Thursday, October 30, 2008

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.

Wednesday, October 29, 2008

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.

Tuesday, October 28, 2008

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.

Monday, October 27, 2008

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.

Sunday, October 26, 2008

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

Friday, October 24, 2008

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.

Thursday, October 23, 2008

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".

Wednesday, October 22, 2008

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.

Sunday, October 19, 2008

Improve Your Trading

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Friday, October 17, 2008

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.

Thursday, October 16, 2008

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.

Wednesday, October 15, 2008

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.

Monday, October 13, 2008

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.

Sunday, October 12, 2008

Week In Review

This past week was historic in many ways, not the least of which being the selloff in the financial markets. This would be a good time to review how you acted and reacted to the market action last week. If you were trying to buy every new low, you probably lost a lot of money. On the other hand, if you traded with the trend, you could have made a year's income in a week.

Let's look at a couple of different ways you could have traded the Dow. Using the traditional MACD with the 8-26-9 settings, we can see that the monthly MACD crossed below the zero line at the end of August indicating a major monthly sell signal, while the weekly MACD remained in negative territory failing to cross above its signal line during the month of August indicated significant weakness in the July/August rally. On September 4, the daily MACD crossed from above to below the zero line and crossed below its signal line. At the same time, the Dow made a new 3 week low and broke below the August low, the low of the high month of the rally. So, we had 3 different concurrent sell signals on the daily time frame. The Dow trend was (and is) down on the daily, weekly and monthly time frames.

On the cash Dow, if you had sold short on the open of 9/5/08 with a trailing stop at the daily swing highs, you would still be short with an open gain of 2,734 points. One e-mini Dow futures contract would have yielded $13,670. This approach took only one trade.

If you had traded the daily chart going short at 3 day lows and exiting at 3 day highs, you would have an open gain of 2,115 points. One e-mini Dow futures contract would have yielded $10,575. This approach took 3 trades with 2 winners and 1 loser.

If you had traded the MACD on a 60 min chart going short when the MACD crossed from above to below the zero line and exiting when it crossed above its signal line, you would still be short with an open gain of 2,430 points. One e-mini Dow futures contract would have yielded $12,150. This approach took 5 trades with 3 winners and 2 losers.

If you had traded the 60 min chart going short at new 3 hour lows and exiting at 3 hour highs, you would have a realized gain of 2,915 points. One e-mini Dow futures contract would have yielded $14,575. This approach took 13 trades with 9 winners and 4 losers. The largest loss was 155 points. Even with 13 trades, this intraday approach took only 1 one trade every 2 days on average.

It's clear that the successes achieved above were due primarily to the accurate assessment of the trend. This is where you should focus your efforts in becoming a successful trader, I believe. A variety of entry and exit techniques can work if you are trading with the trend.

This week, Marketclub's Saturday Seminar featured John Hayden speaking about The Holy Grail of trading, and does it exist. His conclusion is that it does, but it is not in the indicators. It lies in your beliefs about the market and yourself, because you always trade what you believe. If you believed this market could not go any lower after the Dow made a low of 9525 on Monday 10/6/08 and you went long, you lost money. If you are losing money, you must examine what beliefs you have about the market and yourself that are preventing you from recognizing and trading with the trend. I encourage you to check out Marketclub at and INO TV and listen to successful traders describe how they see the markets. If you can align your beliefs with the beliefs of other successful traders, you are well on your way to consistent profitability.

The question now is what next. Perhaps a rally is in store, but the trend is down, except on the 5 min and lower time frames, so unless you are trading those time frames you are not going long. Given that the markets are at historically extreme oversold readings, it would be prudent to take some profits regardless of your trading method.

One very significant event will occur this month if the Dow does not recover dramatically. The quarterly MACD will give only the second negative divergence double top sell signal in the past 100 years. The last one occurred after the 1973 high. It was October, 1982 before the Dow broke out to new highs again. If the current signal is any indication, we are only at the very beginning of this bear market, whether it trades in a huge range or crashes to 1000 as Robert Prechter suggests, it could mean huge profits for traders. The next level of support on the quarterly chart is at the 200 quarter ema at around 5000.

Take some time to write out your plan for the week ahead, what you will do specifically, and then follow your plan.

Friday, October 10, 2008

Rally Afterall

This rally still looks a little suspect, but given that it could be Minor wave 4, the internal patterns could look corrective even at small degrees of trend.

An interesting observation of today's action is that my individual stock short positions did not sell off much at all with the majors. This is a positive divregence in the action.

Given that we are well within the turn date I indicated previously, it would not be surprising to see the markets rally for one to two weeks before turning lower again.

Updated rally targets:

Dow - 9029, 9383, 9736
QQQQ - 34.90, 36.61, 38.31

Triangle In The Making

The indexes are tracing out a triangle pattern. Theoretically, it could go either way, but the final result would be the same - lower prices at some point. Either the markets move up in a c wave and then down to complete Minor wave 3 or they break down. The real key here is - do you believe that anyone wants to go home long after this week? The answer is probably no. The triangle projects a low to 7493 and 7101.24. My hunch is that 7197, the 2002 low, is in sight, but should lead to a bounce as markets typically reverse off of the first test of a major prior low.

The Qs are in the process of testing the December 2002 swing high at 28.79.

Will Today Be The Last Day Of This Selloff?

The Dow futures indicate an opening somewhere around -360. The last support level that remains above the 2002 lows is 7995, which is the .886 retracement from the 2002 lows. At this point, it is doubtful that it will provide much support as a full washout to the 2002 lows in the Dow appears to be at hand. At the current rate of decline, it will only take two days to accomplish, but would probably provide a terminus for Minor wave 3. The negative aspect about such an event is that we are only in Minor wave 3, with waves 4 and 5 to go.

Even so, an explosive rally is likely once any relief in the credit markets occurs.

Assuming a decline to the 2002 lows, we can now estimate the low of Primary Wave 1 down from the October 2007 highs using fibonacci relationships as described in Frost & Prechter's The Elliot Wave Principle.

Using those guidelines for wave relationships gives the following:

Intermediate Wave 3 Low (November?): 6674, 5314

Primary Wave 1 Low (March?): 6579, 5662, 4493, 2735

The last figures are a wide range, but given what has occurred over the last 7 days, we should not underestimate the possibility of the lower numbers.

I present these estimates in case any of you are tempted to believe the TV pundits who are still saying this is the buying opportunity of a lifetime.

Thursday, October 9, 2008

The Carnage Continues

Yes, the carnage continued today, but interesting developments are taking place. The QQQQ relative strength is rising sharply, along with the SMH relative strength. This is behavior that is typical of a potential turn. We are now only two days away from the turn date that I mentioned in a prior post of October 14. In addition, many breadth indicators have hit multi-decade lows.

The McClellan Oscillator closed today at -363, which according to my charting service is lower than the 87 crash low. The McClellan Summation Index closed at -3761.83 only a little above the -4050.17 recorded in the 87 crash.

That said, the Dow is likely to go lower tomorrow. Also, earnings start coming in next week, but next week is an options expiration week so that could mitigate the downside next week. When a reflex rally occurs, and it will occur, the most likely targets will be from the 10 dema to the 15 dema. After the crash of 10/19/87, the Dow hit its 15dema 9 days later rallying 17.85%. Such a rally now would take the Dow to 10110, which fits with the rally targets I have been posting. Currently, the 15dema is at 10172. Looking back at the 1929 to 1932 crash, the longest periods without a significant rally were consistently about 8 weeks. Monday would be exactly 9 weeks from the high of 8/11/08. So anyway you look at it, we are at historic extremes. Perhaps we will exceed those extremes, but somehow I think not too much.

Regardless of how much lower the markets go, it is way too late to go short except on an intraday basis.

Updated Rally Targets:

Dow - 9549, 9731, 10003
QQQQ - 35.88, 37.40, 38.92

Short Term Bottom In Sight

The Qs are tracing out a symmetrical triangle which projects a low around 30 by mid-day tomorrow, but need not go much below 31.84. The Dow is tracing out an ending diagonal triangle, which may end as early as today with one more test of 9043. The intraday day low so far was 9046, just 3 points shy of the projected support in an earlier post.

The updated rally targets are:

Dow 9746, 9963, 10180

QQQQ 35.28, 36.92, 38.55

Wednesday, October 8, 2008

Nearing A Short Term Bottom

It is quite possible and maybe even likely that the Dow will take a stab at 9043 tomorrow after today's poor finish. However, evidence is beginning to build that supports the possibility that Minor wave 3 down is near completion. Today's rally, such as it was, may have been Minute wave iv with Minute wave v down yet to come or Minute wave iv may retest or exceed today's high before retesting today's low.

NYSE and NASDAQ new 52 week lows have traced out 5 wave ending diagonal triangles that indicate a reversal is at hand. Today's volume was the highest since September indicating increasing demand for stocks and some capitulation. QQQQ put open interest is highest at the 32 strike for October and November, while 32 is also weak support from the 2004 low. The Elliot wave pattern is supportive of a low. The 10 period ADX is at 54, a level often associated with trend exhaustion. IBM beat earnings and reaffirmed its 08 forecast after hours, which could help tomorrow. IBM is also sitting at fairly solid support.

All of the above comments are not meant to suggest that you should go out and buy with abandon tomorrow. Rather, if you are currently short you might want to consider taking some profits or hedging with some calls or a position in the QLD until Minor wave 5 gets going toward the end of October. Currently, I am short several individual stocks and would like to hold those positions (with appropriate stops) until the November low. Today I took positions in the QLD and the UWM as a hedge against the potential rally so that I am presently market neutral.

Any rally in the Qs over the coming weeks will not likely make it above the 5odema. Any such rally would be an opportunity to get short or add to existing shorts for the next leg down.

Adjusted Rally Targets

Dow - 9853, 10050, 10246

QQQQ - 36.42, 37.84, 39.25

Remember, this is probably just a relief rally.


That's all I can say, as Minute wave iv, if that's what it was, appears to have occurred in the futures markets only as we are now heading down to 9043 or lower in the Dow. I still expect a relief rally, but obviously targets will have to be lowered. Even though I indicated that the best time for a short term bottom was around October 14th, and even though I called this crash, I am finding it hard to believe the rate at which markets are falling. As I have said over and over again, this is not a market to buy.

Relief Rally Sparked By Global Rate Cut

As anticipated in last night's post, a Minute wave iv rally is probably underway sparked by the globally coordinated interest rate cuts. However, this rally in all probability does not mark a significant bottom and may last no more than 1 to 2 days.

For the Dow upside targets are 9989, 10159 and 10330. Most likely 9989.

For the Qs upside targets are 36.69, 38.05 and 39.41. Most likely 36.69.

Only if 39.5 in the Qs and 10365 in the Dow are exceeded could we conclude that the downtrend may be reversing.

Don't panic out of solid shorts, but scale out of your profitable positions in anticipation of another shorting opportunity.

Tuesday, October 7, 2008

What next?

The anticipated relief rally lasted all of a couple of hours before the markets sold off to new lows wiping out the positive divergence that was present in the 5 period RSI. However, a relief rally still may be in the making as yesterday's lows were tested on lighter volume and the markets may have completed Minute wave iii of Minor wave 3 of Intermediate wave 3 of Primary wave 1 down today. If so, we can expect Minute wave iv to retrace approximately 38.2% of the decline from September 19, which gives a target of 36.69 in the Qs. An now expected Fed rate cut may be the spark to ignite such a rally. With the volatility at current levels the rally targets could be hit in just a few hours, afterwhich the markets would move down again to complete Minor wave 3 down.

Today the Qs bottomed just 8 cents below the 04 low, which may provide temporary support. The Dow closed below the 04 low, which pretty much means the 9043 level will be hit next. The one fly in the ointment here for a relief rally is that the S&P financial index closed under the July low for the first time today, while at the same time the shorting ban on financial stocks comes off tomorrow night at midnight. This is not a good sign. In all seriousness, if the financials continue to selloff hard, we may see the Dow fall to the 2002 lows by mid-November 08 instead of March 09.

This has been a mixed week for me emotionally. I have felt a certain sense of calm given that I am positioned with the market trend and my accounts are rising, but it is sad for me to hear friends and family tell me that their retirement accounts are down over 50% in many cases. I am sad for them because I spent the last two years earnestly encouraging and in some cases pleading with people to sell their stocks and mutual funds before it was too late, but I can tell you that not one of them listened. Many laughed at me when I said that the Dow would eventually fall below (well below) the 2002 lows. And here we are, just 2250 points above that level, not very far at all . Unfortunately, it appears that many people will be wiped out in their retirement accounts before we even get to the worst of this bear market. Yes, this is only the prelude, the warmup, to the real deal that will probably occur from the middle of next year into 2010 to 2014.

Amazingly, with extreme volatility and extremely negative breadth readings, overall, traders and investors are not extremely bearish on a sentimemt level. The Option Buyer's Sentiment gauge is almost in neutral territory. Folks, we are not going to see any kind of bottom until the sentiment matches the breadth. So please don't be buying right now. There will be plenty of time to buy when the market confirms a new uptrend.

If you are in cash, stay there and wait for the next opportunity. If you are short, scale out as your targets are hit. Profits in short positions are often erased very quickly when unexpected rallies occur.

Until the next post, stay calm and support the people around you that are suffering in these difficult times.

Monday, October 6, 2008

Relief Rally Imminent

(Click To Enlarge Chart)

The chart of the QQQQs above shows a positive divergence in both the 14 period and 5 period RSI, while the 12-26-9 MACD is making new lows. Conclusion, a relief rally may be underway that last more than a day, but when it's over, new lows are probable.

Again, as I have stated several times in recent posts, a sustainable countertrend rally is not likely until mid-November, so unless we get some definite trend change signals, any rally is a selling/shorting opportunity.

Crash Underway.

As I has warned as far back as September, a crash is now underway. The pattern from September 2001 has regenerated itself over the last week. While there is no way to know exactly when the climax of the panic could come, based on the September 2001 pattern, it looks as though it would take 7 days including today which puts the bottom at October 14. If you are short, you should be considering scaling out of shorts by the end of this week. Rallies off of these types of panics can wipe out gains in less than a day, so be careful.

Sunday, October 5, 2008

3 Week Rule System

I have added another system to the System Tracker based on Market Club's Trade Triangle technology. This system is only for the QQQQs. I am not recommending to use it in this form for other markets or individual stocks. The rules are posted in the System Tracker.

The system simply goes long or short on a 3 week calendar high or low, respectively, with one exception. To go short the current swing high must be lower than the prior swing high. One can use some judgement here, but the idea is that we don't short during a bull market of primary or intermediate degree. This means that we will miss the first selloff, but this is the price to be paid for not getting whipsawed trying to catch a top.

Currently the system is short.

Saturday, October 4, 2008

The Trend Is Down

Well, the market spoke loud and clear Friday by selling off after passage of the bailout plan. There may be a lot a volatility, but the trend is clearly down until we get a climax selloff. The Dow has now closed twice below the September low and below the 50% retracement of the 2002 to 2007 "bull" market at 10698. There is weak support at 10000, 9871 and 9708. After that the next support is 9043 and 8695. I expect that the lower support levels will be hit in the next two weeks, but if not, then by mid-November.

The next expected short term bottom should be around October 15, 3 months from the July 15 low and 6 months from the March 17 low. As I discussed in an earlier post, these types of calendar dates work very well for projecting market turning points. Do not expect that any low around the 15th will be a lasting low, however. The 10 month cycle low projects to November 19 and/or December 5, 6 months from the May 19 and June 5 highs. We could see a double bottom. A sharp rally may ensue from the October 15 date, but it will be another shorting opportunity, not a buying opportunity.

Elliotwave International's Short Term Update confirmed my 3rd of a 3rd analysis in the Qs on Friday. The Qs may bounce from the 34 area at the October 15 date, but if, not then the next target would be 30 or below. It looks now as if the entire advance from 2002 to 2007 in the Nasdaq 100 will be retraced by March 09 in the span of 18 months.

If you want to understand better how the market could be falling so fast, please take a look at Carl Swenlin's analysis this week at under chart spotlight. He shows very clearly that the market is still very overvalued, regardless of the fact that many are calling this the buying opportunity of a lifetime. If that is true, then by 2012 we should have the buying opportunity of the millenium, so long term and value investors would do well to accumulate cash for now.

If you are looking for simple, clear and effective trading methodologies, check out and INO TV on that site as well. Adam Hewison has presented several videos demonstating their trade triangle techonology, which I find to be the easiest profitable system to implement that I have ever seen.

Note: comments on this site are welcome.

Thursday, October 2, 2008


I hesitate to post an article with the above title, but the facts support such a view. It is almost certain that the house will pass the "Rescue" bill tomorrow and the markets still went down today. If that was all that happened, perhaps a rally would materialize tomorrow, but the Dow Jones Transportation Index crashed 8.72% today in what is clearly a 3rd of a 3rd wave in elliot wave terms. The Dow Industrials should follow suit, if not tomorrow, by early next week.

An interesting situation has occured with the Qs. They are about the only index that is oversold in terms of breadth. Normally this would be cause to consider that a rally would be imminent, but I doubt that will be the case if the DJIA falls dramatically. Also, the Russell 2000 broke support today as well. Any rally that occurs should be a good opportunity to get short or add to existing shorts.

This is no time to be long the market. Risk is extreme and no indication of a trend change is in sight. There is support for the Qs at 35.52, but if that breaks look for a move to 30 to 32.

Wednesday, October 1, 2008

QQQQ Patterns

(Click to enlarge image). The Qs have triggered a large complex head and shoulders top pattern. According to this pattern ranks 3rd out of 21 in performance with 53% meeting the price target. The measure of this pattern is 13.64 points. The entry is the March low of 41.05, which gives a target of 41.05-.53*13.64=33.82. However, the pattern above has some things against it. Price is making new yearly lows and the right shoulder is extended. Nevertheless, the Qs would need to close solidly above 41.05 to negate the pattern.

From an elliotwave perspective, the Qs have either completed 5 waves down from the August high or nearly so, or are in wave iiic of 3 of (3) of primary 1 down. The former leaves the possibility of a short term rally followed by further declines. The latter fits with the HS top pattern and suggests nearly immediate continuation of the downtrend. On the other hand, the decline from June could be 3 waves meaning that the Qs are in an upward flat correction about to take off in wave c up to above the August highs or wave C up to above the June highs.

The point is not to try to guess which one of the alternatives will play out, but have a plan of action for all of the cases. Don't be attached to your opinion about the market direction. The weight of the evidence suggests further declines, but if those declines do not materialize very soon, a multiweek rally could be underway to above the August highs, if not the June highs. If the declines do occur, the Qs should move down to the 2005 low below 34.72.