Pullback Likely Unfinished

Today's correction in the major indexes looks incomplete. It looks as though one more down move is needed to complete 5 waves down. Many ellioticians will be saying it is the beginning of a new downtrend, but most likely it is wave c of a flat correction. The only question is whether the next move down will complete wave c or whether it just completes wave i of c. There is no way to know at the moment. The least probable, though possible, interpretation is that the entire rally has topped and we are beginning a new downtrend. Tomorrow's action may clarify.

Qs Hit Zone Of Resistance

I think the above chart sums it up pretty well. What happens in September will determine the outcome for the rest of the year in many ways. I'm not saying that the market will go up the rest of the year, rather that the character of the ensuing correction will be determined by whether or not the zone of resistance is penetrated.

It might be argued that many investors will want to sell now that the market has recovered back to its pre-crash level (at least for the Qs). However that argument really doesn't stand up to scrutiny. The fact is that most investors did not sell. They have held on with an unyielding belief in the buy and hold philosophy. Now that their belief has been vindicated, there is no reason to sell.

At this point the commercials and the small speculators stand at opposite extremes. The small specs are bearish. The commercials are bullish. The large specs are mixed. Any substantial move above 41.05 will swing the small specs to the bullish camp and lead to an acceleration of the rally. Failure to sustain that level will bring the large specs squarely into the bearish camp and bring on the correction.

If Terry Laundry is correct, the rally in the SP500 should terminate around October 15. We should remember that in 2007, the Qs kept going for another 3 weeks after the SP500 topped. There is no reason to believe that won't happen this time too. So we have the makings for some volatile action, and there is no way to know which outcome will prevail.

That said, what we do know is that the market is in an uptrend. The moving averages are in a very bullish configuration. All attempts to sell this rally have failed big time. You can sell out now if you want, but the weight of the evidence is with the bulls until the red trendline is broken. If the green trendline is taken out first, then the red trendline will not be as important. If it is broken after the green trendline is taken out, then the green trendline will become support on a pullback.

For now I am content to remain long this market. Perhaps that will change next week. We must adapt to new information. One thing to keep in mind is that with the late labor day weekend, many professionals may not return until September 8, which could prolong the low volume chop. If there is not much action on September 1, then we will know that is the case, but I am expecting that Sept 1 and Sept 8 will live up to their typically bullish seasonal patterns, i.e. Sept 1 is usually a strong up day, and Sept 8 is the Tuesday after a 3 day weekend, which is usually a strong up day. We will re-evaluate as the week progresses.

Qs Hit The March 08 Low

The QQQQ has just touched the March 2008 low of 41.05 with an early morning high of 41.08. It would be surprising if this level could be surpassed on the first try. I expect it may require two or three attempts. The continuation of the rally obviously depends on a successful move through this resistance zone. The current pattern in the Qs could be an expanded flat correction, which would allow for a retest of the August low, possibly occurring as a sharp selloff lasting about two to three days. In any case, some sort of pullback is likely here.

Failure to breach the 41.05 level would likely mean that the rally is coming to an end sooner rather than later.

Gold In Compression

Yawn!

Another quiet day, but there were a few breakouts: DLTR and BWLD to name a couple. ISLE fell hard after disappointing on earnings, but remains above its recent low.

The SMH is setting up a nice squeeze, which looks like it will break out to the long side.

I am expecting volatility to increase next week. The last day of August and the first day of September are historically positive, so it would not be surprising to see some strongly bullish action Monday and Tuesday. Selling on Tuesday would be a big cause for concern.

A Quiet Week

I think most of Wall Street must be on vacation as the trading action has been fairly dull this week overall. There is an old adage: "Never short a dull market". I think that adage should be heeded today. A significant correction will occur, but there is just no evidence that it will occur any time soon. That may change next week, but I would not count on it. New NYSE 52 week lows remain in the 0 to 5 range most days, the McClellan Summation index remains at high levels, advance/decline lines continue to rise. I suspect that we will see increasing demand for stocks the first week of September and a surge into an October high. I continue to wait for another opportunity to add to index long positions, even at these so-called "nose-bleed" levels.

Oil just cannot get going, which is as I expected. Negative divergences are developing and traders should be on the look out for a move below the July lows.

Gold continues to taunt us by not showing its hand. Time is running out. It can't do this forever. Frankly, I will be glad when it's over. I have been holding this DZZ gold short position since I initiated my first partial position on June 3, going on 12 weeks now. Some traders use a time stop. I don't. The key is consistency. Either use one all of the time or not at all.

Finally, the Qs are approaching significant resistance at the March 08 lows at 41.05. This is a critical area that the Qs must hurdle in order for the uptrend to resume. If they are successful in overcoming this level, expect another short covering squeeze to at least the July 08 lows around 43.30. I suspect that may be the end of run as it is also around the 61.8% retracement of the entire decline from Oct 07 to March 09. From that level a 50% retracement of the rally followed by a measured move higher in 2010 would put the Qs back at the 2007 high. A highly probably event I think.

TLEOs Breakout Attempt Fails

Taleo Corp looked as though it was going to have a smashing breakout in the first hour this morning. Unfortunately for me, I had to leave the office for much of the afternoon. I returned to find all the breakout gains gone on the highers volume of the year and sold for a small profit. I was long from 18.90 on a lower pivot. TLEO did not hit my first target of 23.90 so I did not take partial profits intraday. Either the breakout was a 5th wave breakout from a triangle or wave b of an expanded flat correction. Of course there is the slight chance that it will hold here and resume the uptrend, but it's not likely. This is the kind of thing that may occur with greater frequency as we approach the end of the rally. This is also why traders should be very careful about trading breakouts this late in the game. IBD names tend to do poorly in the latter stages of a rally as well.

We may see another shakeout over the next 2 to 3 days before the final thrust up begins in earnest. Regardless of expectations that the rally will last until late September or early October, we must be on guard for weakness that materializes sooner. Higher prices the first week of September that quickly reverse and trade below the August lows will be a sure sign that the rally is over sooner rather than later.

I will be looking primarily for swing trades over the next 2 to 3 weeks if any setups occur that suit me rather than intermediate term trades.

Gold is now wound up so tightly it feels like the spring is going to break. Which way will it go? If silver is any indication, it will be down, as silver looks to have completed an abc rally. Oil is at a crossroads here too. Oil tends to follow gold with about a 40 trading day delay. Based on that oil is nearing the end of its current rally. There may be one more up/down sequence, but I suspect it will not move up to 85 or 90 as many expect.

Be careful.

Challenges Ahead

In order for the SP500 to make it to its measured move target of 1158.76 in the weeks ahead, it will have to prove itself by advancing above multiple lines of resistance that lay dead ahead. The first is the upsloping trendline created by the May, June and August highs that also happens to be parallel to the major median line for this rally. The second is the 1044 level which is the Oct 08 swing high and the current 400dema (400dema not shown). The third is the minor median line created by the June/July correction.

We can judge the strength of the rally by which path it takes. The weak case is if it remains in the tight channel between the major median line and the green parallel trendline 2. The most probable path is for it to break above the green line 2 and the 1044 level and oscillate between the minor median line 1 and the green line 2 until the target is hit or the time symmetry is satisfied. The strong case is if it surges ahead of all three lines of resistance. In that case, we would expect a move to the upper major trendline followed by a sideways wedging action to complete the time symmetry.

By determining which path the market is taking, traders can evaluate how aggressively they need to be exiting long positions as we move into September. Obviously, the weak case would demand the most defensive approach.

Avoiding The Whipsaw

The Tuesday edition of Investor's Business Daily called the Market In Correction based on the accumulation of distribution days and Monday's sharp decline. I don't know what they will say in this Monday's edition, but it sure looks like today was a follow-through day to me. That said, how could traders have avoided the potential whipsaw this change in market stance created?

The simplest way is to add two simple confirmation criteria to IBD's market calls: 1) look for confirmation from the MACD, wait for the MACD to turn positive on the SP500 or Wilshire 5000 before going long after Market In Confirmed Uptrend calls (reverse for shorts); and 2) wait for the market to move at least 1% in the direction of IBDs market call the day of the call or on a subsequent day when the MACD is in agreement. In this case, the market did not confirm the call by selling off at least 1% on Tuesday, while the MACD was on a sell signal. Therefore traders could have maintained long positions without getting whipsawed.

So what about the current follow-through day? Since the Market In Correction call was not confirmed, traders need not wait for additional confirmation to go long.

However, I continue to expect some volatility in the next week, so caution is advised. We are most likely heading into the last leg up of this initial rally off of the March lows and some stocks will begin to break down early. Breakouts may fail. For those who wish to increase long exposure, the time to do it will be before September 8, in my opinion, as risk could increase significantly after that date.

This is also the time to begin screening for potential future short positions, as the weak stocks begin to break down before the leaders.

Gold Pops

Gold popped up this morning, but my take on the intraday pattern is that it is wave C of an abc rally. The last two days look very much like a b wave triangle. This action continues to support the bearish case, however trying it has been to maintain that stance.

The Qs appear to have completed 5 waves up from the August low, so today's rally is either wave c of an upward flat correction, or wave i of the next wave up to new rally highs. I am going with the latter and have an order to buy the QLD on a wave ii pullback.

The SMH looks like it will retest the August low at this point.

Light Volume Rally

Today's rally was encouraging but the light volume left something to be desired. Yet many times in the past light volume in August has not meant what it does at other times. I was especially encouraged by the fact that the Qs closed above the low of the opening 5 day range after hitting the probable target for the 5 day opening range breakdown.

The opening 5 day range for the Qs was 40.22 to 39.25 or 0.97 points. 0.618 x 0.97 = 0.60 points. 39.25 - 0.60 = 38.65. The August low so far is 38.48, or a drop of 0.77 points below the low of the opening range for the month, (which just happens to be the sqrt(0.618) X 0.97, maybe that means something, but I wouldn't make too much of it). I have found that breakouts from the opening 5 day range (5DOR) tend to be bounded by 0.618 to 1.000 x the 5DOR. Given the close today, we should not expect a close below 38.48 in August, although a retest is still possible.

"Sears Sheared" Says Marketwatch

Sometimes it pays to have direct experience with the companies you are trading and investing in. It can bring a dose of reality to the fantasy land commentary that is often found on the web.

For years I bought appliances (10s of thousands of dollars worth) for my construction business from Sears. They had the best prices, stood behind the products and worked with you to deal with problems. Then everything changed. New CEO, new management, new philosophy. The prices were still the best so I continued to shop there, but the changes was obvious.

Well, 5 years ago when my wife wanted to upgrade our laundry room, meaning bigger and better, we decided to go with the latest and greatest front loading washing machine. The plan was to have two front loading washers and two front loading dryers double stacked side by side, so that we could get all of the laundry done for our large family quickly. I had to saw up the basement floor to put in the new plumbing for two washers, (I am also a licensed plumber.) and in the process we renovated the downstairs bathroom for our oldest two boys. It was a lot of work.

Finally, the day came when we were ready for our new washer. We decided to start with just one, in case we didn't like it, which turned out to be a brilliant idea because the purchase turned into a disaster. Within one month, the motor was gone. Sears replaced the washer with a new one. Then the electronic controls failed. They fixed that. Then the biggest problem of all occurred - mold. The inside of the unit was taken over by mold. Many of our clothes were ruined. Sears claimed that we were not maintaining the unit properly. They replaced a couple of parts, but otherwise were not helpful at all. I went online and found out that over 50% of owners of this product had the same problem, and also had received little help in fixing it. We continued to have other problems as well.

Basically, the washer could not handle the volume of laundry that we were doing. It is designed for light use. Definitely not as advertised by the salesman.

I called Sears management and they refused to help. They said their hands were tied because Corporate had instituted new rules on replacing defective products. We had to have 4 failures in a year to get a new one. We had missed the qualification by a week. I said to them, "Look, I have bought tens of thousands of dollars of appliances from you over the years, and if you don't make this right, I will never buy another one from you." They haven't made it right, and I haven't bought another one from them.

I am sure I am not alone in my experience with Sears. I realize they are just the middle man on many of these appliances, but they also have to stand behind what they sell, and they don't anymore. I expect that Sears will continue its decline until it goes the way of all retail businesses unless they seriously reconsider their policies.

This experience made it clear that Sears was no company to invest in, and the 86% decline in the stock price from it all time high merely reflects the reality of the company's real world performance.

La La Land

Is the correction complete? It could be, but I don't think so. The SMH (not shown) really needs one more decline to complete its correction. However, the DJ Utility index shown above looks ready to launch into its final wave up. The measure move target is 402.14, just above the 38.2% retracement level shown in the original I posted on July 27. Since that time a triangle has formed, which should lead to higher prices. Even if the next move in the Utility index is down, it is overall bullish, as that would complete an ABC correction.

At moment, it is most likely that this correction will extend a few more days in the major indexes. However, be prepared to go with it if you see a valid follow-through day which could occur as early as Friday.

So far I have been fortunate as I have not been stopped out of a single stock position during this correction. I expect that will change, but so far so good.

Once the rally gets going again in earnest, we should count approximately 15 trading days and then begin selling. It will not matter if stocks have hit their desired targets, the fact is that after that point there may be only 2 to 4 weeks max before the top is hit. One approach would be to sell 1/4 of your positions each week until you are 100% cash. Another would be to take half profits on your profitable positions, sell your losers, and tighten your stops to breakeven or better on your remaining positions. The point is to have a plan. Don't wait until after the rally has topped and the market is down 15% and wake up one day to see that you have given back all of your hard won profits and more.

I sold my DTO position for a loss today. So far, I am now at breakeven on 3 trades since July 1, but up for the year on the DXO & DTO. For now, I will sit on the sidelines until I see a valid fractal pivot setup on the long side. I will not buy a breakout above the June high without a pullback. If it runs, it runs.

Gold remains at a crossroads. It could easily go either way, but the fact remains that the balance of risk is to the downside as long as 972 is not exceeded. If 972 is exceeded, then we should see a run to 1100 or above.

I have been reading Todd Harrison's (see Minyanville) recent articles on his experiences with Jim Cramer back in 2000. Todd and Jim Berkowitz worked with (for) Cramer at his hedge fund and Todd was primarily responsible for the running the trading room, as I understand it.

Beside Cramer's antics, which makes one wonder how they could actually run a profitable fund, it was interesting to see that Todd stated in his last article that the fund was up 36% in 2000. He was basically saying that they had a great year. Folks, my takeaway is this. If you are making 30%+ a year, pat yourself on the back, you are doing a great job. This is a hard business in the best of times, and these are not the best of times. If you are doing better than that, consider yourself fortunate and don't get complacent. If you are making less than 20%, take some time to evaluate all of your trades and try to figure out why you are losing money. If you are honest, you will find a negative pattern of behavior that is causing you to lose. Eliminate that behavior and you will see things change for the better.

IBD Surprise

I must admit that I was suprised, almost shocked really, to open my IBD this morning and see the words "Market In Correction". I felt this way not because I disagree with the call necessarily, although I do think it is premature, but because of the language in the "The Big Picture" over the last week. It is hard to be critical of IBD. Just buying and shorting the Qs on their market calls since Jan, 2008 would have yielded a total return close to 90%, which is beyond the expectations of the vast majority of traders and advisors. Yet, I do think they do their readers a disservice at times with the market commentary. If this were only a recent issue, I would not comment, but I have seen this over and over again since becoming a subscriber in 1999. I want to share my observation with you because in my first two years of trading, this type of language in their market commentary really screwed with my returns.

Over the last few days I have read the following:

Tuesday August 11 - "Hey, even Lance Armstrong takes a breather once in while. After four weeks of healthy advances, the market paused Monday. It wasn't the kind of high-volume, worrisome decline that occurred a couple of times last week. Monday's losses took place in quiet trading, and indexes closed in the upper half of the day's trading ranges."

Wednesday August 12 - "Volume was up on both major exchanges. Yet the hurdle for Tuesday's distribution day was rather low. Monday's trade was the slowest in two weeks for the NYSE composite and the slowest in about four weeks for the Nasdaq. Reports for Tuesday were upbeat for the most part."

Thursday August 13 - "Still, the weakish finale did little damage to the picture. The indexes all closed near the day's highs... One would think that a solid broad-market gain in higher volume would make for a slew of leaders doing the same. But only a handful of leaders made a splash Wednesday."

Friday August 14 - "Stocks zigged up at the open Thursday, then zagged into the red before reversing to notch moderate gains. While the news of the day carried a disappointing tint, the market quickly digested the negatives and pressed higher. The major indexes closed near session highs."

Monday August 17 - "In an odd way, the market showed bullishly tight trading last week even as it ended its win streak Friday and added a distribution day. That tight action and the appearance of the Nasdaq's chart itself, were suggestive of sideways action more that an index in decline. But this was a distribution day deserving an asterisk. Is the market's uptrend under pressure? Not yet, but another distribution day or two under clearer circumstances might be enough to turn the market's light from green to yellow."

Tuesday August 18 - "Trade rose on the NYSE, and dipped on the Nasdaq. That gave the S&P 500 a fifth distribution day. Losses were harsh among many leading issues. Thus, the outlook in IBD's Market Pulse now shows the market in correction."

I have highlighted in green the statements that appear to me as market cheerleading and unnecessarily positive. Such comments, in my opinion, might encourage less experienced traders to continue buying and increasing market exposure. The statements in magenta are indicative of statements that offer a cautionary note. These have been few and far between. The statement in red from today is the first to be outright negative.

In order to be able to use IBDs commentary successfully, the reader must learn to read between the lines. They do not come right out and say, "Hey folks, things are little dicey here. Maybe you should hold off on new purchases until the picture clears up." Rather, we get "One would think that a solid broad-market gain in higher volume would make for a slew of leaders doing the same. But only a handful of leaders made a splash Wednesday." Oftentimes, this last type of statement is as close as IBD will come to putting up the caution sign. Clearly, there is a desire on IBDs part to avoid moving the market before making a call. Readers should be aware that William O'Neill manages positions in the market that his paper is commenting on. I am not in any way suggesting that their is any impropriety here, but I would sure like to know if Mr. O'Neill as selling out of positions over the last two weeks even as his paper was comparing the market to Lance Armstrong.

At the end of July I urged caution as a market correction into mid-August was becoming increasingly likely. I indicated that Iwould not be adding new positions until after August 14 while continuing to manage my current positions. In fact, I did add one new long position, but it was a partial position for a swing trade and not an intermediate term trade. I have also added one short position.

My whole point is that without clearer language in IBD that provides more direction on when to increase, hold or decrease market exposure, many traders may have been caught with their pants down yesterday.

Market Quickly Becoming Oversold

Oversold in and of itself does not mean much, but in the context of a strong uptrend it can be very meaningful. Today the McClellan oscillator closed at -221, which is below the levels seen on Nov 21/07, Mar 10/08, Jul 7/08 Jul 8/09. Bottoms were seen on those days or within a couple of days thereafter. The pattern, on the other hand, is calling for a rally of some sort followed by another decline. As quickly as the market is becoming oversold, it may be that all we see is some sort of double bottom without much lower prices.

The Dow has clear support at 9088, the Jan high, while the SP500 has support at 956. The Qs are approaching support at 37.96.

There are already people calling the top in the rally, which to me is bullish. I don't remember too many tops that have been nailed by the suits on TV or prominent advisors. While we have to keep the possibility in the back of our minds, as long as the March to July trendlines remain intact, there is little reason to believe that we will not see the expected rally into October.

Monday Morning Follow-up

While we may see lower prices today or later this afternoon, at the moment this selloff is being bought. How do I know? The TRIN is collapsing from its opening spike above 12.00 to below 0.90 and the first hour is not even over yet. Of course, it could reverse and begin heading higher, but my suspicion is the large speculators and institutions will be using this as a buying opportunity.

However, there will probably be one more swoon to complete this selloff. I expect some sort of rally into Tuesday or Wednesday followed by more selling into Wednesday to Friday to wrap it up. I am looking at the QLD, UWM and USD. Still long the UYG.

This Is What I Was Talking About

The pre-market futures are down substantially this morning, the most that we have seen in some time. Is this the beginning of a new downtrend? I don't think so. This is the sharp selloff event that I have been discussing as a possibility for this time period for the last month. Many will point to this event as an indication that the rally is over. However, there is a lot of technical damage that would have to be done to reach that conclusion, and we are no where near that point yet.

This week may be similar to Feb 27, 2007 with a large one or two day drop to support followed by a week of consolidation prior to a resumption of the uptrend. It has all of the earmarks of a c wave, a possiblity that we have already discussed. There is support in the Qs at 38.82, 37.96, 37.56 and 37.23. While the 3 week sell signal is at 38.87, the true 3 week net line sell signal is at 34.48 and the low of the high month is 34.30. In my view, any move below 38 is a buying opportunity. While a solid close below 37.23 would be a reason to exit.

Keep in mind that last week we just had the Golden Cross buy signal in the SP500. Quite frequently, a selloff occurs after this signal.

I will manage existing positions on their own merits without respect to opinions about the beginning of a selloff. This is no time to panic.

Golden Cross In The SP-500

On August 10 this past week, the 50dema of the SP500 crossed up the 200dema forming what is commonly known as a golden cross. What is particularly interesting about the current cross is that it is accompanied by 3 levels of support: 1) the June high of 956, 2) the rising 50 and 200demas with the 50 currently around 952, and 3) the rising trendline currently around 932.

Looking back to 1998, there has only been one whipsaw in this signal, which occurred at the 1998 bear market low. Trading near misses would have been very profitable over the last 10 years, ie going long just when the averages were about to cross down or going short just when the averages were about to cross up, so the recent spate of bearishness attending the failed head and shoulder top in July was probably not misplaced even if it was widely followed.

The question that arises now is whether or not we will see one of those rare whipsaws. My guess is that we will not. Rather, based on the cycles that are playing out, I expect we may see a near miss (the 50dema will nearly cross down the 200dema) in December or January, which will be a buying opportunity.

What we are seeing at the moment is a very bullish configuration of the 10 month cycle. The mid-cycle trough came early, and the second high in the cycle has made new highs. This foretells higher highs in a least the first rally off of the next 10 month cycle low due in January 2010.

Median/Trend Lines Should Contain Pullback

Possible Pattern In The SMH

The correction in the SMH does not appear complete. One possible scenario is shown above, which shows wave c down yet to come.

This pattern in the SMH is currently about the clearest that we have among the major indexes. If wave c takes the same amount of time as wave a, then we can expect a bottom around August 25, just ahead of the end of the month bullish period.

September 1 is typically a strong bullish day. We then have the Tuesday following the 3 day weekend for labor day, which is typically bullish. So, if we can make it through one more week unscathed, we should be ready to blast off again in September to round off this incredible rally from the March low.

CHKP Breaks Out

CHKP broke today from a multiyear base. It is not often that we see clean rectangle bases of this length. Personally, I will be looking to enter on a pullback to 28.00 with an initial target of 38. The next targets would be the fib retracement levels to the 2000 high. However, I expect it will take some time, perhaps a year to reach the 61.8% RT level, but given the length of the base it is likely to be hit.

Correction Is Likely Not Over

The Qs made a new rally high today as did a couple of other markets, but it is doubtful that today's rally marks the resumption of the uptrend. It is more likely that this is a b wave in a still ongoing flat correction that will require another down move, possibly sharp, to complete it. The August lows are not likely to be exceeded significantly.

If we see a continuation move on substantial volume we may conclude that the rally has resumed, or if we see a substantial break of the August lows we may conclude that a larger correction is underway. However, neither seems likely near term.

Overall, today's action argues for a continuing sideways consolidation that will ultimately lead to higher prices, probably into late Sept or early October.

Waiting for the eventual move higher may seem like watching paint dry, but there really is not much else to do at the moment, except building a watchlist of potential breakout candidates, of which there are many. The following may be worth a look: AAWW, AIRM, AMGN, CMG, EME, ILMN, JCOM, JST, TLEO.

Correction Underway

The Qs have taken out 39.25 and have confirmed that the correction is underway. It could be over relatively quickly, maybe by Friday. We will have to wait and see how things develop.

Still Awaiting Pullback

Another indecisive day leaves us wondering if and when a substantial pullback will get going, but even though the Qs triggered a short term MACD sell signal (intermediate term traders hold for the second signal), the price levels that would confirm that such a pullback is underway have not been violated. The longer this goes on, the less likely it is that we will see a significant pullback before the market moves higher.

Gold appears to have completed a 3 wave rally from the July low on Aug 6. Coming under 932 should accelerate the downtrend and coming under 926 will confirm that the intermediate trend has turned down. Oil on the other hand held up well and may move higher when the Dollar corrects its first upthrust off of the Aug 5 low. If oil does breakout, it may be a 5th wave, and we may see it top in the next week or two, so such a breakout might be riskier than would otherwise be expected.

I continue to manage my long stock positions and await an opportunity to re-enter index long positions. I will be looking to add new stock positions on breakout opportunities that develop once a pullback or consolidation completes.

Q Steps

The simpler we can keep our trading, the better off we will be. One way to do that is to learn to look for what I call the trading step in a stock or index. The Qs traded from a high of 31.63 in Jan to a low of 25.63 in March, which is exactly 6 points or 2 x 3 points. From the low in March, the Qs have advanced just shy of 5 x 3 points to a high of 40.18. 15 points would be 40.63. Some traders call these types of moves boxes, but I like to think of them as increasing steps in perceived value. Why would a market move in such an obvious (at least in hindsight) incremental fashion? I don't know. It can't just be due to options and futures positions since this type of thing happened before derivatives existed. Nevertheless it seems to be a part of market behavior.

Using this we can project the top of the next step, should the Qs move higher, to be 43.07 to 43.63, pretty close to the July 08 low of 43.30. As big a rally as I thought was coming in March, I really could not have envisioned that the Qs could make it back to 43.30 this quickly, but it does appear to be a real possibility now.

We have completed the first 5 trading days of August with a 5 day range of 0.93 points. A break of 39.25 projects an August low of 37.96 to 38.68. The 38.2% RT of the rally from the July low is 37.93. This would appear to be the nearterm downside risk.

A Bullish Setup In EPIQ

It is not often that one finds such a clear wave pattern in an individual stock, but the pattern in EPIQ seems particularly so. A move above the wave 2 b high of 16.55 will confirm that wave 3 of (3) of III is underway. (Waves I and II are not shown.)

I don't know what the catalyst might be to propel EPIQ higher. The recent earnings report was met with a tepid response, but there must be something there for the I, II, (1), (2), 1, 2 coil to develop over the last 3 years. The less bullish view is that the upcoming move would be wave 3 of (C), so the initial targets are 20.72 and 21.55. If these are taken out, then we might expect a multimonth run to much higher highs. If EPIQ stalls at those levels, then the less bullish view would prevail.

One way to deal with this uncertainty is to watch for the completion of 5 minor waves up in the current count. If wave (3) only matches wave (1) in length or is even shorter, then we should consider it to be wave (C) instead and exit the position entirely. If, on the other hand, wave (3) is 1.618 x wave (1), we should consider taking half profits and letting half run with a stop just below the wave (1) high of 18.91. After the completion of 5 intermediate waves up, we would raise the stop to just below the wave I high of 20.72 with a potential target of 28.61 or higher.

Given the amount of time it has taken for this setup to develop, it could take many months to fully play out, so this is not a trade for the impatient.

Technical Justification

I just finished reading Carl Swenlin's weekly market commentary at Decisionpoint.com and he offers a very strong technical argument for the statements that I made in my prior post.

http://www.financialsense.com/editorials/swenlin/2009/0807.html

What A Day!

The US Dollar Index was sharply higher after the probable completion of wave 5 of C down. The MACD is close to a new buy signal. Gold, silver, oil were down on the day and all things appear to be set for a selloff in commodities and a rally in the Dollar. Any follow through in the Dollar on Monday with a positive close will confirm the turn is in.

The Nasdaq indexes failed to confirm the new highs in the SP500 and Dow, which supports the view that a correction in those indexes began on Wednesday. The SP500 and the Dow will likely play catchup over the next few days. However, given the late start of this correction, it does not appear at the moment that it will be severe.

The number of text book bases has increased significantly since early July and traders should not be having problems finding good breakout opportunities. EBS and ADSK are a couple of recent breakouts. These may be opportunities to buy on pullbacks nearterm. BWLD has formed a nearly perfect cup and handle base. Do your homework.

This rally is beginning to have the feel of one that could have a blowoff top in September and October. It can be difficult to hold on during the wild swings that are occuring in some stocks, but if we do get such a climax run, that will be where the real profits are made in the second half of this rally. The key is to build into positions in August and let them run in September when all of the late comers are jumping in, while being prepared to take profits in early October. Alot of money was made in March and April. I think we will see the bookend of that opporunity begin in earnest in a couple of weeks. I could be completely wrong on this, but that is how it feels to me at the moment. That's not very scientific, I know, but sometimes the intuition, based on experience, must be heard.

Pullback Finally Here - TNDM Crushed

I think it is safe to say that the long awaited pullback is finally underway. So far the decline in the Qs appears to be choppy and not impulsive, so we may expect that the pullback will not be too severe, although that could change. At the moment I am still expecting this pullback to bottom around the 14th, next Friday, but if it does extend, probably no later than the end of August.

The best laid plans of stock market technical analysts cannot alter the reality of price movement. Today TNDM is getting hammered even though it beat estimates and raised guidance. Clearly the street was expecting more. This brings either the flat correction scenario or a completed 5th wave count to the forefront. I was stopped out with a 0.5% hit to my account, which is less than the 1.5% max that I allow. In two trades in TNDM this year, I am down 1.22%. I will be looking to trade this stock again, and I will take some time to explain why in a future post.

We are now approaching the uncle point for my bearish trade in gold. If it is going to go down in earnest, it must begin to do so now. A pullback and breakout from here would be bullish overall, but it is not clear that it is as bullish as many think.

Let's see how the market reacts to the employment report tomorrow before making any projections on the pullback.

Distribution Day

We finally had another distribution day today, but the financials continued to advance. With AIG up a whopping 62.72% today and JP Morgan up almost 4%, it may be that the financials will allow the broader markets to consolidate in a sideways fashion over the next 2 to 3 weeks rather than pullback sharply. Note that RDN and ABK appear to moving in sympathy with AIG, but the pattern in ABK does not appear to be as impulsive, so caution is advised.

One standout this week has been UAL Corp, UAUA, which has broken out sharply from a 5th wave ending diagonal bottom in June with a target of 16.73 over the next 6 to 8 weeks.

The Qs have yet to fall under the 7/31 low of 39.41, but I expect they will in the coming days. Even so, it seems that a sharp correction is becoming less likely with each passing day, particularly as long as the 39.00 level holds. A close below 38.97 on the other hand will probably lead to a move to a least 37.93, but such projections are premature at the moment.

I will be looking to re-enter index long positions once I see a clearly completed correction coupled with an oversold 5 period RSI and/or STOCH at a fib support level.

Double Top In Qs??

The earlier post appears to have been premature, though not still out of the question. The triangle pattern appears to have been invalidated as what would have been wave d moved above the wave b high. The pattern now appears to be an ending diagonal that double topped at 40.19 against the 7/30 high of 40.18. If so, a move below the 7/31 low of 39.41 will confirm the (nearterm) top is in. If the Qs continue to move sideways above 39.41, then expect another thrust higher to the 41.05 target. We should know which outcome will prevail by tomorrow afternoon.

Qs Headed To 41.05

The QQQQ is developing a small triangle that projects to 40.95 to 41.05, the March 08 low. That area may offer enough resistance to jumpstart a pullback. If it does not, expect another surge in the indexes, which may surprise many and send the Qs to 43.30, the July 08 low. Support is now at 38.97.

SP500 Hits Round Number Resistance At 1000

Today we saw the advance continue and the SP500 joined the round number crowd by closing above the 1000 level. However, volume was average to below average on most indexes. I am still looking for a pullback into August 14, but the closer we get to that date without one, the less the decline is likely to be.

The action today is why I said I would not be selling out of individual stock positions even though I sold two index positions. I want to maintain exposure in case I am wrong about the pullback. It is always possible that this thing could keep going and going as the expected 5th wave becomes like the proverbial carrot on a stick.

I was stopped out of the DTO today, but did you notice how gold failed to move even though the Dollar made a new closing low for its decline? Gold may have one more push before it rolls over, but then again, the rally may have ended today. I am not convinced the bullish case for Oil that I presented in an earlier post is the correct one, and I am not going to go long Oil via the DXO without some consolidation.

The financials are performing well and I remain long the UYG. JPM made a rally closing high today. It is now above its long term median line and has solid support. My target is 50.63 or higher.

A Different Kind Of Triangle

Not all triangles are created equal. The textbook elliottwave triangle consists of 5 overlapping waves that each subdivide into 3 waves which can take the form of symmetrical, ascending, descending and expanding triangles. However, sometimes a triangle can develop that has an impulsive form. It is not really a triangle but it has the appearance of one. I believe the triangle that has formed in TNDM may be such an impulsive triangle and today's breakout may be wave iii of 3 of III. The key to discerning the difference is that wave c of 2 appears to be 5 waves down and is followed by wave i, which is 5 waves up. For a true triangle these would be 3 wave not 5 wave forms. This type of triangle is not common, but it is very bullish. The alternative is that the move today completed wave B of a flat correction and wave C down to below the June lows is imminent.

Earnings are expected Thursday BMO, so we shall see which one is the correct view. I am long from 29.90. The first target would be 51.28, but if the bullish view is correct, then much higher prices are possible. A move below 28.75 would be cause to exit at this point. However, I will maintain my stop at my lower initial stop loss until after the earnings announcement to allow for any wild swings which are common in this stock.