike's free market analysis at the link on the left - click on Markets) One thing I would like to say about why I am still in these long positions is that I do not use very tight stops. In this case, I am using 1/2 ATR(10) - daily below last Thursday's low. For years, I used tight stops only to get stopped out and see positions move to my expected targets. My profitability improved dramatically when I reduced position size and widened my stops. For most trend following systems I use a minimum of the lesser of a 3 ATR(10) stop or 2 ATR(10) below the nearest swing low, meaning if 2 ATR(10) below the nearest swing low is closer to my entry I will use that instead of the 3 ATR(10) stop. I rarely use discretion to exit early due to sell signals when a position moves against me, as at least half the time I have found I would not have been stopped out and the position recovered to hit my targets. By being consistent in this I have improved my results.

The important point here is that if you are right on the larger trend, you may find it easier to be consistently profitable with wider stops and smaller positions. And however you choose to exit, be consistent in your approach.

Positive Close But Overall Lackluster Performance

The indexes have managed to stay above last Thursday's low, but the depth of the retracement calls into question the chances of a wave c thrust to above the 11/4 highs. Unless we get a powerful rally tomorrow, it appears that we are due for wave iv of an ending diagonal triangle that should peak around the 20ema by the end of the week. Thereafter, we should see one more new low to complete the decline. Even so, many stocks are showing signs of weakening downside momentum and the reward for shorting is probably too small to take any chances there. I continue to exit individual short positions on new lows.

Wave v of 5 down will probably last no more than 3 days. Swing index shorts may be a possibility, but don't overstay your welcome. The target should only be slightly below last Thursday's low.

Rally Still Intact

The markets closed above the 11/13 low as well as the 10/24 and 10/27 lows on lighter volume today. The action since last Thursday's high appears corrective and so I am still expecting another upmove. The quality of that move and whether or not it moves above the 11/10 high will determine if I hold on to the index long positions for the 50dema or take profits earlier. Of course, I am presently in the red from from Friday's entry near the close.

Regardless whether this rally makes it to the 50dema or not, the next swing low should be one of intermediate degree, and will be another excellent long opportunity. Positive divergences are beginning to develop on a number of indicators suggesting that a low of significance is forming. The Jan 08 and Mar 08 lows were separated by 33 trading days (fib 34 less 1). We are currently at 26 trading days from the Oct 10 low. It is interesting to note that Nov 26 is 34 trading days from the Oct 10 low, yet another confirmation of the estimated 11/26 cycle low. With that day also falling before the typically bullish Thanksgiving holiday period, I do not want to be short at that time.

If that does turn out to be the intermediate wave (3) low, we can expect 6 to 8 weeks for intermediate wave (4) to play out. However, we can also expect that wave (4) will be nearly as difficult to trade as wave 4 has been, except that the swings should be larger and longer which should make things a little easier. The reason for this is the elliott wave guideline that waves 2 and 4 generally alternate in structure. Wave (2) was a sharp upward correction. Therefore, wave (4) should be a flat or a triangle or some combination thereof.

Of course, this is all predicated on the supposition that this primary degree decline from October 2007 will occur in 5 waves. There is always the possibility that it is completing now as a 3 wave decline which could theoretically lead to an advance to new highs or 3 wave upward correction that would be larger than a 4th wave. Clearly, the advance to new highs is a long shot, but we should always keep all the options on the table until we can rule them out. Until I am proven otherwise, I will be trading this next intermediate wave rally as if it is a 4th wave.

One point I would like to make is that now is the time to be looking for good individual stock trades setting up. Leading stocks are setting up now an may be breaking out ahead of the market lows. Testing the waters over the next week may be a good idea.

Here are some of the stocks I am looking at as candidates on the long side:

QCOR, AMGN, SQNM, ALO, MYGN, VRTX, VRUS, HAE, CHDX, TCBK, EBS, CRI, CPSI, PETS, AXYS, SXE, OCR, ANEN, LMNX, GXDX, CMP, GB, SUSS.

Rally To Continue?

I am long the DDM and the QLD from Friday's close. I did not get as good an entry as I had hoped as I entered with about 8 minutes to go and the indexes continued to fall strongly in those last few minutes. The Qs appear to have completed a small 2nd or b wave flat. There could be some downside Monday morning, but the 11/13 lows should not be breached. Any move above 31.97 in the Qs should trigger acceleration toward a high above the 11/4 high of 34.01.

The alternate view is that Friday's rally is wave ii of 5. If this is the case then we should know it fairly soon as wave iii of 5 should quickly take out Thursday's lows.

I am finding it easiest to follow these moves on the 15min and 60min charts, which gives me time to perform other tasks in between. Thursday's reversal developed as a head and shoulders bottom breakout around 2pm which completed as 5 waves up. By 1pm Thursday it was becoming clear that a rally was at hand and I began taking profits on short positions. If the markets do rally to the 50dema, I believe that it will be the last great short opportunity of the year, but it should be followed by one or two great long opportunities as well as large swings should be the norm until this primary wave down completes next year.

I usually don't have the luxury of following the intraday action, but I try to be in front of the screen when I think reversals could be at hand, and I use the intraday charts to determine pivots and entries whenever possible.

Throughout this year I have been developing my intraday trading methods. While there are any number that are profitable, I have been most interested in simple methods that allow the greatest flexibility from the screen. I have narrowed it down to two methods both of which consistently produce winning trades with few variables. My criteria for full time trading is that I should have enough capital to produce double my current income. That way, if I have a bad month I will not be under a lot of pressure to catch up. Once I have consistently produced income from intraday trading for at least 3 months, I will share specifics of what I am doing.

I wish you all profitable trading this week.

Follow Up On Rally Post

The key to this rally making it to the 50dema is a move above Monday's highs of 31.97 for the Qs and 9159.58 for the Dow. Failure to follow-through above Monday's highs by this coming Monday or Tuesday accompanied by a 3 wave rally would indicate that wave 5 is already in progress and the triange completed at Monday's high. While this is possible, I think the fact that today was an outside reversal day limits that probability.

Rally To The 50dema

A rally to the 50dema is underway in the major indices, most likely in wave c of Minor wave 4 of a flat correction. The move up from this mornings lows was 5 waves on the intraday chart. Look to enter index long positions at a 38% to 50% retracement of today's range with a stop loss somewhere below today's low. The target is the 50dema. The 50dema is declining sharply, and therefore if the rally is also sharp we should see selling and a possible reversal at that moving average. This would be a perfect opportunity for a macd short position should it signal a sell after the 50dema is touched.

I exited all index short positions by the close yesterday and many of my remaining stock short positions around 1pm today. If you are still heavily short, it would be wise to lighten up tomorrow in my opinion as this rally could be intense.

What happens after this rally is over will clearly determine what happens in December, but another move back down to today's lows is certainly a possibility before a 6 to 8 week rally to follow. A breakout without retesting the lows will mean that the intermediate term wave (4) or (A) rally is underway.

Lack Of Downside Follow-Through

We have seen lower prices today, but on lower volume. Advancers and decliners and up/down volume are roughly even so far today. To me this has the feeling of a b wave, although it could be wave 5, it just doesn't feel right to me. This is entirely subjective. I have continued to scale out of shorts as targets were hit and I am 75% cash at the present.

The one thing that has been nagging me all along is the time factor between Minor waves 4 and 2. While they don't have to be the same, wave 4 has seemed too short and far away from the upper channel line. I am beginning to suspect that the 10/24 lows completed Minor wave 3, and we are only now in the middle of Minor wave 4. If this is the case, we now have the possibility that we are still in a triangle or a flat that will work over toward the upper channel line. We could see a sharp thrust back up to 9800 to 10000 in the Dow in wave c of 4 before wave 5 gets under way.

While typing this post the markets have reversed and are moving higher. Volume is picking up. Perhaps wave c is underway. This is why I have urged caution in dealing with the current market pattern and timing as there are too many potential outcomes to be overly committed either way. If we get a substantial rally, it could be the last opportunity of the year for a good short trade.

Wave d Follow-Up

Intel's negative report afterhours increases the likelyhood that the 11/24 lows will be taken out tomorrow. However, we should not become complacent and expect that an immediate downside follow-through will ensue. There are clearly a number of ways that we can get to the bottom of wave 5, but take care not to be overly aggressive as it is possible that merely a retest of the 10/10 and 10/24 lows is all that will happen.

I've spent a lot of time discussing the potential elliott wave patterns because it is a subject that interests me, and it can help keep us on the right side of the trend, but I want to make it clear that I am not trading the pattern specifically. The fact is that there has been no clear change in the weekly trend since the beginning of September. All I have been doing is selling the rallies and buying the lows while this consolidation plays out. If we get a test of the 10/10 low in the Dow, I would first expect a rally simply because the first test of lows and highs typically fails and also because so many people believe we have seen the worst there will be some buying at those lows. When they fail on the second test is the most likely point of acceleration. For now, I am still waiting for a rally to add to short positions. I will not short the breakdown tomorrow.

Tomorrow before the open would also be a likely opportunity for a surprise positive news event, possibly intended to avert the breakdown. Whether it is working or not, we have seen some sort of government news every time we approach the 10/10 low.

On Comments:

I believe Laundry indicated that he would be surprised if markets held past the end of the week. I think the point here is the big picture not whether he is right about specific timing. As long as we have a good handle on the big picture, we can use other entry and exit techniques for profitable trades.

Wave d May Be Nearing Completion

The recent targets mentioned were for wave d, not wave 5. The wave 5 targets will be reassessed when we get to the end of the triangle, if that is what we are dealing with. Wave d may be ending as of Wednesday afternoon, if so then wave e could finish anytime between Thursday and Monday. As I said before, look for some positive news announcement that is concurrent with a market rally to signal wave e. We can enter or add to short index short positions near the end of wave e with the wave c high of 11/4 as a stop-loss. To be valid, wave d must not come under the 10/24 lows. If it does then either we are in wave b of the triangle or a flat, or wave iii of wave 5. Today's light volume is not congruent with wave iii of 5, however.

I took partial profits on index shorts this afternoon, and will look to add back on the wave e rally. I am maintaining partial short positions in case I am wrong and we are already in wave 5.

Triangle Still In Progress

There's not much to add today. The triangle pattern continues to work its way toward wave e, which may come as early as Wednesday or as late as the first of next week. In Elliott Wave International's Short Term Update today Steve Hochberg reminded readers that wave e is often accompanied by some contrary news, in this case bullish, that would seem to indicate the end of the downtrend, when in fact the opposite would be true since wave 5 would be imminent at that point. So, don't get faked out if we get a sharp rally on some unexpected positive news in the next few days.

I must say that this triangle is doing its job by wearing people down. I have even got bored the last few days with the lackluster action. I have only added one new position in the last week and have one open order for another that I am not sure will get filled.

This morning's post on Terry Laundry's T Theory Observations was one of the best I've read in a while. As far as I can tell Mr. Laundry has come up with a unique market analysis methodology that is quite reliable. He uses a volume oscillator to measure accumulation and distribution and has observed that when measured correctly the time of accumulation tends to match the time of distribution thereby creating a T that can project market turns. His current analysis fits perfectly with my recent observations that the triangle period may last until the end of this week or early next week before the downtrend resumes into a late November early December low.

The current wave projects to 29.03 to 28.36 in the Qs and 8633.77 to 8142.80 for the Dow.

Unless something unusual happens I will probably not post again until we approach the end of wave e. Be patient.

Market Sentiment

One of the best sites that I have found for free market sentiment data is Market Harmonics. The Options Buyers Sentiment Gauge is currently in neutral, but the Eliades New Trin and Nasdaq Composite New Trin are indicating an overbought condition even after the decline of the last two days. These indicators are consistent with an upward correction as opposed to a new trend thrust. If the markets had broken out above the 10/14 highs and the 50dema, then the interpretation might be different.

While the current decline could be wave d of the developing triangle, it could also be wave b, so we could continue to see sideways movement for another week, unless the 11/4 high is exceeded.

The INO TV Saturday seminar series had an interesting seminar from Charles LeBeau today. Check out the link above. As he explained his interpretion of the ADX, it is also clear that we are in a correction. I use the 10 period ADX. Currently, I see that the ADX is declining indicating a correction, and DI- > DI+ indicating a downtrend. LeBeau recommends buying pullbacks in an uptrend when the ADX is declining. In the current case, we have the opposite, so we should be selling rallies. Very interesting to see another method that confirms the state of the market.

Comments:

The only rules that I am aware of for extended waves is that they usually occur in wave 3 or wave 5 and usually only one wave is extended. For stocks, wave 3 is generally the extended wave, but for commodities, it is generally wave 5. Extended 5th waves often retrace to the point of origin.

I appreciate the compliment. It takes a lot more work to produce intelligible commentary and ideas than I could have imagined before starting this blog. I have a great deal of respect for anyone who publishes substantive work on daily basis.

Impulsive Decline

The decline from tuesday's high appears to impulsive and nearly over, so a sizeable countertrend bounce may occur tomorrow and last into Monday. As was indicated in the comments this may be wave i of 5 toward new lows, but it may also be wave d of our triangle that is grinding ever so slowly toward that declining upper channel line. I don't think there is anyway to be certain at this point. We also have to be on guard for an unexpected move above tuesday's high which would negate both viewpoints. Unless we get a surprisingly good jobs report in the morning, that doesn't appear likely though.

As Dave pointed out in his comment, we could also have a failed or truncated 5th wave scenario due to the extreme move of wave 3 down, although I think that the amount of the decline since tuesday would make that unlikely. As far as the DUG ETF, I have been extremely dissatisfied with its performance relative to Oil. Part of the problem is that it is tied also to Natural Gas which has been in a countertrend rally while Oil has been going down and from what I can see it tends to respond to Nat Gas more strongly. I have been equally dissatisfied with the SKF as its movements seem to be too exaggerated relative to the underlying. I think the best strategy with the leveraged ETFs is to take profits at set % gains or ATR multiples and accept that we will not be able to capture all of the swing.

As far as the cycle low expectations are concerned the triangle pattern fits the best as the thrust from the triangle typically lasts about one third of the length of the triangle, and if the triangle completes sometime next week, it will put the completion of wave 5 close to the projected cycle low.

Cautiously Short

I exited my remaining index long positions this morning and entered some partial index short positions. While the upward correction could be over, I think this pattern needs more time to work itself over to the declining upper channel line so that the time of wave 4 is closer to that of wave 2. That doesn't have to be the case, but it would align this wave count with my cycle analysis.

So far during the last 3 1/2 weeks I have only been stopped out of one short stock position. I credit this accomplishment to using Marketclub's 3 week rule and some discretion. Using long index positions to hedge my short stock positions, I experienced only a modest drawdown while waiting for the resumption of the downtrend. When the opportunity presented itself along the way I took partial profits on short positions. I will be fully short the indexes once we get a clear signal that the downtrend is underway, which may take a few more days.

I don't expect this 5th wave thrust to last very long. There are too many cyclical and seasonal pressures building that should lead to another sharp rally in December and possibly into January. Unless I have a large cushion, I will probably exit any remaining short positions at the conclusion of this next leg down and look to re-enter after the new year as the year-end rally should be the largest since March 08.

One thing to keep in mind about 5th waves. The end usually comes unexpectedly. If you are not already short, or not comfortable with discretionary exits from short term positions, you should probably keep it light on the short side on this 5th wave as most trend following rules will have you give back all of your profits or leave you with a loss before you know what's happened in this market condition.

Post Election Letdown

By letdown I am not referring to the election of Barrack Obama, but rather just the letdown that occurs after any kind of emotional life event. Examples include marriages, births, deaths, sporting events, retirement, etc. The market has rallied into this election event on declining below-average volume, which does not support a continuing rally. Just as the Dow made a new closing low on 10/27 without penetrating the 10/10 intraday low, it could be that we are seeing the end of this rally with a closing high above the 10/13 closing high that does not penetrate the 10/14 intraday high. The only thing missing is waning momentum. The 50dema looms ahead and is an attractive target, but there is no law that says it has to get there.

So far only one of the intermediate term systems in the System Tracker is long this market, the others remain in neutral or short positions. The monthly-weekly-daily system exited yesterday on the open and has a year-to-date gain of 56.3%, not bad with only 4 trades. The 3 week system remains short and is not far behind with an open gain of 53.75%.

One of my ongoing goals is to become more effective and efficient as a trader and in other areas of life. I know that I work harder to achieve my goals than I have to. While my personal performance has exceeded the above, I have worked much harder for it than 4 trades. The question is, where is the point of diminishing returns? How much does short term and intraday trading add to the equation for the hours required versus the risk of levering up an intermediate term system? I don't know the answer to that question, yet. For now, I enjoy watching the markets and analyzing the possible and probable outcomes too much to not be involved on a daily basis. For those who aren't into the markets like some of us are, the point is that it doesn't take that much work. For sure, this years results from the System Tracker will be skewed to the high side more than most years, but for those who are content with consistent average to above-average returns, 4 to 8 trades a year is really all it takes.

Election Day Thrust To 50dema

After closing at a new low on October 27, the Dow rallied for about 12 hours before forming a 3 day triangle pattern or ending diaganal pattern. In either case it indicates that the end of this rally is near as we approach the October 14 highs and the 50dema. It could be over as soon as mid-day tomorrow. There is still the possibility that we will only see a pullback followed by another rally before the downtrend returns.

The narrow range day usually implies range expansion to follow which is what we are seeing this morning.

Interesting Day

While the markets appeared to do little today, the day left us with an interesting development. All of the major indexes traded in the narrowest range of the last 7 days while simultaneously registering a 5 period RSI greater than 90. In addition, most of them are pressing against resistance of one kind or another, e.g. 20dema, 1.0SD bollinger band, etc. The Qs, meanwhile, have also closed the last 3 days at a trendline drawn parallel and equidistant from the uptrend channel from the 2002 low to the 2007 high, i.e. the lower fork of an Andrew's pitchfork.

The probability has increased that we will see a near term pullback in this unfolding upward correction. The pattern that has developed would seem to negate an immediate return to the downtrend, so we may still see one more rally afterwards to complete the correction before the downtrend resumes.

Did You Outperform T. Boone Pickens?

I can only say that I was shocked to see T. Boone Pickens on CNBC earlier this week discussing the performance of his commodity based hedge fund BP Capital. Mr. Pickens seemed to be less than his usual dynamic self when stating that year-to-date his fund is down over 60% and is now currently in cash with expectations that half of the invested capital will be pulled out by investor redemptions. I am not trying to pick on Mr. Pickens (no pun intended). I am only pointing out that even the wealthiest most successful traders lose money and sometimes a lot of it. So when you get discouraged about your performance, remember that.

I don't know what kind of strategies are used at BP Capital to trade the commodities markets, but in listening to Mr. Pickens on CNBC several times this year, I suspect that much of the trading is based on his subjective opinion about the direction of oil prices. Earlier this year he stated that he was short oil around $100, and then went long after it went above $110. I can only guess that he failed to exit when prices returned back below $100.

What if there was a different, completely objective, approach. Check out this free video from Marketclub that shows how you could have made $46,000 with less than $10,000 using Marketclub's trade triangle technology - Crude Video.

Resistance Ahead

Volume continued to decline today as this rally progresses suggesting we may see a pullback tomorrow before further upside. Resistance at the 2004, 2005 and 2006 lows is not far away. The IWM was stopped at the 2004 lows today. The Dow is well below the 2004 low of 9708 and will have resistance at 10000, the 2005 low, should that level be breached. Resistance for the Qs is at 34.45 and 35.54.

My cycles analysis indicates that this rally could hold up until the end of next week, but I continue to expect a selloff after the election.

I will not be looking to be seriously long until we get a positive macd divergence into the expected cycle low date around the end of November, or until a breakout above the high of the low month on volume. The latter does not seem to be at all likely in the coming month, but anything could happen.

Wave C Continues?

The outcome from here is uncertain. We could see a divergence in the patterns between the Dow, SP-500 and the QQQQ. For example, the Dow & SP-500 could form a flat correction while the QQQQ stays in the triangle. In any case, I will be looking to exit hedge positions when the 5 period RSI is > 90 which may happen by Friday afternoon.

Gold and silver appear to also be in countertrend rallies that could last a few days.

IBD called the market in confirmed rally again after yesterday's rally, but made a very interesting point in the "The Big Picture" - the IBD method is not intended for index investing. This seems to be confirmed by the number of whipsaws in the IBD calls this year. As followed in the System Tracker, using IBD as an index trend following system has significantly underperformed other methods. They emphasize that there are really no leaders to buy at the present time regardless of the confirmed rally call.

Don't Put On Your Bull Hats Just Yet

Today's rally had enough breadth to put the potential for wave c of an upward flat correction to the top of the list. However, the triangle possibility is still on the table. If the flat correction is correct, then we may see a move toward the 50dema, which should be a great selling opportunity. Given the typical upward bias for the end of October, it would not be surprising to see this rally hold up until election day and perhaps a little longer.

I appreciate the comments. Keep them coming. As a side note, I agree that Robert Prechter's history is tarnished. I believe that he let his desire to be right, and perhaps be the hero, get in the way of seeing what the market was actually doing. Nevertheless, I harbored a strong suspicion over the last few years that by time people had given up on him, he would end being "right" after all. The most important point is the elliott wave theory and practice to me is only a guideline and a way to assess how hard to press the trend and when to let up while using basic technical analysis to follow the trend.

Downside Action Not Convincing

While the major indexes made new closing lows for the year, the action was not indicative of impulsive action. The lack of volume still supports the b wave of a large triangle interpretation. As I said before, if the action warrants, I am willing to step back into the downtrend, but today's action did not meet my criteria.

One other view is that the choppy downside action since October 14 is part of an ending diagonal triangle which will complete minor wave 3 down. This still leaves minor waves 4 and 5 to go to complete intermediate wave (3) down. If this is the case, we will continue to see choppy down side movement the rest of this week and possibly into early next week.

The last interpretation that could fit the action is that we are in wave b of an expanded flat correction. In this case, we should continue to see the same type of choppy downside up to the election.

In both of the latter cases, a sharp rally will ensue that takes the markets back to the October 14 high. Afterward, a retest of the lows would occur in November. If we continue to see light volume this week with downside probes that fail to follow-through, I suspect we should be watching for a massive rally out of the blue. This would not be surprising as it is often the case that the market seems to be designed to fool as many people as possible and that would convince most people that the lows have been seen.

Given that the odds for the above outcomes are even and 2 out of 3 result in a substantial rally, it does not seem prudent to remain heavily short after this week, unless we see strong indications that the triangle is playing out. The old adage, "never short a dull market" seems to fit the bill here. I will continue to be looking for opportunities to scale out of shorts this week.

Monday Morning's Action

The current market action is supportive of the b wave view. I exited my index short positions near the open and bought an index long position to hedge my individual stock short positions.

The Week Ahead 10/27/08

The US markets tried to go down Friday, but in the end finished off of the lows. The intraday pattern from Friday suggests that there will be some downside Monday morning, but unless the downside momentum accelerates by Monday afternoon, it is likely that Monday's low will be wave b of a large triangle that will terminate around election day.

This week the Fed meets on Tuesday October 29 and everyone expects a substantial rate cut which may provide the lift for wave c of the triangle. On Wednesday October 30 we get the advance GPD number. Anything less negative than -0.5% will also likely help provide temporary support. While I have no real proof of this, it seems apparent to many that the government's GPD deflator, a measure of inflation, has been rather low, which gives the appearance of higher real GDP than perhaps it should be. If this is the case, it would seem likely that the powers that be will do everything possible to make this GDP number look better than expected.

After reviewing my positions over the weekend, I have decided to exit my remaining index short positions on Monday unless the market moves down with volume and breadth early on. I will maintain the balance of my existing individual stock short positions and look to re-enter the index short positions near the end of the wave c retracement. If I am wrong about the triangle, I will re-enter the short positions on the downside breakout as I did in September. If this is not a triangle, but rather a flat, then wave c will show very strong volume and breadth, and I will wait for a retest of the October 14 highs to re-enter short.

The difference between success in trading and success in other areas of life is the ability to be comfortable with uncertainty. In engineering, certainty is paramount and one can rely on others to use verifiable references and standards to comfirm one's analysis. In trading, there is no certainty. The only confirmation of success is a rising, on average, account balance. The way we handle uncertainty in trading is by being disciplined in acting in a consistent manner with respect to the market with a clear understanding of what outcome will indicate that we are on the wrong side of the market. When that outcome occurs, we exit the market and wait for another opportunity or reverse the position. If we do this consistently, even with an otherwise poor trading methodology, we will still make money or at least not lose much. While I might have many ideas about what I think the market will do next week and down the road, I know what will confirm that I am wrong, and therefore when I need to exit the position. This is the best that we can do, but doing it consistently will lead to profits.

Wave c targets:

Dow - 9180.54
QQQQ - 33.07

Spoke Too Soon

Wow, it is not often that we get to see limit down moves in the stock indexes. I thought for sure that I was dead wrong about the large triangle pattern, but today's action puts it back on the table. If fact, it looks a lot more likely now. None of my short positions reached my exit targets this morning so I was a little disappointed. It was clear after the first 30 min that the big move down was going to fizzle as there was just not any real selling pressure. The volume in the Qs at 10:00am showed a very low run rate for the day. I quickly abandoned any thought of a big down day at that point. We may see a little more downside Monday morning, but unless the selloff gets going fairly quickly, I do see the large triangle pattern playing out. This pattern will also give the markets time to catch up to the declining moving averages.

Review your stop levels on short positions this weekend and make sure that you have enough cushion without too much risk to ride out this triangle. There's no point in getting stopped out when another big down move will be coming in November.

I was pleased to see that my large triangle possibility was featured as the top alternate count in Elliott Wave International's Short Term Update. I am sure they did not see my post. I am just saying that it inspires confidence that my analysis is on the right track when the most notable elliott wave service agrees with me.

Unless Monday does start with a strong selloff, it will be a good time to take a break from active trading next week as markets will likely be going nowhere fast. Trading can be very demanding mentally, emotionally and physically so take advantage of these opportunities when they come.

Triangle Negated

If you are waking up to find the index futures limit down, hopefully you've realized that any notions of a triangle that lasts until election day have been completely shot down. This morning's limit down move confirms the wave iii of Minor wave 5 wave count.

Orders will be hard to get filled on the open this morning, so you might want to wait for 30 minutes to an hour to start taking profits on short positions.

While the markets could reverse off the low, the violence of this morning's move indicates that we will most likely see a severe decline today followed by a "black" monday type of scenario. It was sad to see the heads and former heads of our government's top financial regulatory agencies sit before congress yesterday and testify that this was unforeseeable and they are shocked at what is transpiring. The fact is human nature has not changed, apparently, for thousands of years. The markets are a reflection of human nature, and therefore what has happened in the past will happen again and again until there is some kind of evolutionary leap in our mass consciousness. These types of events happen at the generational level, meaning that each generation forgets what the previous one "learned".

It is no coincidence that 21 years ago within a week, the crash of 1987 occurred, and 21 years before that, 1966, was the low of the initial decline that kicked off the 1970s bear market, and 21 years before that we dropped the atomic bombs on Japan, and 21 years before that was the low that preceded the parabolic rise in the markets up to the 1929 high. Markets conceal the cycles very well, but they are there for those that have eyes to see, but that is a topic beyond the scope of this blog. My point is that anyone that looks back at history can see clearly that, while the form of events changes somewhat, events do occur on a cyclical basis.

So when is this bear market likely to end? Most elliotticians agree that 1942 marked the end of the 1930s bear market, and 1982 marked the end of the 1970s bear market, so it is not hard to forecast that the end of this bear market will be around 2022+-. Of course, the nominal low will be much earlier, but we won't likely see a secular bull market until the early 2020s.

Another View

(click to enlarge chart)

While Minor wave 5 could accelerate tomorrow, today's action leaves open the possibility that today's low is wave b of a larger triangle or a flat. My hunch is that it will turn out to be a larger triangle for two reasons: 1) it will give the market time to move toward the downsloping upper channel line making waves 2 and 4 more similar in duration and 2) it will allow the market to hold up until the election. The added support for this position is that it would also align the pattern with the expected cycle low date in November.

If this turns out to be a flat, then we will see a sharp rally back to the October 14 highs. There really doesn't seem to be the impetus for such a rally at the moment given the overall disappointing outlook from the companies that have reported earnings. Nevertheless, be prepared for it by realizing that if you are short you will see a drawdown. Perhaps you might consider hedging as I suggested before October 10. If we do see a flat correction, then the recent October lows will probably not be violated by much, but the triangle will allow for lower lows.

For those of you interested in learning Elliott wave theory, I recommend Elliott Wave Principle by Frost & Prechter. I don't use Elliott waves for entries (for the most part), but rather to help me see the possible and probable outcomes of market action. It helps to know when to press hard and when to ease up on the pedal.

Failed Follow-Through

IBD has called the rally dead after yesterday's selloff. The market is back to correction mode. This is not unexpected as I indicated that the internals of the follow-through day were suspect. Even though the futures are down this morning, the triangle pattern is still in play.

If you look back to October 10 when the Dow hit 7882, that low occured in only few minutes, seconds actually. Other than limit orders, that still may not have been filled, there was not a great chance of buying that low. I had a buy order that did not get filled.

The upcoming low will likely have the same character. It won't be tradable. If you haven't scaled out of your shorts, you may get caught in a short squeeze unable to get filled. Remember, "Pigs get fed, hogs get slaughtered".

Breakdown Coming

The markets are in either Minor wave 5 of Intermediate wave (3) down or still in Minor wave 4. In either case, new lows are soon to follow. If the current pattern is Minor wave 4 with a triangle, the thrust down out of the pattern should be fairly short as the time duration after a triangle is typically about 1/3 the time of the triangle formation. This puts the thrust at 3 to 4 days, meaning we could see some type of bottom as early as next week. On the other hand, if we are already in Minor wave 5 down, we could see much lower lows and a longer duration to the low. My original cycle low date was November 26 and my revised date is December 6. I am expecting the low to be somewhere in that time band. This would imply significantly lower lows in November. We could easily see the Dow and S&P test the 2002 lows. Currently, the Qs look like they might bottom in the 23 to 25 range. We should see the Qs test the 2002 lows by March 09.

The most important point to understand here is that while there is some short term reward to the downside, it is probably too late to add to short positions. I added two new positions today and I am going to hold with that. I am looking to take profits at targets as the markets move down, hopefully being completely out of all shorts by the time the low is seen.

After this low, we can expect a 4 to 8 week rally. It will be weak at best and volatile. Most of the profits will be seen in the early thrust off the bottom, so there won't be much point in coming in late. Look to add small long positions in beaten down large caps by mid-November and scale out when the rally comes.

Don't fight the trend.

Improve Your Trading

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Caution On IBDs Market Call

With the futures down nearly 300 on the Dow this morning, two possibilities come to mind. One, this morning's open is a gift to those who failed or were unable to take profits on shorts yesterday before the rally. Two, yesterday's rally was a fake. Perhaps the best course of action is to begin taking some profits on shorts, but taking a wait and see on the confirmed rally. If the Dow falls below 8437, a decline of 542 points, the rally will be dead in the water since it will only be 3 waves. On the other hand, if it fails to fall more than 274 points below 8705, then this mornings gap down open could be wave 4 of a 5 wave advance off of the lows. For the Qs, the levels are 30.32 and 31.43, respectively. If the rally advances above yesterday's highs, it will probably gain traction.

Typical, but not required, market action on Fridays after a major advance on Thursday is for the initial selloff to bottom around 10:30am to 11:00am. The tenor of that decline will tell the tale.

Overall, it appears that markets are working on a triangle. If so, the triangle targets are 6934 for the Dow and 25.80 for the Qs. Another possibility is an expanded flat correction. In that case, we will see new lows followed by a massive rally to back above the 10/14 highs and then a retest of the lows. The last possibitity with merit is that today's decline is wave 3 of a 5 wave decline to the lows. In that case, we could see much lower lows, 6445 on the Dow and 20.52 for the Qs.

Unless you are trading intraday with a proven strategy, I think that taking profits on declines when they occur is the best approach. Looking back to 10/10, the 7884 low lasted all of a few seconds - not much time to get out. I suspect that will be the case this time as well. We may make one or more new lows, but they will be so short in duration that you will not be able to react quickly enough to take advantage. Greed will not be rewarded.

IBD Marks Confirmed Rally

Today's action qualified as a follow-through day per IBD, although they indicated there is little worth buying at the present time. It does warn that it might be prudent to begin scaling out of short positions. I gave back a lot today, unfortunately, but that's the way it goes sometimes. I will be exiting some short positions tomorrow, however, I am not convinced as yet that this rally is for real. I want to see more confirmations before I reverse and go long.

Resistance tomorrow in the Dow is at 9184, 32.88 to 33.51 for the Qs.

Pullback Or Continuation Of Downtrend?

It is still too early to tell if today's decline is part of a correction of Monday's rally which will lead to new bear market rally highs, or whether we are proceeding down to new lows immediately. I suspect that the markets could be trading in a range, possibly a triangle pattern until the election is over. It is hard to imagine a scenario that would have the markets advancing on volume for a follow-through day before the election.

Currently support is 8828 and 8613 for the Dow, and 32.82 and 31.97 for the Qs. Breach of 8613 and 31.97 would confirm the downtrend continuation.

Yesterday I exited my short hedge (index long) positions on the open for a nice profit and initiated new index short positions. My intention is to stay in the index short positions until we get a valid confirmation of a new uptrend or my downside targets are met. I will discuss the possible targets once the market action unfolds for a few days.

Currently, the Dow would need to rise above 10,365 and the Qs above 39.50 to show a real change of character.

Explosive Bear Market Rally

Today the indexes rallied powerfully, and I am sure many will be celebrating the end to the bear market, but the fact is that the Dow closed 3 points above my second target of 9383 and the Qs closed 23c above my first target of 34.90. The fact that it happened all in one day says more about the severity of last week's decline than it does about whether there will be follow-through from today's rally.

Typical action after a day like today is one or two pause days followed by more upside. The next next likely targets are 36.90 for the Qs and 9736 for the Dow, after which I expect the markets will trade in a range for a couple of weeks bofore heading down to complete Minor wave 5 of Intermediate wave (3). After the pattern plays out, I will discuss downside targets. Look for the 5 period RSI to approach 100, and then start looking for new shorting opportunities.

The outlook will only change if the Qs make it back above the March low of 41.17, and the Dow makes it back above the July low of 10827.