Is This What We Have To Look Forward To?

Uncanny Close In The Qs

The January range displayed its predictive effectiveness this year as the April high and today's close were precise multiples of the January range above the January high.  Long entries were possible on a breakout above the August high which was above the January high, and the November pullback which remained above the April high. Shorting opportunities were available in June and August against the January high.

I will be reviewing the trading strategies in the strategy tracker for 2010 and giving my outlook for 2011 next week.

Wave B of (B) Is Nearing Completion

I've shown what I believe to be the most likely count for the Qs with a zigzag for wave B.  The correction from the April high would then either be an expanded flat or a running triangle or even possibly a running flat with 5 waves down terminating above the July low.  A running flat was seen in the middle of the 2002 to 2007 rally and could show up again.  It would probably be best at this point to wait for the secondary reaction in wave [ii] or [a] of C down to complete before getting short or adding to existing short positions.

While not shown, one possible alternate is that the move from the early November high to date is part of a 4th wave expanded flat correction and the Qs could see another new high.  That would not eliminate the above expectations for an expanded flat or running triangle, but it would change how it is counted.

Mirror Mirror On The Wall

In a somewhat strange manner the highs and lows of the Qs since the March 2009 low have formed an almost perfect mirror of the decline from the October 2007 high.  The only significant difference being that the rally is stretched in time compared to the decline.  At some point this unusual behavior will break down, but if the correspondence continues to hold up, we may be looking at a significant decline in the very near future.

Happy Holidays

The SP500 appears to be completing a small degree 4th wave triangle while the Qs seem to be completing a 4th wave zigzag in a ending diagonal triangle.  My best guess is that Santa Claus will deliver tomorrow followed by muted selling next week with perhaps one more attempt at a high by next Thursday.  The last day of December is usually a down day while the first day of January is usually an up day.  However, either on January 3 or right after a correction should begin.  Once underway we can begin to assess the prospects for the extent of the correction.  At a minimum the April high should be tested.

Posting will be minimal until the end of next week unless something dramatic happens.

VIX Approaching 3+ Year Low

For the fourth time since October 11, 2007 the VIX is approaching the 15 level.  Each time this occured it was accompanied by a selloff.  Will this time be different?  It's possible, but beware a false breakdown in the VIX that sucks in the last of the bulls.

I suspect we may see a new 3 year low in the VIX coinciding with a market top.  However, the subsequent rise in the VIX should be limited to the July 1 high of 37.58 which is the origin of the declining wedge pattern.  This should correspond with a wave  C or 2 low.

Any sustained break of the 15 level would indicate the SP500 is ready to run to its all time high now instead of later.

SP500 At Resistance

The SP500 has neared resistance at 1256.98 at the March 21, 2008 low with a high today of 1255.82.  However, this is an area of weak resistance.  I define weak resistance as a previous swing low that has been penetrated by a subsequent swing high.  Strong resistance is a previous swing low that has not been penetrated.  The July 15, 2008 low of 1200.44 was a level of strong resistance.  Price did not penetrate that level again after closing below it on the weekly chart in 2008.  We can see that this was a strong resistance level in the price action this year as it has taken 3 attempts for the market to successfully move above 1200.44.  We should say successfully so far, as a failure to hold support at that level now would likely be viewed as a major failure.

When the market hits an area of weak support or resistance it is unlikely to hold that level.  We can see that once the SP500 failed to hold support at the 5/12/06 high of 1326.70 for the third time in 2008, the previous levels of weak support from the 2002 to 2007 rally gave way rather easily which partly explains the severity of the crash that occured in 2008.

I have pointed out the likelihood for an intermediate to long term top at the current time window.  Should the market top in this area, there is weak support at 1219.80 and 1200.44 and strong support at the August high at 1129.24.  The previous July low of 1010.91 is an area of weak support.  While double bottoms are common, a low that occurs well above a previous support zone creates a level of weak support.  The next lower level of strong support is the 6/12/09 high of 956.23.

Based on the above, I expect that a top that occurs now would likely try to hold the 1200 to 1220 zone.  If that zone fails, the 1100 to 1130 zone would probably halt the decline at least for a sizeable countertrend rally.  If the 1100 to 1130 zone holds, then a new base should form to propel the SP500 back to the vicinity of its previous all time highs.  If that zone fails, I would expect a retest of 950 to 1000 to follow before another rally could materialize.

The one thing to really keep an eye on here is if the 1256.98 level is taken out, there is little to stop the SP500 from racing ahead to its all time highs as there are no strong resistance levels remaining.

Waiting For A Signal

At the moment it is just a waiting game.  Of course I am looking for a top as I have explained over the past couple of weeks, but we haven't quite got there yet.  We probably need to see some sort of spike up and reversal to conclude that the top is in.  Tomorrow would be a good day for it being the winter solstice.  We also have a lunar eclipse this evening.  Maybe that will mean something. 

In any case, we are waiting for a MACD sell signal, which would be a negative divergence sell signal, as well as a break of the December low, which is now the low of the high month, for signals to go short this market.

For the time being I am still of the opinion that the coming decline will be wave (2) of [C] or wave (C) of [B] either as a triangle or a flat, but it will be many weeks before we will know how it will unfold.  Even though this will be a cycle high, I am reluctant to conclude that it is the top of primary wave [2].

Update On AMGN

It has been over a year since I've mentioned AMGN, and it has continued to progress steadily in a very boring B wave triangle.  Presently, wave [d] of B is in progress and should continue for a few more weeks before wave [e] begins to complete wave B.  There is a slight chance that the December low completed wave [e], but I doubt that's the case.  After the completion of wave B, there should be a sharp upthrust in wave C of (D) which should last 6 to 9 months.

Given the very long nature of the primary wave [B] triangle, it may be prudent to exit long positions at the end of wave (D) and wait for a new entry point at the low of wave (E) which should bring AMGN back down to current levels.  However, there is no guarantee of that and wave (E) could just hang out high for a few months before it breaks out.  So, pick your poison. 

BIIB is slightly ahead of AMGN in the overall pattern, and it is disappointing that neither company is paying a dividend for the privilege of owning their stock during this huge consolidation, but I am personally accumulating shares in both as I think at least one will eventually have a huge runup similar to the 1990s.  I don't know what the catalyst will be for the runup, but the pattern says it should come.  When it does I will be counting 5 waves on the monthly chart to find the exit point.

What Did GE Do Today?

Yeah, it DOES look like EVERYONE'S getting into stocks.  A rare mention in the comics yesterday:

I don't know what's going to happen over the next few weeks, but the above is enough for me to not be buying stocks for a while.

Triangle In Progress

A small degree triangle is near completion that should carry the Qs up to 55+ prior to a top.  The next up move should be the last one for the rally from the July low. 

Sentiment has reached extreme levels.  See the article from Mark Hulber:  http://www.marketwatch.com/story/sentiment-has-taken-turn-for-the-worse-2010-12-17?link=kiosk

4th Wave Triangle In Ford

A 4th wave triangle in Ford points to a likely continuation of its rally into year end.  It is also points to a looming correction when wave 5 is over.  It is hard to say whether the broader market will follow in Ford's footsteps.  The stock indexes appear to have almost completed a very small degree triangle that indicates higher prices Monday and Tuesday.  That may be it for the rally unless the markets can manage to subdivide the rally further.

Evidence For A Top Continues To Build

Two key breadth indexes are pointing to a top in the very near future.  Notice how the Absolute Breadth index has marked or preceded most of the major tops for several years.  Once again it has returned to an extremely low level that often occurs at or up to a couple of weeks before a significan top. 

The High Low Logic index shows when there is a divergence in breadth with a large number of new lows occuring with new highs as it rises above the 2% level.  It now stands at 1.93%.  I have highlighted previous instances where the 2% level was hit that resulted in a correction or selloff.  Notice that once the 2% level is hit, the index tends to fall with the market.  Bull market conditions are said to exist when the index falls back below 1%.  A sell warning occurs when the index rises from below to above 1%, which it did on November 5 and December 10.



The market may continue higher into the end of the year, but I think there is no doubt we are in a dangerous market period.  It is truly amazing how easily the drumbeat for a continuation of the rally into 2011 has increased in volume over the last few weeks.  Trader beware.

AAPL Ripe For A Fall

AAPL appears to have completed 5 waves up from the August low.  If the current impulse is also completing intermediate wave (5), then the coming correction in AAPL could be severe, but at a minimum it should retest the April and July highs around $275.  The action in AAPL just adds to the evidence that a top could be coming soon.

For those with an interest in astrology and the stock market, Mercury went retrograde on Saturday December 11.  It will go direct again on Thursday December 30.  It has been my experience that one of three things will occur when Mercury goes retrograde:  1) nothing happens as the existing trend remains in force, 2) the market sells off on the retrograde, reverses at 9 calendar days in +/-, and then sells off again into the date it goes direct, or 3) the trend continues until 9 calendar days in +/-, and then the market sells off until the end of the retrograde period.  A turn at 9 days in occurs quite often and would correspond to Monday December 20.  It looks like things could be lining up for a turn around December 20/21.

A Bullish Count For The TLT

Calls for the end of the bond rally may be premature.

A Cycle Turn Of My Own

It is my personal and humble opinion that all of life is connected. Connected in ways that we will probably never fully understand. For some reason that I cannot explain, it seems that major events in my life have been connected directly or indirectly to the financial markets even before I became so involved with them.

I married my wife in December 1987. We were in love. I didn't have a full time job, and I didn't know anything about the stock market or any other financial market for that matter. I wanted to live a simple life, but life had other plans. Little did I know that the crash of 1987 would affect me so greatly. Even though I was highly qualified for a variety of positions in the engineering field, the economy was in the doldrums and there were few jobs to be found. I needed a job badly, and I only had two offers. One required moving to another state to work at a stable Fortune 500 company where I would probably still be working today if I hadn't taken the other job that did not require moving.

The other job (the road less travelled, if you will) has led me down a path that has been an adventure to say the least. But adventures are rarely easy. They can be fun, exciting, fear provoking, life threatening and a host of other uncommon things. I was able to get my professional engineer's license, general contracting license and heating and plumbing licenses while working in the other job that didn't require moving. After some time I got up the courage to strike out on my own in construction in 1995. This was coincidentally the acceleration point for the late 1990's stock market bubble. I had no idea.

I had this sense that housing was about to take off. I was right, but we were not in the right geographical location to really benefit from the boom. So although we were able to develop a high volume of work, the margins were not so great, and the business was difficult.

I started trading in late 1999. At the same time several important developments occured in the construction business. We landed several large commercial contracts, and it really looked as though my dreams were coming true. The sky was the limit. My trading account soared, and so did the construction business. But then just as quickly, the tide turned. First of all, I gave back all of the profits in my trading account and then some. Then, one of the commercial contracts fell apart after 9/11. Things continued to get worse into 2002. It was in December 2002 at the bottom of the dot.com bust that I learned I had a thyroid disease. I was so physically spent that I could barely work, but it was at that time that I committed myself to really learning how to trade.

Over the next four years I worked to regain my health, maintain enough construction work to pay the bills, and I learned to trade. I kept a small account. My goal was not account appreciation, but learning how to trade safely, prudently, consistently and successfully. During that entire time I only added money to my account one time, and it was a small amount. By late 2006 I knew that I had achieved my goal of learning to trade. The only thing to do was to keep on keeping on. I did add a little to the account at that point, and I started using sufficient margin to generate sizeable returns. The experience that I gained during the four years from 2002 to 2006 has allowed me to keep drawdowns under control with appropriate position sizing and risk management. These two things alone have kept me out of trouble most of time.

At the same time that I reached a level of competence in trading. We decided to buy a development from a local developer that was getting out of the business due to health problems. The price was right. I had done a proforma based on a worse case scenario. If the worse case scenario was seen, we should get out around break even. I also knew based on the work of Robert Shiller, Harry Dent and Robert Prechter that the housing market was likely due for a downturn. We had hoped to have the small development finished by late 2007 or early 2008, so I believed that we could miss the coming disaster. Well, I was wrong. Things started off great, but just as we passed the halfway point in 2007, the bottom fell out. The contracts fell through on the houses we had under construction because the banks would no longer loan money to the buyers. We ended up sitting on those unfinished houses until 2009. Fortunately, our business bank worked with us and did not call the construction loans or it would have been all over for us financially.

Also, fortunately we had found a great new realtor who was able to find buyers for those homes. She also got us presale contracts on the remaining lots this year, and we have been able to finish the development. We closed the last unit on December 1. I did some touchup work the following week and everything is complete.

Back in 2006 when we bought the development, I had a strong sense that I needed a backup plan. By another set of fortuitous circumstances it was suggested to me that I should consider doing consulting engineering work by a draftsman that had done some work for us. I had kept my PE license active all these years and a friend referred me to a businessman in our town that needed an engineer. After an interview with him, he hired me to do all of the mechanical and plumbing design for his new microbrewery. He had already been brewing beer successfully for many years and is well known in the area. This launched my consulting engineering business. There have been many ups and downs and late nights, but after two years I was able to replace my construction income. This is what allowed me to continue working on the development even though we only broke even in the end.

I am now officially no longer a contractor. I am leaving that business behind after 16 years. I find it interesting that I may be doing so at another important cycle turn date.

In late 2007, I decided to start blogging. I knew that this would be an exciting time for trading, and I got started right at the beginning of one of the biggest downtrends in many decades. It is my goal to replace my consulting income with trading income. That hasn't happened yet, but I started this site for the purpose of conveying to others what I have learned along the way, and as a way of forcing myself to maintain an even greater level of personal integrity with respect to my trading. I will continue to blog, and I have plans to expand this site to include for pay services in the future. These will be more along the lines of trading education, not stock picks and trading signals. I would rather people learn to trade for themselves.

At this time I am also starting a joint venture with a friend to trade a futures system that has proven successul over the last few years. It is a conservative system, and I expect that it will be profitable over the long run. I will let you know how that is going next year once we get everything up and running. This will not be a fund or for outside investment.

So, I am starting a new chapter in my life. I expect that based on past history future changes in my life will occur at important times in the financial markets as well. If so, they may be coming fairly soon as there will continue to be regular major turning points over the next six years before the next secular bull market gets underway.

Heading Toward A Cycle Top

For some time now, from late last year, I expected that we would see a market low in the time frame around the middle of December 2010 to the middle of January 2011 with specific target dates of December 21 to January 6. I have done some additional cycle work this week that narrows the window to December 30 to January 6.

The typical pattern for the 10 month cycle, which can vary from 9 to 11 months, is 12 weeks up - 4 weeks down - 4 weeks up - 12 weeks down. In a strongly trending market the up weeks will increase and the down weeks will decrease. At the beginning of a new 4 year cycle, there will hardly be any down weeks. This was the case in 2009. In 2010, we saw a surge off of the February 5th 11 month cycle low followed by a selling panic that bottomed on July 1 - just shy of 5 months from the previous cycle low. At that point it was quite reasonable to believe that after a 4 to 8 week rally, the market would sell off into the next 11 month cycle low due around January 6. However, this has not occured, and with each passing day it seems more likely that it will not occur.


Apparently, the force of a larger cycle is at work here pulling the market up into a high. More than a couple of analysts have noted the 7.25 year cycle that has been in play since the 1974 bottom. 7.25 years subdivides into four 21.75 months quarter cycles and is related to a larger 45 year cycle.

In comparing the 2009 low to previous lows, the 1974 low has the greatest similarity, in my opinion, so perhaps I should have given greater weight to the extent of the rally off of that low which lasted from December 9, 1974 to September 22, 1975 for a period of 1 year, 9 months and 13 days (21 months and 13 days). This is pretty darn close to the 22 month cycle period I have been discussing for the last few months.

I had hoped that we would see a low this December or January to set up the next leg of this cyclical bull market, but it appears that will not be the case unless the market sells off hard into the end of the year starting Monday. Unfortunately, triangles have formed all over the place which indicate more upside over the coming week. (BIDU is an example) This strongly suggests to me that we are moving up to a major cycle high as indicated by the basic price tee in the chart of the Qs.

In support of this view is the fact that sentiment has reached extreme levels as measured by the TRIN, the PPO of the equity only put/call ratio, and sentiment surveys. In addition, the Absolute Breadth Index is setting up for another top, the High-Low Logic Index appears ready to breakout for a sell signal, and the McClellan Oscillator and Summation Indexes are diverging strongly against price as are the MACD and RSI. Volume has also been below average.

In short I now believe that a top of Intermediate if not Long term significance is near at hand. If so, we should see many weeks and possibly months of down to sideways market action. At the moment it is too early to say whether this is the top of the infamous Primary wave 2. Personally, I don't think it is. Rather, it is more likely that we will see a larger double top with highs 10 to 20 months apart after which a more powerful down leg will ensue into the 2016 low.

So what is there to do now? Based on the above I will not be buying stocks or adding to existing stock positions until there is a clear cut unambiguous cycle low. I will be trading the Qs and the metals using my basic trend following strategies, some of which are shown in the Strategy Tracker.

The selling after the end of the year may be surprisingly strong. Be prepared. If the market were to top in the same time as the 1975/76 rally, the top would be December 19, 2010, which is also amazingly close to the winter solstice date. However, I suspect the powers that be are working to keep it afloat until December 30 if at all possible. Unless we see selling materialize in a dramatic fashion beginning early next week, there is little doubt that the coming cycle turn will be an important top.

A Short Term Top (At Least) Is Imminent

The TRIN closed at 0.50 today and the 5 and 10 MAs of the TRIN remain well below 1.0 as they have been for some time. This is an excellent indication that strong selling event is imminent. The PPO of the equity only put/call ratio ($CPCE) hit 19.50 today - only a fraction below the level of 20 that has been associated with market tops for the last 3 years.

As has been the case since the November top, it remains to be seen how far the selloff will go and which elliott wave pattern will win out.

Developing MACD Sell Signal For The Qs

Sentiment Finally Approaching An Extreme

Sentiment as measured by the PPO of the equity only put/call ratio is finally approaching its extreme upper limit after hitting an extreme low in May. Had we put aside all other speculations and gone long on the low of this indicator we would have done quite well.

Citigroup Supports Bull & Bear Case

Citigroup is working on a very nice textbook elliott wave triangle. The most likely scenario is a move down in wave E beginning about now and ending in January followed by a 6 month advance in wave (C) up. However, the triangle could break to the downside which would mean wave (C) would be delayed for a few months. The primary takeaway is first that there will be a wave (C) up. It will likely top well before the rest of the stock market and so could be a leading indicator. Second, Citigroup will retest its 2009 low which supports the case for a resumption of the bear market once the current cyclical bull market comes to a conclusion.

JPM is tracing out a much smaller B wave triangle that also suggests more upside after a 2+/- month decline. I am not suggesting that either of these would be good investments or trading vehicles, but rather they point to the likelihood that the cyclical bull market has further to run. Less risky alternatives to C and JPM would be the XLF or the KBE if one is so inclined.

Summation Index Still On Sell Signal

New highs in the SP500 and the NYSE were not confirmed by the NYSE Summation Index. The Summation Index remains on a sell signal as its MACD is below its signal line and the zero line. A MACD hook sell setup is now in place which would be triggered by a fall to new lows in the MACD. It also appears that the Summation Index is about to break long term support around the 400 level.

Whether or not the expected selloff is just wave [c] of minor wave 4 or represents the beginning of wave C of (B) is still open for debate. As I have said before, it will probably be December 20 or thereabouts before we can know for sure.

FXI Double Top

The double top in the FXI (Xinhua China 25 Index Fund ETF) looks pretty solid. We have 5 waves down from the November high for wave 1 and wave 2 appears to be underway with a likely top at the previous 2009 high. Thereafter a break of the December low will confirm that an expanded flat or triangle is in progress at primary degree.

Given that the FXI has led the US markets by 4 to 5 months more or less for the last 2 years, if the relationship holds up, we should expect a top in the US markets around the end of December to first of January followed by a decline in January, another high in March/April and a low in May/June.

Overall the pattern in the FXI is long term bullish for stocks as it suggests that once the correction is over in US stocks we will see another leg up along with the FXI. Exactly how the pattern will develop is still open for debate, but we may see a sharp decline over the next two weeks which corresponds to the August decline in the FXI. The nature of that decline and the subsequent rally will tell us a great deal.

Isn't It Obvious?

This morning I find that IBD has now changed their market stance to "Market Resumes Confirmed Uptrend" without a follow-through day based on the Nasdaq Composite making a new closing high for the year. This is only the 2nd or 3rd time I recall this happening. It certainly is a reasonable position to take. Yet, I suspect by the middle of next week, we may see another change.

The rally to new highs appears to be wave [b] of 4 of (C). OK, I give in. Since it is so obvious to everyone, it really must be true. Yet, I had said that if the SP500 rallied above 1207.38 we would have to reconsider the bearish case. Now that it has happened it is time to get on board the train even if it is nearing the station. Without getting into all of the details, there are very good reasons to believe from cycles work that we will see selling from early next week into December 20+/-, but that will likely just be wave [c] down at this point. Thereafter, a rally into January should follow. Again, a fall below the July/August highs before wave 5 is seen would reinstate the larger wave (B) or [B] view.

While some may see the positive in this view, I definitely do not. Unfortunately, this outcome raises the specter of a very much less bullish resolution to this cyclical bull market than I have heretofore believed possible. In other words, it is beginning to look possible that the Robert Prechter camp could be on to something. The problem here is that we are heading into a cycle turn date of significance which raises the possibility that once wave 5 is complete the entire rally from March 2009 will be complete. The next large time frame turn date is in the late 2012/2013 time zone, so we could be looking at a two year bear market very soon.

The only thing that could save the bull market would be if the coming 5th wave is only wave [v] of 1 of (C), or wave 3 is wave [i] of 3 of (C). The question is how will we know? First, we will be looking at the character of the decline. Is it impulsive, or is it corrective? Secondly, we will be looking at sentiment. Does it get extremely bearish very quickly - perhaps even more bearish than the July low? If we see a corrective pattern and quick turn to bearish sentiment, then we are likely looking at a 2nd wave, and an even more powerful rally to follow.



The PPO (50,5,1) of the CPCE has been an excellent measure of sentiment during the entire rally from March 2009. It has remained in the neutral range during the entire rally from the July low. Wave 5 should produce and extreme high reading in the PPO. If it does not, then we may be in the middle of wave 3 instead of 5, with a more muted pullback coming after the January high. A pullback that remains above the December low would be the most bullish of all.


The low volume of this week's high coupled with low TRIN readings is consistent with a [b] wave high. We should see a retest of the November low before wave 5 begins in earnest.

For those who are interested, since 2000 the Nasdaq has been following the pattern of the Dow from the 1929 high. If this repetition continues, January will be a high followed by a two year decline (see the Dow 1939 to 1942). While such synchronicities can be helpful, they can be just as dangerous if you believe in them too much.

A 22 Month High??

Markets are pushing toward new rally highs. The Russell 2000 and the Dow Transports are already there. These could very well be [b] waves of minor wave 4 of the rally since July 1. If so, it adds another layer of uncertainty to the big picture. We are coming up on the 22 month cycle turn date which is due in the time frame from December 20 to January 20 with a mid-point of January 6.

The problem is that instead of a cycle low, which has been my thesis since this summer, we could be looking at a cycle high. This might very well coincide with a completed wave (C) of [2] or [C] of x for the rally from March 2009. Unfortunately for the bulls, this would mean a long and significant decline is very near upon us.

The alternative is that the 5 wave advance from the July low is just wave 1 of (C) or (1) of [C]. In this case, a multi-week pullback in wave 2 or (2) should follow a top in December.

At the moment the wave [B] flat correction or triangle interpretation is still on the table so there is no reason to jump to conclusions just yet, and there are quite a few indications that a top is imminent which could still derail the wave 4 view: 1) the Absolute Breadth index is making a double bottom with its November 1 low suggesting a big top is near, 2) the Summation Index is still falling with a negative MACD, 3) Volume on the latest short term rally has been anemic, and 4) the JNK is not rallying with stocks suggesting that the appetite for risk is falling.

I think we will definitely see some kind of top tomorrow or early next week that may last into December 21. Whether it is just a part of wave 4 will not be known until then.

Not So Fast!

While the percentage gain today was impressive, I have not found any major stock indexes with higher volume than yesterday which means that today's action did not qualify as a follow-through day. It does appear that we may see at least another short term rally high before this upward correction ends, but it still looks like some sort of upward correction - double zigzag for the Qs, expanded flat for the Dow, etc.

Of course, the descending bearish wedge pattern was invalidated. Even so, I am seeing alot of large cap stocks that have completed impulse patterns and are ready to correct. I suspect this market will try to hold up until early next week before another leg down gets underway. So far, the 4th wave scenario is still on the table. We'll see next week if it stays that way.

My Take On Oil

VIX Breaks Out

The VIX has broken out from a falling wedge pattern, a typically very reliable pattern which targets the origin of the pattern. It will take a move below the November low to invalidate the breakout at this point. The breakout suggests stock market weakness in the coming weeks.

As of this post, the pre-market futures are making a strong showing with the SP futures up over 14 points. As long as the SP500 remains below 1198.62, the bearish triangle pattern will be the top count, and as long as it remains below 1207.38 the recent action should be viewed as an upward correction. However, if 1207.38 is taken out, then we would have to reconsider the bearish interpretations.

Bearish Triangle In The SP500

The intraday pattern in the SP500 appears to be developing as a bearish descending triangle. The key to maintaining the formation is completion of waves (c), (d) and (e) over rest of this week without violating yesterday's low of 1173.64 or the 11/16 low of 1173. Wave (b) probably completed yesterday at 1173.64. Waves (c), (d) and (e) should be complete by Friday or Monday at the latest.

If the triangle does complete as suggested, the only question will be whether it completes above or below the August high. The former will allow for the 4th wave interpretation to remain on the table while the latter will leave us with the more likely outcome that we are currently in the middle of a much larger triangle for wave [B] of x for the overall cyclical bull market. I suspect that we will see the latter outcome, but we won't know for sure for at least 3 more weeks.

The other valuable piece of information from this triangle is that it will invalidate the possibility of a flat/expanded flat correction. However, we will still have to be on guard for the development of a double zigzag for wave (C) down which is now underway that could extend well into January.

FTSE At Trendline Support

After reaching trendline support a multi-day rally would not be surprising, but we will be watching for a break of the trendline to confirm lower prices and the invalidation of the 4th wave scenario.

Upward Correction Still Underway

The current intraday pattern in the stock indexes lends itself to a couple of interpretations. Either this morning's low in the SP500 ended a small degree double zigzag b wave, and now wave c wave up to retest the November 18 high is underway. Or this afternoon's rally is just retracing part of the decline from last Wednesday's high. Either way, the market will be headed lower whether it be from this afternoon's high or a little higher.

JNK Shows Falling Appetite For Risk

The appetite for risk as measured by demand for high-yield corporate bonds is falling, and not just falling, but falling out of a rising wedge pattern that targets the May lows. The JNK has fallen below its January high. The February low and the May low occured close to the 1.0 and 1.618 extensions of the January range. The May low coincided with the June 2009 high. The top in JNK was on 11/4. The typical length of the retracement of a rising wedge pattern is 1/3 the length of the pattern. In this case, it works out to 39 trading days, which targets a bottom on December 31. It could occur sooner or later, but the lower target range is a high probability target.

Notice how the JNK closed near it November low. This suggests that any continuation of the short term rally in stocks next week will fail, and probably in a sharp fashion to play catch up. Also, the pattern in the JNK fits with the expanded flat or triangle thesis that we have been discussing. The more violent the coming decline, the more likely it is that we will see the expanded flat correction as opposed to the triangle, or it may be that markets are mixed with the Qs in a triangle while other indexes complete the expanded flat.

In any case, the downward pull of the 10 month and 20 month cycle that is currently in force should bring a conclusion to the correction that began April 26. All in all, it appears that this will not be a typical December for a mid-term election year as the market may be down for almost the entire month.

FTSE Heading Toward Trendline Support

For whatever reason, over the last two years the elliott wave pattern in the London FTSE index has been cleaner and clearer than the US indexes. From March 2009 to April 2010, the FTSE traced out a very clear 5 wave advance without the overlapping waves present in the US indexes. Yet, the action in October this year was not so clear and we are left with the same ambiguity as in the US.

However, the FTSE is clearly headed for trendline and channel line support. It needs to hold this support to prevent breeching the November low. I think the November low in most stock indexes is the critical level to be watching. Once it gives way the only downside support will be the July/August highs, but touching those highs will invalidate the impulsive wave count from the July low, which will be a big blow to the bulls.

Regardless, we will still be left wondering whether we are completing a flat correction or are in the middle of a larger triangle until the action in December plays out. One interesting possibility that I had not considered before is that the Nasdaq 100 could be forming a rare, but valid running flat. In a running flat, wave (B) exceeds the high of wave (A), but wave (C) does not reach the low of wave (A). This would be a very bullish outcome and really keep everyone guessing as most would see the 5 wave decline that fails to test the July low as a clearly bearish turn of events.

The fact is that the market action relative to current events is not dissimilar to what occured earlier this year, and we should be ready to take full advantage of any repeat of adverse market action.

Before You Get Too Excited

First of all, today was not a valid follow-through day as volume was lighter than the day before even though the Nasdaq 100 and Composite had gains greater than 1.7%. More importantly, the action since last week's low still appears to be an upward correction. For the Dow it looks like a 5-3-5 zigzag on the 30 min chart. Below you can see a clear head and shoulders top pattern developing. These have not panned out well over the last two years, but perhaps after so many failures this one will work. If it does, the target is below the August high.

Happy Thanksgiving!

Impulsive Decline In The FXI

The clearly impulsive decline in the FXU is consistent with wave 1 of (C) of a large flat correction. Notice how today's low almost touched the August high. We have discussed how the FXI has been leading the US indexes, and while there may be a near term rally, this action suggests that the US indexes may follow suit. If so, we should see downside acceleration very soon.

More Downside To Come

The action since the late morning low is clearly corrective against the early morning decline. There will more downside to come either late this afternoon or tomorrow. The decline should accelerate on another failure of Dow 11,000.

What's Going On With Elliott Wave Counts?

When I look at the lack of congruence between cycles analysis, the elliott wave count and seasonal patterns, everything seems to be out of whack - a technical term meaning "what the heck is going on?"

The move down from the recent November high is clearly not impulsive on the intraday charts. This makes it difficult to conclude - as much as might want it to be - that wave (C) down in a flat correction is underway. On the other hand the various stock indexes are really not in sync with the impulsive count from the July low either. For some, the rally from the August low just does not look all that impulsive, which does not fit with the idea of a 3rd wave.

It is beginning to look as though we could be in the worst possible outcome for traders, one that I have suggested a few times, but had forgotten about over the last couple of months. Folks, we are probably in a very large [B] wave triangle. For the Qs, it would be a running triangle. For other indexes it would be an ascending triangle. This would explain the lack of clearly impulsive moves, the corrective quality of most of the swings, the slight new highs to new highs, the long wave (B) which is common in triangles, and the continuing strong performance by top-rated stocks. We are running out of time with respect to the coming cycle low due between mid-December and mid-January, so we would really have to a sharp decline develop soon in order to define the cycle low. Should we see such a sharp decline it would most likely be wave C of (C) for the triangle case.

If this is a triangle, then given the overall time of development so far, it may take well into March for it to reach a resolution. Fortunately, the fact that the Qs would be presenting a running triangle eliminates a bearish resolution of the triangle. My view at the moment is that we must wait and see if the July/August highs are touched to rule out the 4th wave count. If that happens, unless we see a powerful move that undercuts the August low before December 21, then the probability that the current market action is a very large triangle rises greatly.

So what should we do now? I will be looking to exit short positions at a 61.8% retracement of the July to November rally unless the August low is broken before mid-December. After that I will be looking to be only long until the top of wave [C] while using waves (C) and (E) of the unfolding triangle to build long posiitions.

Triangles can be frustrating affairs, but once recognized confidence in the outcome increases greatly. My hats off to the elliott wave bloggers that are keeping up with the intraday counts. Some are really good, and I plan to add them to my blogroll soon. However, tracking the intraday moves can lead to a myopic view of potential outcomes. Let's see if clarity develops over the next 3 to 4 weeks with respect to a possible triangle count.

Dollar Is Key

The Dollar broke out above its intermediate term downtrend line on 11/16 and is now consolidating its gains since bottoming on 11/4. The impulsive move since 11/4 exceeded the previous swing high, and coupled with the trendline breakout, there is little reason to believe that the Dollar rally will not continue.

For the time being the inverse correlation between the Dollar and stocks and commodities remains in force. Thus, we should expect that a resumption in the Dollar uptrend will result in additional downside for stocks and commodities. If the next move up in the Dollar is a 3rd of a 3rd wave as some have proposed, then the coming decline could be severe. This fits with the expectation that we are now in wave (C) of a large flat correction in stocks.

Of course, if the trendline breakout in the Dollar was just a fake-out, then this interpretation is not valid.

More Rally Next Week

There are many who would like to believe that yesterday's gain is the beginning of another leg up in the rally that began August 27 (or July 1), and I suppose anything is possible in this crazy market, but after stalling at the April high and median line resistance, the most likely next move is a correction to the lower (magenta) channel line which is now around the August high.

I suspect that we will see a little pullback early next week, more rally around the holiday and possibly into the end of November. Then a break of the September to November channel line will usher in a retest of the April/November lows. Once that level around 1170 to 1173 fails then a quick decline to the August high should follow.


If the correction doesn't continue as outlined above, then we could very see another huge runup into the end of the year. I think this is doubtful now, but this crazy market could do about anything.

"GM IPO Soars"

Oh brother!!! GM prices at 33 and closes its first day at 34.19 after reaching an intraday high of 35.99 and the headlines read "GM Soars". I think we will see whether or not it soars over the next few weeks or not, but today's action was not soaring. And why would the rest of the market go up because people are buying GM? I really wonder who they let write the stories. Is this an orchestrated pump and dump?

We got the bounce - all in one day it seems. The Qs closed below the middle of the range, which showed weakness on an otherwise solid up day. A move below today's low could put an end to this mini-rally. Today's advance did not qualify as a follow-through day as it occured on day 2 of a rally attempt. While some are looking for this little rally to continue for a few days, I think it is just as likely that it is all given back tomorrow followed by downside acceleration. We will see. A move above today's high tomorrow would likely lead to additional upside before the correction resumes.

Oversold Bounce

IBD has called the "Market In Correction" as of yesterday's edition. Futures are up substantially this morning but it will take alot more that a one day rally to confirm a new uptrend.

A sharp bounce is not unexpected as the NYSE McClellan Oscillator had reached an oversold condition below -80. Reaching this level in such a short time from the top - only 7 days - coupled with a broken trendline is more consistent with initiation of a new downtrend rather than a brief correction. Other indicators such as the 14 day RSI are far from oversold, however, we must be open minded as the 4th wave scenario is still on the table until the July/August highs are broken.

We would like to see the SP500 remain below 1207 for the downtrend to remain intact.



For those following the IBD strategy, today's bounce would be a good opportunity to enter a short position or one could wait for confirmation with a break of Tuesday's low.

IWM Breaks Trendline

In my opinion, we are probably at least a month away from a correction low. The IWM has already fallen over 5% from its high and support at the July high is only 6% away. The force of the trendline breakdown today was significant and greater downside action should be expected, so unless the market finds a footing soon, the 4th wave scenario that many are proposing could be invalidated within a week.

Today's range and close were very similar to May 4th, right before the "Flash Crash" episode. Another such event, or least a dramatic selloff, could be setting up. The only difference being that the market has become more oversold than it was on May 4th and a bounce may be coming first.



A valid MACD negative divergence sell signal was given on the IWM and the IWM can be shorted. Entry on a bounce would be advisable. Today's distribution day should push IBD to call the Market In Correction. If so, that would be another reason to look for a short entry. That said, we have to respect the support at the July high (August high in other indexes), so a staged entry would also be advisable, i.e. 1/4, 1/3 or 1/2 positions depending on your account size.

NYMO Confirms Correction Underway

The NYMO fell below its lower rising trendline yesterday confirming that a significant correction is underway. While the consensus is now that a 4th wave of minor degree is in progress, we are already seeing signs that this correction may be deeper than would be permitted by a 4th wave as the stock indexes are poised to put in a major monthly reversal bar with a move below the November 1 low.

The expected period for a low based on the 10 and 20 month cycles is December 15 to January 15, but more likely around January 6. There is a lot of time left for this correction to unfold. What we will be looking for is a deep low in the NYMO, which is the correction momentum low, followed by a higher low near the expected cycle low period in conjunction with a completed 3 wave or 5 wave pattern. A 3 wave pattern would be associated with a 2nd or 4th wave. A 5 wave pattern would complete a flat correction from the April high. The latter will unfold with greater force and throw the bulls completely on their heels, but will provide the best buying opportunity since the March 2009 low.

Another distribution day today should push IBD to call the "Market In Correction" from the current stance of "Uptrend Under Pressure".

SP500 Headed To Support Or Lower

A Review Of The MACD

I personally think that the MACD - moving average convergence divergence - indicator developed by Gerald Appel with the settings of 12,26,9 for the two moving averages and the signal line, respectively, is one of the most powerful and yet underappreciated tools that we can use to trade in the financial markets. I was asked to update the Strategy Tracker for the MACD, and I am assuming that there is an expectation that the results of the latest MACD signal in early September would be added to the results. I want to explain why it isn't.

In order to be used effectively, you cannot take every buy and sell signal that results from crosses of the signal lines. If you do, you will find that you will have a lot of losing trades and whipsaws. In order to minimize churning and whipsaws, filters must be added to eliminate some of these trades.

The filters that I am using for the MACD is that we will only take long trades with a flat to rising 50dema or from a rising 200dema with price at or above the 200dema and when there is a positive divergence. Reverse for shorts. We exit long trades on either the second sell signal or if the MACD falls below the zero line. Reverse for shorts.

I have labelled the relevant signals for the Qs above. The interpretations have been a little tricky, and I have used some discrection, but I hope that my explanations will convey how I have applied the rules. At A there was a negative divergence short signal with no ambiguity. At 1, on June 2, there was a valid buy signal as price bounced off of the rising 200dema, but I chose to ignore that signal as price had risen to within 2% of the falling 50dema when the signal occured. At B there was another buy signal off the rising 200dema with a little more room below the 50dema accompanied by a rising bottoms pattern in the MACD. This was also the second buy signal since the April short signal was initiated, and the short position was reversed to a long position. At this point we are long, and we ignore the first sell signal on June 28. As long as the MACD itself does not fall below its low of May 26, we will stay in the position until the second sell signal occurs even if price falls below the May low. At C we have the second sell signal and exit the long position. There is no signal to go short at C since the 50dema is rising and there is no negative divergence.

The signal at 1 was ignored by discretion. Signals 2 and 3 were not actionable according to the rules as set forth. It is possible that the signal at 3 could be considered an actionable long signal, but since the price low was well below the 200dema, the signal was ignored. In most cases, one would have expected a pullback to generate a second actionable buy signal. That did not happen here and a major rally was missed. However, this is not a reason to change the rules. Perhaps better discernment would have led you to conclude that was a valid long signal, and that would be ok, but having not taken it, I will not change the results retroactively. Even without the lastest rally, this strategy as described is up 16% for the year, which is excellent.

Currently, the MACD gave its second sell signal since the rally began, which is a strong indication that a significant pullback or correction is underway. A buy signal with a rising 50dema would be taken should it occur. This goes against my expectation that the Qs will fall below the August high, but that is not something that would fall under the umbrella of discretion.

One more advanced MACD behavior that I would take on discretion (but not include in the Strategy Tracker since it is not a part of the rules) is a hook sell signal. If the market rallies and the MACD attempts to cross above its signal line and fails by turning down without crossing, this would be a valid short signal.

Which Is More Likely?

Of late there seems to be a consensus that wave [C] up is underway, but is it more likely that wave [C] up is underway or that wave (X) of [B] has topped? The XLF did not get anywhere near the April high and the recent November high came after a very clear triangle that means it was likely the final impulse in wave Y of (X). Coming under the November 1 low will confirm that the financials are headed down in wave (Y) of [B] which projects to a low in mid-January.

It seems to me that we should expect the broader markets to be following the same theme. If that's true then the recent November top in the Wilshire should be wave (X), a double top. We will be looking for a retest of the July low. This will be wave (Y) down, equivalent to a C or 3rd wave in force, which may be surprisingly sharp. If we see a violent acceleration in the decline, it could shorten the end point for wave (Y) to mid to late December.

Given the moderated increase in bullishness associated with wave (X) up, the bearishness should become quite severe as the July low is approached creating the greatest buying opportunity since March 2009. Perhaps this is a hopeful interpretation, but while my timing of the count has been off since July, the form fits what I have expected from the beginning. We will just have to give it a little more time to see if it proves to be correct. Either way, an excellent buying opportunity should be here in just a few short weeks.

The Qs may diverge from the Wilshire and SP500 by correcting in a wave 2 of (3) of [C], but the overall outcome will be the same.

QQQQ MACD Sell Signal

Top In Progress

It may take some time for downside acceleration to occur. A break of the November 1 lows should create some selling pressure. While that is below the April highs for most indexes, the Qs will still have support at the April high and then the 50ema. Nevertheless, I strongly suspect that the long awaited correction is now underway with a probable low sometime in mid-December to mid-January. We can evaluate the pattern once we have reached the time zone for the low.

My cycle work is showing the next 10 month cycle low is due January 6. I had charted a probable cycle pattern for this year in the spring, but I had forgotten about it after the flash crash excitement. I wish I hadn't because that chart nailed the late August low and called for a mid-October high. It is now calling for a low in early January. Sometimes it is difficult to keep up with so many charts.

Regardless of the final wave count at the coming low, it should represent an excellent buying opportunity. It should actually be better than the August low, in my opinion, as we will either be entering a powerful 3rd wave in wave (C) up or beginning wave (C) up.

I may not be able to post again until the weekend. We have been fortunate enough to sell (in fact they were presales) the last two townhomes in our development, and I working to finish them by Friday. We obtained the Certificates Of Occupancy today, but there is still alot of cleanup and punch list work to do. I can't tell you how relieved I am. After all of the craziness that has occured in the last 3 years, I am grateful that we were able to find a way to finish the project.

Huge Reversal In The Precious Metals

I think the SLV put in a major top today which is probably wave B of an expanded flat correction. SLV opened above the upper 3 SD 20 day Bollinger band and reversed powerfully to close below the upper 2 SD 20 day Bollinger band. Wave B reached the maximum level seen for an expanded flat at 1.65 x wave A, just a little more than a fibonacci 1.618. Wave C down should terminate below the October 2008 low.

The Euro has probably topped as of 11/4 with a confirmed MACD hook sell signal yesterday. Stocks should follow the lead of the Euro and precious metals. The only question is what degree the pullback/correction will be: wave 4, wave ii of 3, or wave C. There's no way to know but the first real support will be the 50dema.

Put/Call Ratio Finally Moves

The equity only put/call ratio has finally moved out of its neutral range into an area that is often associated with tops. The inverted PPO 50,5,1 does a good job of indicating when the CPCE is approaching a level of excessive optimism as measure by the red line in the lower pane.

As far I can tell, the PPO of the CPCE as shown above gave the best measurement of market sentiment during this latest rally. While many sentiment polls showed either strong or excessive optimism, the PPO of the CPCE stayed in the neutral zone. This was a great clue that the rally had the potential to run. We will watch this one more closely in the future.

SP500 In Resistance Zone

While the SP500 has managed to breakout above the April high, the volume on the breakout was quite subdued - only barely above the volume at the April high. It is now just above median line resistance from the April to July correction and the August correction. While more upside may be seen near term, 1270 will have to be hurdled before the market can really run without interference. The 1200 to 1257 zone is probably an area that many will see as a selling opportunity, but until there is a break below 1220, the rally will remain intact.

Searching For Clarity

From early in 2009 through 2010 I have believed that the rally in stocks that began in March 2009 would be greater than most were expecting, bulls and bears alike. My personal view is that the market is wave x of a large combination correction. X waves are 3 wave affairs that separate two corrective patterns in a combination to form a larger corrective pattern.

The primary reason for my thinking is that secular bear markets during the last century have consistently lasted 16 to 18 years, and since the 1980s and 1990s secular bull market was the longest of the century, it is reasonable to assume that the following secular bear market would be longer than the previous bear markets - possibly longer than 20 years if Japan is any indication. This means that the low in 2009 was just the end of the first corrective pattern.



However, X waves are corrective patterns in and of themselves which can make following them difficult even if you are confident of the overall outcome. The rally from March 2009 has certainly born this out as wave (A), for example, doesn't really have the true character of an impulse wave, though it has definite similarities in appearance.


We have been trying to determine over the course of the summer and fall whether or not the correction within wave x that began April 26 was over or not, and we still cannot be sure of that, but at least we can be sure that wave x has much further to go since all of the major indexes have exceeded the April highs. The only question left is whether we will retest the July low to complete wave (B) first or whether wave (C) up is underway, and if wave (C) up is underway, what are the likely targets?


There are four probable targets for the Qs: 1) wave (C) = 61.8% x wave (A), 2) wave (C) = wave (A), 3) wave (C) = 161.8% x wave (A), and 4) wave x = 61.8% x wave w. Assuming that wave (C) is already underway, these would give targets of 56.93, 66.79, 82.25 and 80.22 respectively. I think that the higher targets are definitely possible, and with the Qs closing today at 53.67 that represents a substantial return from the current or lower levels.


If wave (C) is already underway, then the current rally is most likely wave 1 of (C) or [i] of 3 of (C). If this is wave B of (B), then a substantial correction should be imminent with an expected low in January that retests the July low. No matter where we are in the wave structure, this is not the time to be buying stocks as a correction is long overdue. Better buying opportunities lie ahead at the low of wave 2 of (C), wave [ii] of 3 of (C), or wave C of (B). Regardless of how well or poorly you have traded this year, you can look forward to the continuation of wave (C) up, and the eventual decline to follow.

There will always be an opportunity. The main character trait needed to take advantage of the opportunities is patience.

Dollar Rally Still In The Cards

The Dollar peaked on June 7 and has been in a steady decline every since with only one short rally. Has the stock market rally been nothing but a revaluation based on the Dollar? If so, a rally in the Dollar, particularly a 3rd of a 3rd wave rally, could be all that is needed to end the rally in stocks. The Dollar is at a potential turning point with multiple levels of support.

Small Degree Triangle On 5 Min Charts

A symmetrical triangle has formed on the 5 minute charts of the stock indexes, which indicates a probable continuation of the rally into the close today. This does not bode well for tomorrow as a close at the high on Thursday usually means a selloff on Friday. In my opinion, this is it for the bears. Either the market tops here by tomorrow morning or it's over for the intermedate term bearish case. This is the uncle point I talked about as being analogous to silver. We are at the uncle point. It really doesn't matter what your elliott wave count is, higher prices just will not fit a probable bearish interpretation.

For an expanded flat correction, 1.382 x wave A (April high to July low) = 12.27 + 41.77 (July low) = 54.04 = maximum probable price for wave B. While it has been seen in some expanded flats that wave B = 1.618 x wave A, it is rare for the stock indexes. If we count the Dow's rise to October 2007 as an expanded flat, wave b was 1.54 x wave a, but this is a rare case. Let's see what happens this afternoon and tomorrow morning. I am looking for a reversal, but after that I will be squarely in the bullish camp.

Qs At Upper Channel Resistance

The upper 50 day by 5.0 Keltner channel stands at 53.41 as of yesteday. The Qs are bid at 53.49 this morning. The next resistance level based on the January Range is 54.66. I cannot find a single instance since 2000 when a top was not seen within 7 trading days after the upper 5.0 Keltner channel was touched. The rally is now 47 trading days long. The April rally topped at 54 trading days while the decline lasted 47 trading days.


The impending top need not be THE top for this rally. It could be a 3rd wave top , but consider the same chart from the 2007 top. We saw 53 trading days and 10.68 points followed by a dramatic 8 day selloff.



It could be different this time, but what is the likelihood that it will be? The risk in this market is high in my opinion.

Significant Resistance Dead Ahead

I don't know how the market will react to the election results tomorrow or to the Fed, but I do know that the Qs have reached a very significant resistance zone at the 1.618 extension of the January Range above the January high. Just to point out how important this level is, the low in 2008 was just a little below the 1.618 extension of the 2008 JR below the 2008 January low, a very dramatic year to say the least. In 2009, the Qs moved 4.0 times the 2009 JR, but that was an exceptional year as was 1999. Of course the market can extend higher, but a number of factors seem to be lining up at this resistance level. We'll see very soon whether it is respected or not.

Another New High For The Qs Today

The pre-market action this morning has confirmed that yesterday's decline was a 3 wave affair and likely wave (iv) of [5] of C of (C) up. The upper limit for wave (v) to invalidate the ending diagonal triangle is now 54.31. I don't think 54.31 will be seen, but a new high is definitely probable. Even so, it is a last gasp as the market runs up into the election and Fed news - not exactly a recipe for upside. Absolute Breadth fell to 18.22 yesterday, almost a 3+ year low. This indicates that the rally has become extremely narrow. NYSE new highs minus new lows stood at 181 yesterday, well below the October peak around 400 and the April peak at almost 650. This is typical action for B waves. We will see by January if that proves to be the case.

QQQQ Topping Signals Accumulate

A retest of the April high could be seen this week. How it reacts at that level will be revealing.