Sunday, January 31, 2010

The January Range

With January in the bag we can calculate the January range and project support and resistance levels for 2010. But first let's look back at 2009 and see how well the 2009 January range projected levels worked out.

For January 2009 the range (high - low) for the Qs was 31.63 - 27.96 = 3.67 points.

March 9 low at 25.63: 27.96 - 25.63 = 2.33 pts, 2.33/3.67 = 0.635 X JR ~ 0.618 X JR

May 6 high at 35.34: 35.34 - 31.63 = 3.71 pts, 3.71/3.67 = 1.01 X JR

June 11 high at 37.23: 37.23 - 31.63 = 5.60 pts, 5.60/3.67 = 1.53 X JR

August 28 high at 41.08: 43.82 - 31.63 = 9.45 pts, 9.45/3.67 = 2.57 X JR ~ 2.618 X JR

December 4 high at 44.73: 44.73 - 31.63 = 13.1 pts, 13.1/3.67 = 3.57 X JR ~ 3.618 X JR

January 11, 2010 high @ 46.64: 46.64 - 31.63 = 15.01 pts, 15.01/3.67 = 4.09 X JR ~ 4 X JR

As you can see most of the major swing highs and the most recent high hit on round number or fibonacci multiples of the 2009 January range.

For 2010, the JR = 46.64 - 42.63 = 4.01 points.

We should expect significant support at the following levels:

0.618 = 2.48 ==> 40.15
1.000 = 4.01 ==> 38.62
1.618 = 6.49 ==> 36.14
2.000 = 8.02 ==> 34.61
2.618 = 10.50 ==> 32.13

The top 4 levels are also near fibonacci retracement support of the rally from the March 09 low, so these are the primary levels we will be looking at for support during this correction.

We should expect significant resistance at the following levels:

0.618 = 2.48 ==> 49.12
1.000 = 4.01 ==> 50.65
1.618 = 6.49 ==> 53.13
2.000 = 8.02 ==> 54.66
2.618 = 10.50 ==> 57.14
4.618 = 18.52 ==> 65.16

Based on the above calculations, I expect the first significant support for the correction will be in the range of 40.15 to 41.05.

Saturday, January 30, 2010

More Signs For A Bottom

The CPCE (Equity Only Put/Call Ratio) is a very good tool for measuring sentiment and spotting tops and bottoms. One notable occurrence in the above chart of the CPCE is the breakouts in both the PPO of the CPCE and the CPCE itself, which are indications that a full scale intermediate term correction is now underway. We can see that the CPCE and its 10MA as well as the PPO have alot of room to reach the levels seen at prior intermediate and primary term lows. This means that at a minimum we should expect the current correction to last another 2 to 4 weeks if not longer. That doesn't mean that the correction must be down the entire time. It can make a low, retest the high and make another low, essentially moving sideways and achieve the criteria for an important low.

My cycle work has lately not been in alignment with the market action, but sometimes you just have to step back and see the bigger picture. I was looking for a 40 to 42 day low in January that turned out to be a high. I looked at the Qs again and noticed that from 3/9/09 to 7/8/09, low to low, was 84 trading days, and from 7/9/09 t0 11/2/09 was 82 trading days. Counting from 11/2/09, we have exactly 60 trading days. If we project a low at 82 to 84 trading days from 11/2/09, this leaves 22 to 24 trading days from yesterday, which is March 3 to March 5, 2010, almost exactly one year from the 2009 bear market low. Sometimes the annual cycle overpowers the 10 month cycle, and that may be the case this time around. In any case, I believe that we will see a low in this correction sometime in late February to early March. The coming low may be just part of an even larger correction, which remains to be seen. Nevertheless, traders should prepare for another month of bearish market action.

Friday, January 29, 2010

200DEMAs In Sight

The selling has been vicious. I don't think I can remember a time when the market sold off this hard below the 50dema without hitting the 200dema. We may see a brief bounce Monday and Tuesday, but the poor performance of AMZN and AAPL today does not lead me to think a significant rally will be seen before the indexes hit their 200demas, and when they do it would be prudent to exit short-term short positions.

The above chart shows the traditional McClellan Oscillator (not ratio adjusted). We can see that the Oscillator bottomed Feb/Mar 2009 and Oct 2009 below the -300 level, but the market did not bottom until several days after the Oscillator bottom. In each case, we saw a positive divergence in the Oscillator with higher hook lows. Although it is not required, I expect we will see the same thing this time, which is another reason not to expect the low of wave (A) down in the indexes just yet.

I am short AMZN, AAPL, PCLN, RIMM and long the SDD. So far, so good. I am still short GME on a medium term basis and expect it to move much lower even with share buybacks. It is way too late to add new short positions. It's time to let existing shorts run and wait for a rally for new opportunities.

Thursday, January 28, 2010

Still Looks Lower

Today's afternoon rally appears to be a 3 wave countertrend move. If so, lower prices will likely be seen tomorrow. Markets did manage to close above the worst levels, but not by much. Although a rally could materialize at any time due to the extreme oversold condition of the markets. Any rally should be repelled by the 50dema should it make that far. One interesting phenomenon is the annual selloff in technology in February. This has been so dependable over the last 10 years that it would be surprising not to see it again this year.

AMZN beat on all counts, but is only up $3 afterhours after being up as much as $7 to $8. If will be interesting to see if it can hold up tomorrow. NFLX was today's big winner and it looks like a buy after this market correction is over.

Markets appear weaker than even the drop in the indexes would indicate. While the McClellan Oscillator is very oversold, other measures of breadth remain well above bottoming levels which means there's alot more of this correction ahead.


The action today is particularly damaging to the near term rally case. The worst outcome would be if markets close at the low of the day. During market corrections and bear markets, when markets close at the low of the day on Thursdays, the following Friday also tends to selloff and sometimes severely. On the other hand, the next two days are seasonally bullish, but I am not sure that means much right now.

If the Qs break below 43, the SP500 below 1080 and the Dow below 10,000, I think the selling will intensify until the 200demas are hit, currently around 41, 1045, and 9750 respectively. If the above levels hold today and tomorrow, then we should see a relief rally over the next few days, which will be an ideal opportunity to increase short exposure.

A Second Look

I decided to take a second look at the major indexes this morning, and I thought it prudent to point out that while it looks like the markets want to rally a bit, any rally may be very short lived. The pattern on the 30 min charts looks very much like a bearish flat correction, which is 3-3-5. If so, we are now in wave c up of the flat correction and the rally could be over in just a few hours. The thing about this flat correction is that it is hard to know whether it is a 4th wave, an x wave, or a smaller degree second wave. Most elliott wave sites are calling it a 4th wave and that is the most probable count, but if it is either of the other two counts, then the next wave of selling could be severe.

I haven't discussed any of the systems in the System Tracker lately so it's probably a good time to review the current status. The following systems are long but are on the verge of sell signals: Modified Donchian and Moving Average. The following systems are neutral: Cabot Tides, Weekly Trend - Weekly Close, Weekly Trend - Daily Close, MACD, and the 3 Week Rule. The IBD system is short. The Breadth Momentum system is long and not likely to change in the next two weeks.

Clearly, it is not prudent to be adding significant long positions in this environment. It is also not the time to be heavily short either, but increasing short exposure as the correction unfolds is the way to go. I am expecting this correction to last to at least the end of February with an intervening B wave rally. The rally could be sharp and do major damage to short positions, which is why going short in steps is the most prudent thing to do.

Wednesday, January 27, 2010

Retracement Rally Probably Underway

The trend is down but the market looks like it is ready to rally for a couple of days. For the Qs the upside targets are 45.34 to 45.64. The critical level of 43.76 has not yet been broken and a sustained move above 45.64 would put a dent in the severity of the correction, although I don't expect that to happen at this point. Even so, caution is advised on the short side until the rally runs its course. If today's lows are broken on volume, then expect some severe selling down to the 200demas in short order. Again, I don't expect that to happen, but we must be prepared for all outcomes. I expect some good shorting opportunities to develop by the middle of next week.

Tuesday, January 26, 2010

Is The Dow In Trouble?

Today's action finished up the sideways consolidation after a brief early morning retest of yesterday's low. It looks like more selling tomorrow, but a sharp countertrend rally will be coming soon as markets are extremely oversold in the short term.

Adam Hewison of Marketclub shares his thoughts on where the Dow is headed. Check it out: Is The Dow In Trouble?

Even though we could see a couple more days of vicious selling, I am hesitant to add any more on the short side until we get a relief rally. I am short IBD's market correction call using the SDD and will remain short the SDD until IBD calls a confirmed rally. I will wait for the Qs to complete a clear 5 down 3 up sequence on the daily chart to get short. I also think AAPL looks like it will hit its 200dema around 175. GRMN looks like it could roll back over in wave C of a large ABC correction.

Oil could be in trouble tomorrow if the inventory report does not show a drawdown in crude supplies, but I will remain long pending a 3 month sell signal. Gold and silver are knocking on the door of 3 month sell signals. I am trading them on shorter time frames with different methods. Once the correction is over I will detail the trades for you.

Monday, January 25, 2010

Pause Day

The correction paused today, and given the tepid reaction to AAPL's earnings report afterhours, I suspect we will see more decline tomorrow. The market is very oversold. The McClellan Oscillator hit -271 Friday and the Put/Call ratio hit 1.0 as well. These levels often lead to a rally, but the pattern in the price suggests at least 1 if not 2 more declines to complete the first leg down of this correction. Another consideration is the typical end of the month/first of the month rally which is due to begin sometime this week. The rally will setup new opportunities to get short. Traders with short-term short positions may want to consider looking for an exit over the next 2 to 3 days, and then look for a new entry point. Medium-term short positions can be held for bigger gains.

Sunday, January 24, 2010

Where Is This Correction Headed?

I realize that there are a number of analysts that disagree with the above wave count that shows the advance from the March 9 low as 5 waves, but until proven otherwise I believe that it is the best fit. The question is: how deep will the wave [B] correction be? There are several levels of support for the correction. The first cluster of support is in the 40 to 41 zone. We have the 50% RT of the bear market decline at 40.06, the 200dsma at 39.84, the 200dema at 40.94, the August high at 41.08, and 23.6% RT of the rally at 41.68. There is also support at the lower channel line. The second cluster of support is in the 36 to 38 zone. We have the 38.2% RT of the bear market decline at 36.52, the June high at 37.23, and the 38.6% RT of the rally at 38.61. There is also major support at the downtrendline of the bear market decline (not shown) which was broken to the upside in September 2009. This support is currently around 37.50 and is the most likely terminus for this correction. I discussed this breakout in my post The Breakout No One Is Talking About.

The likely path of an (A)(B)(C) correction is down to 41, up to 44.75, and then down to 37. A test of the broken red trendline is expected next week and into February 1-2 time frame. This may be a good place to get short for a move to the first level of support. Currently the trendline is around 45.00.

As frustrating as December and January have been, the one good thing that came out of it is the upside breakout from the wave (4) triangle which led to wave (5). 5 waves up means that there will be another 5 waves up once this correction is over, and this fits nicely into the view that we are in an x wave that will top in the summer or fall of this year as I discussed in my Year Ahead posts during the first week of January.

Friday, January 22, 2010

Failure At Support - Correction Underway!

The Qs dropped through support like a knife through butter today. Of particular note is the way the Qs reversed out of a long squeeze into a short squeeze which triggered today. While the critical level of 43.76 was not hit, the low was 44.04, which is so close as to be irrelevant. It will be hit soon enough.

The combination flat correction I postulated was invalidated today. One thing that led to my error was that the Qs matched the earlier January high of 46.64 on Tuesday, but the NDX did not match its high. This discrepancy, while small, means that the January 11 high was the end of wave (5) of [A], and today's action is wave 3 of (A) or [iii] of 1 of (A) of a correction that is expected to last into late February or March. I suspect the meat of the first leg of the decline is nearly over, but there is no way to know for sure. I am expecting waves 4 and 5 to complete early next week with a sharp countertrend rally to follow. The first target for the Qs is the 200dema currently at 40.94. The second target is the June high of 37.23.

The primary reason that I expect a sharp countertrend rally soon is that the McClellan Oscillator closed at -271 which puts it in the severely oversold category. The rally would be a good chance to enter new short positions.

Hopefully, you had a few short positions going into today. I am currently short AMZN, RIMM and SLV. I will be looking to add new short positions. I suggested earlier this week that the semiconductor stocks looked like good candidates. I didn't expect that they would get annihilated today, but that's what it looks like. There is surely more downside for the semis.

The question that traders must ask is whether to exit existing long positions. I have addressed this question before, and I think that it really doesn't matter which approach you use, but you must be consistent. Either exit all short term long positions on a market sell signal or hold them and exit using your plan for each trade. Personally, I have exited positions so many times just to see them run in my direction afterward that I prefer to wait for a clear sell signal rather than make a discretionary exit. Also, with a sharp rally possibly on the horizion, I would rather give them a chance.

Using the downside targets above, we can calculate the ultimate rally target using a measured move: 46.64-25.63 = 21.01 pts, 37.23+21.01 = 58.24 is the first target and 40.94+21.01 = 61.95 is the second target giving theoretical gains of 56% and 51%, respectively.

I know that the wave 3 crowd will be out in force over the next few weeks, but there is a significant problem with that thesis: the percentage of stocks making new highs has been high while the percentage of stocks making new lows has been almost non-existent. I calculate the % New Highs on 1/11/10 at 14.6% with only 2 New Lows. According to Lowry Research the average at market tops for the last century is 6% and new lows at tops were expanding. I continue to believe that the wave 3 interpretation is invalid, but we will know in a few weeks. If that view is correct there will time to change our stance.

Lastly, I am sure IBD will call the Market In Correction in Monday's edition. I will be putting on a position using that call but I will wait for a bounce first. Also, it should go without saying that this is not a time to be looking for long positions.

Thursday, January 21, 2010

SP500 At Support, But Will It Hold?

Have The Wheels Come Off This Rally?

While the pattern in the Qs is still holding up, a number of high profile leading stocks fell sharply today. In addition, a lot of the bank stocks fell hard. JPM was down almost 3 points, -6.6% today along with GS. This is not a good sign. On the other hand the McClellan Oscillator fell to -179.10 which is rapidly approaching an oversold condition. Readings under -200 preceded the rallies off the October and November lows.

I think the action yesterday and today is a wake-up call for the bulls and gives the bears a taste of what the impending correction will look like once it gets going in earnest. While I have yet to conclude that the top (of A) is in, the failure of leading stocks will set up a negative divergence in breadth indicators on the next push to a top. If the Qs fail at the December highs, then I will be looking for a 5 wave decline or a fractal sell pivot for a short entry.

So far I have only been stopped out of one short term long position. I would not be surprised to see more selling tomorrow to cap out the week. If the bulls are going to regain control, they must do so early next week.

Line In The Sand

I've updated the unfolding progress of the combination correction. It may be that wave c of [y] has completed with this morning's low, or nearly so, but typical downside targets for broadening formations are about 1/2 the width of the pattern. This puts the downside target for c at 44.82, which is still above the support level of 44.73. Another possibility is that c could turn into a double zigzag which could move the bottom of the correction into next week.

At the moment I still don't see cause to believe that the top of the rally is in.

Wednesday, January 20, 2010

Update On Flat Correction

I've updated the chart from earlier today. I believe that we are currently in wave b of [y] of 2 of (5). I suspect that we will see some continuation of this afternoon's rally tomorrow, and then a retest of today's low on Friday. Given the impulsiveness of today's decline, many traders will probably view a break of today's low as a sell/sell short signal. However, I think this will be one more bear trap to add to all the others since this rally began, and it will be the fuel to drive wave (5) to its completion. There also seems to be a possible positive divergence developing in the MACD on the hourly chart.

Surprisingly I was not stopped out of any short term long positions today even though a few of them have fairly tight stops. I view this as supportive of the above interpretation, but we will know the answer very soon. Time has run out on any more wiggles other than what I've shown.

Gold and silver sold off hard today and may be headed to new lows for the correction. The interesting thing about the current correction in the metals is that it doesn't seem to have the impulsiveness that one might expect from wave C of a flat correction that has been proposed by some analysts. It has the look and feel of a simple ABC correction. If so, new highs will be seen later this spring.

I continue to stay long oil even though it is having trouble breaking out in earnest. Barring a break of the December low, I think oil is coiling up for a substantial runup this spring and summer.

Another Shakeout?

Given the selling this morning, I thought I would offer one last possibility with bullish implications before you all get loaded for bear. As frustrating as the month of January has been, the pattern does not yet look bearish. Consider, that after making a new rally high the first week of January, the Qs completed what appears to be a text book flat correction, which is a 3-3-5 wave count. Since the 45.53 bottom, the Qs have moved up in 3 waves, not 5 to match the January high of 46.64. We know this because the intervening low of 45.65 has been violated this morning. Putting these two movements together we have the first two parts of a combination flat correction, waves [w] and [x]. It appears that wave [y] is now underway. While we would expect support to hold at 44.73, the critical level for this interpretation is much farther below at 43.76.

If this count is correct, we should expect a low sometime today followed by another small rally and another low, or a triangle to develop that remains above today's low. On the other hand, if we see a clear 5 wave move down that closes below 44.73, then we would conclude that the top of wave A is in.

You may recall that I indicated that a low today on January 20 might actually be bullish as January 20 has been a consistent turning point in January during the last 10 years. The fact that we are moving down today while possibly in the last stages of a correction of 1 of (5) could be bullish for the rest of January.

I guess the take-away is that it is still too early to conclude that the top of A is in and some restraint on the short side is advised until the picture gets more clear.

Tuesday, January 19, 2010

Expecting Higher Prices In Wave (5)

We are so close to a top in terms of the wave count it may be difficult to pinpoint it, but I believe that today's action was wave i of 3 of (5). All that is required is that wave 3 not be the shortest wave and we should not necessarily expect that wave iii of 3 will be an extended wave; however, when the Qs breakout above the January high, the target should be in the range of 47.50 to 48.00 as I have mentioned several times. Today's action only confirms the prior commentary. A break of 45.53 would significantly change the outlook.

Impulsive Advance

The action this morning in the Dow, SP500 and Nasdaq 100 has been impulsive. Markets appear to be in a small degree 5th wave, so a small pullback may be in order before a breakout to new highs, but new highs are likely as expected. Once wave (5) is complete, the real correction should begin.

Saturday, January 16, 2010

I have labelled the above hourly chart of the Qs to show the levels discussed in the prior post. Level A is weak support at 45.53, which is the January low, level B is strong support at the December high of 44.73, and level C is critical support at the wave E of (4) low of 43.76. There is also trendine support from the November 2 low which held the Qs on Friday.

I have noted the negative MACD divergence on the hourly chart because, the Qs did not breakdown out of the sell signal at the end of December, but, in fact, went sideways. This suggests that the impact of the negative divergence has been worked off by the sideways pattern since the sell signal.

The broadening formation is still in force and could go either way, but the main take away is that as long as support at the December high holds, we would be hard pressed to conclude that a correction was underway. A breach of the January low would tell us to stand aside on new longs, but a move below 43.76 or a clear 5 wave impulse down from the high would tell us to lean to the short side.

A top is coming, so there is nothing wrong with slowly building some short positions in individual stocks that are breaking down. The semis look like a good place to start after the recent big runup, and the financials are also promising after lagging for so long. Just look for clear setups and don't short something just because it looks overbought.

Friday, January 15, 2010

Up In The Air

Reading blogs and financial new sites this week, I see that the number of opinions on the markets next direction have multiplied over the last week. After today's action many are convinced that a correction has begun, but interestingly enough, the pattern of today's decline, while sharp, did not look particularly impulsive. In fact, it looks to be a 3 wave movement. Frankly, I have just about lost patience with this top that never seems to materialize while the markets are essentially marking time.

Since the Qs did not come under the 45.53 level, it appears that they could still advance from this level next week. If the 45.53 level is broken, the 50dema of the Qs is now at 44.71, which is right at the December high of 44.73. This should be the first level of defense should the decline continue. If they get far, we should be able to use a bounce off the 50dema to go short assuming we see a clear impulsive pattern from the high, but that is a big if at the moment. We can count a larger 3 wave movement with a measured move target of 45.42 from the January high from which the rally could continue as well. This is why I am so reluctant to get short right here.

Back in December, things seemed so clear. The Qs were finishing up wave (5) and I was short. But then the breakout at the end of December terminated that plan.

Now, what we know is the pattern 11/16 to 12/17 was a triangle, and triangles always precede the last motive sequence of a pattern. If the 1/11 top completed this motive wave, then the high of 1/11 must not be exceeded. If it is, then the higher targets are in play as wave (5) moves higher in wave 3, 4, and 5 of (5). While coming under 45.53 is a clue that the Qs may have topped, we really can't be sure until they come under 43.76, the wave E low of wave (4), or we see a clear impulsive move off the of the top. To date, we haven't seen either of these things, and so it just doesn't make sense to get short again. It also doesn't make sense to jump ship on long positions that are working either.

In my opinion, the best thing to do right now is to sit tight. Hold onto to positions that are working. Do not add new longs, unless we see another breakout, and wait to go short when we have a clear setup.

I'm not sure if this post was clear, or clear as mud. I've been working on business tax prep all day, and my brain is in a fog. I'll to put it on a chart this weekend.

Selling On The News

INTC and JPM have not been able to propel the market higher. INTC's earnings were well above analysts' expectations, but below the whisper number. JPM had good bottom line growth, but loan loss reserves are a concern. The Dow has broken down below its short term trendline from the 12/31/09 low, but as long as it remains above support at 10516.70, we cannot conclude with any certainty that the top is in. Of course, the deeper this current pullback, the lower expected rally targets will be should the rally continue next week. The Qs really need to hold above 45.53 or there will be trouble, but for now the pattern in the Qs still suggests higher prices, although the lack of follow-through puts a damper on upside expectations.

High volume today may not mean anything with options expiration. The selling could very well be attributed to options expiration as well. Keep in mind that we have a 3 day weekend coming up, and the Tuesday following such weekends tends to be bullish. Also, keep in mind that if we pullback into the January 20 turn date, it could be a bullish omen.

My biggest concern is that traders will want to jump the gun and try to short this top before it really tops. When it does top we'll know it soon enough.

Thursday, January 14, 2010

Broadening Formation

The Qs have formed a broadening formation with a range of 1.11 points over the last 3 weeks. An upside breakout projects a target of 47.75, which is within the range we projected yesterday using the 5 day opening range for January. INTC came in with earnings better than expected, but I believe they were less than the whisper number. Still it should be enough to propel the Qs higher to complete wave (5). At this point closing under 45.53 on volume would be a strong clue that the top is in.

One reason I believe the breakout will happen is that we have already broken down below the low of the 5DOR and now we are headed for a breakout above the top of the range. This whipsaw should keep the bears at bay until wave (5) targets are reached. Of course, a massive outside reversal or other such climax sell signal should not be ignored.

Wednesday, January 13, 2010

Still Looks Higher

The Qs bottomed yesterday at 45.53, which is exactly the 0.618 extension of the 5 day opening range of January, 45.92 to 46.55, or 45.92 - 0.618*(46.55-45.92) = 45.53. The rally today put the Qs back in the upper half of the range and that points to higher prices near term. We can expect a target somewhere between 46.94 and 47.57 as a minimum projection for the current rally extending the range to the upside. If we use an extension of wave 1 of (5), the target is 49.64, which is definitely at the upper end of what might be possible for January.

In any case, January 20 +/- 2 days has been a common turning point looking back over the last decade. I believe it is quite likely that whatever high is seen in January will be seen next week, and traders should begin to prepare for that event. We will have to judge what to expect after that on the form of the decline from that high.

Tuesday, January 12, 2010

Not Enough To Call A Turn

Today's action in the Qs was pretty severe, but the critical levels have not been broken yet. We must still respect the potential that the current decline is wave c of ii of (5). There may be a couple or more downmoves to complete wave c. If we get a rally that falls short of the high and a break of the swing low, then the picture will change.

What Will It Take?

Futures are negative this morning as expected after earnings reports from AA and warnings from CVX and ERTS, among others, but the real question is how low can the market pullback without violating the uptrend?

For the Qs, the answer is pretty clear, 44.73 is the level that must hold. It is the high of the consolidation period from mid-November to December before the market broke out. It is also the 0.618 RT of the rise from wave e of the consolidation triangle on 12/17 at 43.76 to the first high of the breakout rally on 12/28 at 46.30. Everything since then for the Qs can be considered part of a still ongoing correction of that rally. It appeared last week that the Qs might just march straight on up to a top, but todays action may change that. Nevertheless, as long as support holds at 44.73, it would be difficult to say that the trend has changed. For the Dow the level is 10516.70.

I know many people are chomping at the bit to short this top. Looking back at my last attempt, which failed, I waited for a decline and then a retracement of that decline. I gave it a little room above the high and it was stopped out. So far, we haven't had a decline to indicate the top is in at any degree of trend since the breakout. So either we need to wait until the upside targets are hit, or we need to wait until there is clear evidence of a turn.

Monday, January 11, 2010

Closer Every Day

Alcoa is selling off a little afterhours which is not the best of indications for the bulls, but the Dow Industrials and Transports closed higher for the day. While the pattern is getting muddy, I still think we have several more days before we ring the bell on wave (5) of [A] in the Qs. The reaction to INTC earnings Thursday evening may give us more insight.

Oil appears to have completed 5 waves up from the December 14 low, but if this is a 3rd wave as I suspect, then it could be hard to pinpoint the top of the current upmove. Currently, the move is too short to be all of wave 3 of (C), so either it extends higher, pullsback and then moves higher, or wave (C) is complete and the top is in. I don't think it is the latter. If we get a pullback, and then a move higher, oil will be going alot higher than most people are thinking at the moment. I have targets around the 103 area, but if wave (C) extends, oil could move up to the 130+ zone. While this is not likely, we must keep this possibility in mind.

Gold and silver may be near the end of their countertrend moves after the decline from the top in December. Today was the first poor close since the recent upswing began.

Currently, I am looking for shorting opportunities in individual stocks that may be breaking down early. I am long the Qs from 46.42 (a little late after the breakout), and I am willing to take a point of heat for a target around 48.40+ unless we get an outside reversal day or some other significant sell signal.

EXPE is continuing to act well on the short side. GME announced a share buyback plan. Perhaps it can support the stock, but I don't think it will be enough to stem the tide of bad news. AMZN looks like it is ready to croak, of course, after I got stopped out of my short position in December. If it fails here, it is headed for its 200dema around 102. RIMM looks weak and BIDU appears to be breaking down, but 200dema support is not far below. GRMN may roll over after it completes an ABC rally.

On the long side, I just missed getting stopped into a long position in CSCO today by 1 tick. It then proceeded to close poorly. I will leave my long order in place. If it moves higher now, it should pop nicely. JNPR and EBAY have formed nice triangles, but these could go either way. LINTA is moving up for a test of its October high. Of course, the triangle that I didn't buy, CAT, was up 6% today.

Looking at some IBD 100 stocks, KGMB has moved up in 5 waves from its December low and could form a handle soon. TLEO is forming a handle. ININ has turned up nicely. ATPG just finished 5 waves up from its recent low and may now be forming a handle.

Intermediate term I like STRA, MON, ATLS, CMG, IAG, BVN, ROST, TJX, WYNN and FSLR, although caution is advised on intermediate term trades at the moment.

Just keep in mind, until we get a strong sign of a reversal the trend is up with a target for the SP500 of at least 1158.


Friday, January 8, 2010

2010 The Year Ahead - Part V

In this final post on the year ahead in 2010, I would like to consider the possibility that my previous speculations are wrong. How will we know and how would we or should we react?

First, if the primary wave 3 view is correct, then in all likelihood the initial selloff from the impending high will be more severe with expanding downside breadth than would be expected from a b wave correction of the still ongoing bear market rally. Wave (1) down should take the SP500 below the June 09 high quite quickly and probably below 850. We would be able to recognize wave (1) down and look to go short on a retracement in wave (2) up. We would look to add to short positions in wave (3) down. Being a 3rd wave, it would not be advisable to try to trade in and out like we did during the decline from 2007 to 2009 as there will most likely be many powerful downside gaps, and we don't want to be out of short positions when those occur. The one thing that could make the current situation difficult is that theoretically, wave [B] could retrace almost all of [A] and the proposed scenario would still be valid. However, it should not be an impulse wave. As long as the SP500 remains above the June 09 high, we can be fairly confident that were are in wave [B]. Below that level we will have to reconsider.

The other alternative is that we are at the beginning of a new secular bull market. This case is fairly easy. Since we now have possible 5 wave counts in at least a few major markets, we will be able to recognize that a possible 4th wave is developing after wave [C] is complete. If the high of wave [C] is taken out we would then have an impulse of primary degree, and we would adjust our future plans accordingly. This case is easy because, for now, we just go with the proposed scenario. There is no change in our plan for 2010. Only later in the year, or possibly in 2011 would we have to make an adjustment.

We should know by the end of March, if we need to change our view, but based on today's action after the less than stellar jobs report, I don't think the current view is wrong. The Qs closed well today if not powerfully, and wave iii of (5) appears to be underway. See the earlier post today on the T Theory update. The latest we should see a top is probably January 21.

T Theory Update

For those who follow Terry Laundry's T Theory (and for those who haven't but might be interested), I thought his comments this morning on the short term condition of the market to be very relevant:

"The small red T and the larger blue T are jointly forecasting an eventual peak time wise at their respective right end dates (by Jan 21?). What is interesting about the red T is that we couldn't get confirmation because initially the rally would not cut the green cash build up line. Now we see an upside breakout in the blue volume oscillator going into the Ts projected peak. This amounts to an accelerating demand going into a top which invariably is caused by "panic buying".

Such acceleration is keeping the Arms ratio very low which warns that when the buying ends, a sharp correction should follow. However it should not break below the mid channel number which is also rising, so the correction is likely to be sharp but brief. The 5% correction can be bought because other larger Ts are still bullish."

I interpret this to mean that a buying panic is an opportunity to sell short-term long positions. The easiest way to do this is simply to wait for range expansion on the daily chart. You can either exit a short term long position after a big range day, or wait until the range contacts or a down day after the range expansion. Either way, you don't want to ride it after that because the risk of a sharp reversal is significant. Better to exit early than late.

The market definitely feels as though a buying panic might be developing. Of course, this fits well with the notion that we are coming into a 5th wave top as well.

Thursday, January 7, 2010

A Look At CSCO

CSCO has broken out above a triangle trendline. This large cap stock which is in both the Dow and the Nasdaq 100 supports the notion that the rally has longer to run. A typical expectation for the length of a 5th wave after a 4th wave breakout is that it will last about 1/3 the length of the triangle. In this case, we have a target in time of 17 trading days which began January 4, 2010. So the target date for the end of wave 5 is January 27. The target price is between 26.20 and 27.20 based on the width of the triangle. This seems somewhat conservative to me, but the 0.618 RT of the bear decline in CSCO is around 26.40, so these are probably pretty close. I plan to go long on a breakout above the high of the handle and exit in the target zone even if it is hit well before the target date. I suspect that when CSCO hits this target zone, the Qs may be at or near the end of its 5th wave.

2010 The Year Ahead - Part IV

Tonight I present an slightly enlarged view of the combination flat. We are currently near the end of wave a of X as shown above. Whether we are in case I, II or III, the current position in the overall pattern of the secular bear market is the same.

Given that it is fairly clear that we are very near the end of wave a of X (note: this is shown as wave [A] on the more detailed chart of the Qs shown previously) either because we are in wave (5) of a, or wave Z of a triple zigzag as others propose, this is not a good time to be taking on new intermediate term long positions. For longs, short term hit and run trades and/or intraday trading are the only reasonable options available until the top of a is in.

If you have profitable intermediate term stock positions, you may be content to ride out the coming correction if you have enough cushion. There is nothing that says the expected correction must be deep. It could very well be a triangle or flat in the indexes, which might well support individual stock positions. This is a decision you should make now before the top is in.

As I said back in October and November, shorting this top will not necessarily be easy, as we found last quarter. It may be to your advantage to sit it out until wave c is underway. If we get a very sharp selloff, wait for a retracement to enter short instead of being agressive near term.

Of course, if you find suitable short candidates in individual stocks, now may be a good time to start dipping your toe in. I am short EXPE with a double top pattern from 12/30/09. GME has collapsed from a large triangle pattern. I am short from 26 on 11/10/09 after it broke down through its trendline after a 3 wave rally and then retraced to the 200dema. These are the kind of stocks to look for - clear topping patterns with negative divergences, or stocks making lower highs as the market is moving up to its top.

As far as the near term is concerned, we appear to be in the very last stages of the rally, but I don't think we are at the top just yet. Of course, anything could happen after the employment report tomorrow, but it looks as though we need one or two more up moves to complete the first leg of the rally. With the currently very low volatility, this could take as long as one to two weeks, or if volatility increases, it could happen in just a few days.

Patience is key at the current juncture.

Wednesday, January 6, 2010

2010 The Year Ahead - Part III

Today I want to look ahead at the most likely, in my opinion, outcomes for this bear market and how 2010 fits into the picture. The passage above comes from pg 53 in the section on combination corrections in the book Elliot Wave Principle by Frost and Prechter. In the book there are two combination patterns shown that begin with a flat correction followed by a 3 wave upward correction and then finishing with either a zigzag or a triangle. At the bottom of the page I have added what I believe may be an as yet unrecognized elliot wave combination correction that I am calling the combination flat correction. I have only seen this pattern one time in one individual stock and that stock is no longer listed, but I believe it to be a valid possibility, as well as one that may dove tail with the consensus elliot wave opinion, but without as extreme a decline to complete wave Y.

These flat combinations only apply to the SP500 and the Dow and not the Nasdaq Composite or 100. The primary reason I believe the above flat combinations will be the likely path for the rest of this bear market is that 1) the SP500 and the Dow clearly completed flat and expanded flat corrections, respectively, at the March 2009 low, and 2) the proposition that the March 9 low was only primary wave 1 of c of a still ongoing flat, frankly, seems proposterous, and 3) if, and it does seem possible at this point even if not likely, the SP500 makes a new high this year, it will invalidate the ongoing flat with the impending primary wave 3 down case as put forth by Robert Prechter. It may ultimately prove to be correct, but a number of analysts have put forth fairly convincing models of the Dow that put the expected bear market low at somewhere between 2700 and 4000, not 400 to 1000 as proposed by Robert Prechter. I am not trying to beat up on Robert Prechter, but rather I am trying to put forth a hypothesis for the rest of the bear market that fits with my analysis of the cycles and that seems a little more sensible.

In my view, case I above is the most likely outcome. In case I, wave X does not have to approach the old high and is followed by a long drawn out zigzag for wave Y. We would expect wave X to top sometime this year. Wave a of Y would probably bottom in late 2012, which will be a confluence of the 4 year and 10 year cycle lows. Wave b of Y would probably last until 2017 and wave c of Y would probably bottom around 2019. Wave a of Y would most likely approach or test the March 9 low, and wave c of Y would most likely bottom between 2700 and 4000 for the Dow.

Case II above is the second most likely outcome. In this case wave X is followed by a triangle. This could be a problem for active traders as volatility might be so low as to make it difficult to be profitable. Even so, skilled intermediate term traders should be able to be profitable in this scenario. Wave a of the triangle would likely bottom in late 2012. Wave b would likely top around 2017, but wave e might not complete until well into the 2020s. Wave e of the triangle would most likely bottom at or above the March 09 low. Unfortunately, there will be no way to know whether Case I or II is in force unless and until the wave a of Y low is taken out, years from now.

Case III is the new pattern that I propose and the least likely outcome as I see it. If it occurs, perhaps some kind soul will give me credit, but since it is probably not going to happen, I won't worry about it too much. In this case, we would expect wave X to top out near or above the all time highs for the Dow and SP500. Afterward, a very sharp 5 wave decline that goes well below the March 09 low would follow and would likely bottom in late 2012. I say that this case dovetails with the consensus elliot wave view because it does end in a severe 5 wave decline, albeit from higher levels than the consensus expects. This case also presents another problem since it will be difficult to tell if the bottom in 2012 is the end wave Y or simply wave a of Y from case I. However, if it is deep enough we might reasonbly conclude that it is case III. Nevertheless, there will be no way to prove it until there is a higher low later in the decade.

These hypothetical corrective patterns show that 2010 is the year that wave X will complete and the next leg of the bear market will begin. They also show how it can be that we will approach the old highs while still remaining in the middle of a secular bear market, which will most certainly fool most traders and investors. X waves, like B waves, are fakes and the breadth and momentum of wave [C] of x will probably diverge from wave [A], and if so, it will help us conclude that the hypothetical combination corrections are the correct interpretation and prepare us for the coming decline.

It is not clear that after this correction is over that a typical new secular bull market will ensue as it may be that any of the above outcomes are simply wave a of very large triangle that lasts until the second half of the century in Supercycle wave IV. Even so, there should be several long periods of strongly advancing markets until the 2040s. If I'm fortunate enough to still be trading at that time, we can speculate about the next secular bear market then.

Tuesday, January 5, 2010

2010 The Year Ahead - Part II

In many respects the rally of 2009 mirrored the decline of 2008 just as the dramatic decline of 2000 to 2002 in the Nasdaq mirrored the parabolic rise between 1997 and 2000 and the recent dramatic fall in the price of oil mirrored its extraordinary rise. This is a common occurence in markets. When extreme moves are seen in one direction, there is often an extreme move in the opposite direction. But for the stock markets, most of the momentum of the rally in reaction to the 2008 selloff is probably over. So, we are left with the question of what to expect in 2010.

There are extreme views and there is the consensus view. To date I have only seen one analyst who is presenting the interpretation that we are in a new secular bull market. This analyst expects new all time highs for the stock markets in the not too distant future. Mostly, it seems that the extremists are in the bear camp as many, particularly those in the elliot wave group, believe that the worst decline in the last 100 years is near at hand. The most dire predictions are that the Dow will fall below 1000 and perhaps even as low as 400. Personally, I don't put much stock in either of these extreme views. The consensus view is that markets will continue to rise into the end of 2010, but with only modest gains. The consensus view is not likely correct either.

We can probably rule out the secular bull market case quite easily by looking across market sectors. If I were expecting a secular bull market, I would expect to see greater synchronicity in the pattern and momentum across many market sectors. We just do not see this. While a few sectors are showing possible 5 wave advances from the market low, the pattern of the rise for most sectors from the March 09 low appears to be choppy with overlapping waves and lots of triangles. In a secular bull market I would expect to see clearer and more distinctly impulsive advances. The second reason that this is probably not a secular bull market is simply that the bear market has not been long enough. If we count the secular bear market from the 2000 top, then we only have 9 years. The typical secular bear market has been 12 to 16 years.

On the other hand, we can probably rule out an imminent primary wave 2 top by looking at some individual stocks. While Robert Prechter is fond of saying that the indexes don't have to behave coincidently with the underlying stocks, I have just not found that to be true. I distinctly recall posting a question at EWI back in 2003 asking how the bear market could resume so soon with so many stocks rising impulsively. I did not get a satisfactory answer, and as you know the rally continued for some time thereafter. The fact is that with stocks like AXP, HPQ, IBM and UTX rising impulsively during this rally, we should not expect that the Dow is going to fall to new bear market lows near term. I can also list a great many other stocks sporting 5 wave advances. These stocks point to a near term correction developing with at least one more leg to complete the bear market rally.

Looking back to 2003 and 2004, the rally off of the March 2003 low topped on January 20, 2004 in the Qs and on February 19, 2004 for the Dow. While such comparisons rarely hold up, the rallies are similar. After the top in early 2004, markets pulled back to the 200dema and then traded sideways for the rest of the year.

Without getting into the details, the main difference between 2010 and 2004 is the phasing of the longer term cycles. We are now very definitely on the downside of the 10 year cycle which last bottomed on October 11, 2002. This will begin to weigh on the markets just as the currently contracted 4 year cycle is running out of steam this summer.

Putting the big picture observations together, we should expect some sort of correction in the first quarter of 2010. Once that correction is completed, we should expect another rally leg of equal measure in points to the first rally leg, but with a divergence in breadth and momentum. When the second leg is finished, the secular bear market will return.

In Part III, we will look at the possible form of the remainder of this bear market.

Monday, January 4, 2010

2010 The Year Ahead - Part I

Looking in the rear view mirror at the year now past, it seems truly amazing that we got through it. The emotions were running so high during the first quarter. In January, many thought the worst was over, but we knew it wasn't. In late February and early March, several market commentators were calling for Dow 4000. Then, as the rally accelerated out of the low in March and April, few believed that it would last. There was the head and shoulders top that wasn't in May and June. We saw a breakout above the January highs in the SP500 and the Dow in July, but few believed it would last. We were looking for a top the last 4 months of the year that has yet to materialize. And here we are today with new rally highs in the major indexes.

All in all, I think I called it fairly well in 2009 with a few hiccups toward the end. The following are a few excerpts from my 2009 posts:

Tuesday, February 10, 2009

Looking at the Dow, I see the two primary targets at 6400 and 5000, based on fibonacci extensions and long term moving averages. I really don't think 5000 is likely, so 6400 is the most probable bottoming area.
(The bottom was 6469.95.)

Monday, February 23, 2009

No Rally = Climax In The Making. The lack of a rally today and the subsequent break of the 2002 lows in the Dow probably means that a climax selloff to complete wave (5) down is underway.

Tuesday, March 17, 2009

This market seems to want to go up regardless of any other considerations and the Qs made a 3 week high today adding to the growing list of buy signals.

Monday, April 27, 2009

One thing seems to be clear to me with each passing day: the rally from March 9 is not over. JNPR staged a powerful breakout above its downtrend line today. That is not an indication of a market ready to roll over. HANS broke out strongly yesterday as well. AMGN rallied after a poor earnings report. I shorted AMGN(half-position) on Monday at 46.00 with a stop at 51.00. I thought that it would fall apart today after the action last night. If it continues higher Monday, I may reverse and go half long. This is bull market (rally) type behavior. (I am still long AMGN. It hasn't gone anywhere, but it hasn't broken down either. The upside target is 75 to 82.)

Thursday, May 28, 2009

It's just hard to get too excited about the upside when we are at the end of the month, and so many factors point down into mid-June.

Friday, June 26, 2009

Regardless of a possible deepening of this correction. I still stand by my statements from April and May that the risk in this market is to the upside. Any shorting should be done with that in mind in terms of position sizing and targets.

Thursday, July 23, 2009

I will not be selling this correction, but continuing to manage positions and looking to add at support levels.

Friday, August 28, 2009

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.

Friday, September 25, 2009

Elliott Wave International has called the top of primary wave 2. This means that under their interpretation, primary wave 3 down is underway and will be a devastating decline lasting more than a year that will bring the major indexes down far below the 2009 low. They may be right, and if so, it will be the first time that they have had three successful market calls in a row since I have been following them... My view is that this is simply a minor correction in a still ongoing rally.

Wednesday, September 30, 2009

My long term view remains the same. After a correction to complete the 10 month cycle, we will see new rally highs in 2010.

Friday, October 30, 2009

The point is that the correction has a lot further to run and we can't know what the ultimate target for this correction really is.

Tuesday, November 17, 2009

If, on the other hand, markets begin to consolidate next week rather than decline in earnest, the bearish near term case would be severely compromised.

Thursday, December 17, 2009

What I have been pretty clear about is that I do not believe that yesterday's high was the top of primary wave 2 and that this is the start of the dreaded wave 3 armageddon in stocks. A low should be seen in January that will be the last best buying opportunity for some time, in my opinion.

Perhaps that low will be in February or March, but the conclusion remains the same: it will be the last significant buying opportunity of the rally. Today's action appears to be wave i & ii of 3 of (5) in the Qs. The SP500 appears to be headed for its measured move target of 1158. We should see the rally continue for a few more days to complete wave (5) before the largest correction since June gets underway with a probable target in the 40 to 41 zone for the Qs. At this point there is no need to jump the gun on new shorts. We need to let this thing run out of gas first. We will have to see one of the following to conclude that wave [A] is over: 1) a completed 5th wave, 2) a clear 5 wave decline from the high, or 3) a move below the December 17, 2009 low.

Friday, January 1, 2010

New Year Ringing In (A) Top

Happy New Year everyone.

There seems to be a consensus among many technicians that the top of primary wave 2 is at hand and the bear market is set to resume with a vengeance. The view is that the rally from the March 9 low is a triple zigzag. Unfortunately for the bears, the weight of the evidence just does not "bear" out this interpretation. The fact that markets have not declined into the 10 month cycle low indicates strength - not weakness. It supports the view that the March 9 low was in fact a "4" year cycle low with the typical result that rallies off of such a low will last 16 to 24 months. In this case, it will probably last until the summer or fall of this new year.

In addition, we now have a very clear 5 wave impulse move up from the March 9 low that satisfies all of elliot's rules. Purists may argue that wave iv of 3 of (3) slightly overlaps wave i of 3 of (3), but the NDX does not show this overlap.

We know that the rally is coming to some sort of top because the Christmas week breakout invalidated the ending diagonal count which left a very clear wave (4) ascending triangle, triangles always precede the last actionary wave in the pattern of one larger degree. The only question that remains is whether this past week's high was the end of the rally or whether it was only minor wave 1 of (5). Since the expected cycle lows were to be next week and the market has rallied into this time frame, I suspect that we will see higher highs into the cycle turn dates between January 4 and January 15 instead. The Qs could possibly make it into the 48 to 50 zone before a top is seen if this occurs with 48.58 being the most likely maximum.

The current interpretation puts us on a solid footing for the new year as we can be fairly confident that a correction will occur sometime after the first week or two of January and that we will see another sizeable advance to complete cycle wave x in 2010. The main question will be how severe the correction is. We can only wait and see how the first wave down unfolds to speculate on that.

From an elliot wave perspective, it was certainly reasonable to expect a zigzag upward correction off of the March low, which lead to speculation of tops in September, October and November. Missing out on a 5th wave is not the worst thing for traders, and now we will have a good idea of the form of wave [C] of x for this year.

For those who still cling to the notion that primary wave 2 is nearing completion, I recommend that going short in stages with partial positions rather than going all in or even double all in as has been recommended by some newsletters.