Sunday, February 28, 2010

Battle For Direction

The week ahead will hopefully provide some information that will help us determine how the rest of March is going to play out. At the moment the SP500 is trapped in a range between 1086 and 1112. Volume since the rally off of the 2/5 low has been only average and we have not seen a valid follow-through day. The volume oscillator has yet to turn up to confirm the trend as well. On the other hand, the SP500 is sitting above its 50dema and the MACD is in a strong position as it is crossing up through the zero line parallel to its signal line. This type of action typically points to continuation.

The 61.8% RT of the January range is around 1120. Given the first of the month positives, the most likely outcome is that we will see wave (B) continue higher into that level, which conflicts with my top wave count at the moment.

The question arises as to whether we are already in wave c of X up. The balance of the evidence suggests that we are not. We have not seen a buildup of negative sentiment as measured by the put/call ratio. Bullish sentiment increased significantly over the last week even though we have only seen a tepid rally at best. And finally, we would expect wave b of X to last at least 1/4 of the length in time as wave a of X which puts us out to the end of March. Other cycles point to a low in mid to late March as well. So, the best interpretation is that we are still in wave (B) even if the market moves higher. We should at least see a retest of the February low before the market can move higher in wave c.

A couple of things could help us come to an earlier conclusion about the near term action: 1) if the market sells off early Monday and comes under last week's low, then wave (C) down is most likely underway or 2) if we see a small triangle or expanded develop this week, then we know that wave (B) is headed higher.

Either way, it seems that the only option is trade both sides of the market or stay out. This is one of those times that we will have to wait for the market to tell us what it wants to do.

Friday, February 26, 2010

Wave (C) Down Still The Top View

It looks liks Monday will determine the course of stock market action for the next couple of weeks. Today's action completed an impulse pattern off of yesterday's low which is most likely wave c of [c] of 2 of (C) in an expanded flat correction. But there is little room left for upside without invalidating that view, so the selling must begin fairly quickly Monday, or the current rally will likely continue for several more days.

Volume has been very light today. They are blaming it on the snow, but it could just be signs of lack of buying interest. There's not much to do, but wait and see.

FWLT has made a deep retracement of yesterday's rally off of the low, but yesterday's rally looks quite impulsive, and as long as the low is not taken out, FWLT will probably move higher from here.

AMZN has not budged at all during this entire rally. This is quite bearish and supports the view that we may see selling early next week.

All in all this continues to be a tough tape to trade, and calls for a mix of longs and shorts with the expectation that many will not work out and the hope that a few will move enough to make it worthwhile.

Have a great weekend, and don't worry - the trend in stocks will assert itself before long.

Thursday, February 25, 2010

What A Day!

The bearish case hasn't been nullified yet, but it is close. All we can allow for now is that the current up move is wave [c] of an expanded flat correction, but it must remain below the 2/19 high. If it penetrates the 2/19 high, the next move will be back to the January high.

Another blow to the bears is that the recent correction has allowed a number of leading stocks to set up very nice bases, and we are also seeing some nice breakouts during the correction. All of this really does make it hard to justify a powerful (C) wave decline. The setup for wave (C) down was there, and it should have gotten some traction this week. It didn't, so we have to seriously consider the alternatives.

The primary alternates are either a flat correction with wave (B) retesting the January high followed by wave (C) retesting the February low, or a large triangle, or finally that the correction is over entirely.

The fact is that if the 2/19 high is exceeded it will most likely be bullish overall. In that case I will be looking to exit remaining short positions and going long. If we do not see some selling tomorrow I will probably make discretionary exits of short positions that aren't working anyway. The first day of March tends to be a bullish day and the short side just isn't working.

At this point, I believe that any outcome other than a strong down day tomorrow is a sign to move to the long side. We had a brief opportunity for some short trades, but that time is probably over even if the correction continues, and shorting will be a losing proposition.

GME matched its November 2008 closing low of 17.50 today, and I exited the short position for a gain of 32.7%. FWLT moved nicely in my direction early, but then came back with a vengeance after 10am. By the time I got back from a business meeting, half the gains had evaporated. Given the action in the broader market, I took my gains.

Wednesday, February 24, 2010

Seeking Resolution

The action today did little to clarify whether we are indeed in wave (C) down. So far, the pattern from the 2/19 high could be counted in multiple ways and we could see another wave (B) rally high before wave (C) turns down in earnest, but coming under yesterday's low on increasing volume would resolve the uncertainty.

It is at points like this that traders can lose alot of money. While I might believe that we should see wave (C) down, the market doesn't have to do what I believe, and if we get a solid follow-through day from this level it would have to be respected, which might mean exiting some short positions prematurely and going long. Even if I got whipsawed 3 times in a row, I would take the next trade, because you never know when the market is going to run big in your favor.

Oil is close to completing a 5 wave impulse from the 2/5 low. This would give us a solid pivot for getting out of the trade because if oil comes under 69.50, the low of the impulse, the rally must have been wave C of an expanded flat and we could expect oil to move much lower. However, my expectation is that 69.50 will hold.

Sharp Countertrend Bounce

While the impulse pattern in the Qs did not appear complete yesterday, the pattern in the Dow and SP500 was complete with 5 waves down. This has led to a small but sharp countertrend bounce this morning. The pattern in the SP500 this morning appears to be a zigzag confirming that it is countertrend.

If the bearish case is correct, we should see the market roll over by this afternoon in an even more severe 3rd wave of minor degree. If the recent rally highs are exceeded, then the bearish outcome will be of much lower probability. However, the reaction to the new home sales data does not appear positive, and Bernanke just said that a "sustained recovery still in question." Doesn't sound like the bullish case will hold up, but we need more downside to confirm that wave (C) is indeed underway.

Tuesday, February 23, 2010

Update On The Qs

The Qs are near to completing wave 1 or A down from the wave (B) high. They remain above support at 44.97 for the moment, but that should be broken tomorrow. At the same time the trendline for the rally from 2/5 has been broken which is perhaps more important. As long the 4th and 5th waves complete tomorrow, we can be sure that the downtrend has resumed.

One alternate that should be mentioned is that the current wave could be wave [a] of A of a still unfolding wave (B) triangle. If this is the case, then markets will trade in a range for some time and perhaps well into March as I mentioned this morning. We will just have to wait and see how it unfolds over the next few days. I do expect that we will see a multi-day wave 2 rally after this thrust down completes. This should do to convince most traders that today's sell-off was just a shakeout in a renewed uptrend.

The most convincing aspect of today's selling was that just about everything was being sold - stocks and commodities. As long as the wave (B) high is not violated, the trend should be presumed down.

It Showed Up

Wave (C) down appears to have showed up this morning. The pattern is pretty clear. The immediate selloff looks like a small degree 3rd wave in the Qs which actually topped on Friday 2/19. Coming under 43.51 will pretty much confirm that the trend is down as it would overlap wave [b] of B up and confirm that the recent rally is not an impulse.

The duration of wave (B) means that we are likely to see the entire correction drag out into March unless we see a climatic selloff that retests the February low by this Friday. Otherwise, this week's selloff will probably be wave 1 of (C) with wave 2 up to follow next week in keeping with the typical first of the month seasonals. This would put the end of wave (C) into the latter part of March.

That really seems like a long time right now, but at least now we have some targets to work with. The Qs should bottom around 40.53 for a measured move with equal legs. If wave (C) is 1.618 x wave (A), then the target is 37.73. We can better judge which target is likely once wave 1 of (C) is over.

I continue short with the Qs as well as FWLT, JOYG, NVDA, AAPL, AMZN, SLV, GDX and am prepared to exit at any time. These are short term trades for targeted gains less than 10%. I was stopped out of PCLN before earnings. I sold STX for +8% on Friday and remain long various intermediate and long-term positions including OIL.

Monday, February 22, 2010

Just Waiting For Wave (C) To Show Up

There's not much to add today except that it was a down day. I was expecting a bit more, but we have to take what we get. The longer this drags out, the more we have to be on guard for a surprise follow-through day that confirms the correction is over. While I might believe that wave (C) is imminent, it doesn't matter what I believe. The market action is what matters. The indexes have regained the 50demas, so a solid follow-through would have to be respected.

There are a few options before us: 1) wave (C) down may begin immediately, 2) wave (B) up may retest the high and morph into a flat or expanded flat, 3) wave (B) may extend out in time into a double zigzag or triangle, or 4) the correction may be over and the market will move higher from here after a brief pullback. If option 1 prevails, then the selling should begin tomorrow and intensify into the end of the week. If options 2 or 3 are seen, then wave (C) down may not occur until the later part of March while we trade in a range. The triangle option would mean that the downside would be limited. If option 4 occurs, then I would expect it to occur by early next week.

For now, I think the current rally is a bull trap and that we will see wave (C) down whether it is this week or in March, but I will be prepared to go the other way if conditions warrant.

Saturday, February 20, 2010

A Different Look At Oil

In case you are doubting that the trend in oil is still up after the rally this week, I thought I would show you a different way to look at the trend. The above chart shows oil with Darvis boxes drawn. Darvis wrote the well known book, "How I Made $2,000,000 In The Stock Market." His description of his box method was rather cryptic to me until I saw it explained by another trader. A box is formed by swing highs and lows. A swing high is defined by a high followed by 3 lower highs, and a low is defined as a low followed by 3 higher lows. Sometimes a market just trends and no box is formed.

The idea is to trade in the direction of the breakout from a box. However, I think it is prudent in general to let another box form to confirm a change in the trend. After the 2008 high, a lower box did not form on the weekly time time, but you could have drilled down to the daily time frame to look for an entry.

Currently, a new box is forming that continues the uptrend. Even if a new lower box forms, I would not exit the trade unless the low of the second previous lower box is broken or the low of the new lower box is broken. From this point it would take at least 4 more weeks for a new lower box to form.

I may get stopped out next week, but for now I will sit on my hands in this trade while the trend continues to develop. If oil makes a new high, I expect the uptrend will accelerate as the action has been essentially sideways for 4 months now building up alot of energy for the next move.

Thursday, February 18, 2010

Whitney Says Banks To Fall

Meredith Whitney claims to be batting a 1000 when it comes to calls on bank stocks over the last two years. I don't know if that's true or not, but now she's making a new call: bank stocks should fall 10% to 15% this year. I don't think that's an overly aggressive view given the fact that she's right that the banks aren't lending. However, in my opinion, the sector may fall that much over the next couple of weeks, rebound and then fall again. The financials have been lagging for a while so this is no surprise.

The interesting thing to me is that banks are treating their clients with good credit the same as the ones with bad credit. That tells me they don't really believe in the credit scoring system, so the whole thing is a farce. I am currently in the process of refinancing our mortgage, and everyday I'm told about a new requirement that must be met in order for the underwriter to approve the loan.

The behavior of the financial industry leadership, with a few exceptions, makes it abundantly clear that these guys are no more talented or knowledgeable than your average small businessman. They just got the right degree at the right school and got their foot in the door at the right time. I don't mean to offend anyone, but my point is that, in my opinion, there is no justification for the salaries and bonuses they are paid. I really don't understand how shareholders can put up with it. When the Fed says lend, they lend, and when the Fed say stop, they stop.

I don't know the answers, but I am tired of being treated like a number instead of a human being. I don't think I am the only one. People are getting fed up of it, and in the long run the banks will suffer if they continue to alienate their customers.

Rally Continues On Declining Volume

On February 11 I said that if the rally continued the likely target for the Qs was 44.82+/-. Today the high for the Qs was 44.93. The volume has declined with the rally and today's volume was the lightest volume for an up day since the rally began on February 5. There may be an attempt on 45 tomorrow, but given the poor reaction to Dell's earnings after the bell, that is looking less likely. The rally is probably over.

Even though the rally was not supported by volume, the depth of the rally means that we should see support around 41. The 200dema is now at 41.39. I will be exiting remaining short positions when the 200dema is hit and will be looking to go long at that point. In essence we will be looking for a double bottom for the correction with positive divergences.

One interesting fact is that the rally has lasted 8 trading days while the decline lasted 13 trading days. I think wave C down will be a fib number as well, either 5, 8 or 13 trading days. The most likely being 8.

Wednesday, February 17, 2010

Formula For Trading Success

What is the key formula for trading success? There are so many lists of rules that traders should follow it can be hard to make sense of it all. But it really comes down to understanding just a few "fundamental" facts:

1. You must be willing to take losses.
2. You must keep losses small.
3. You must have a plan to take profits.
4. Your plan must allow for profits to grow into large gains.

Thus we arrive at the following formulas:

Loss Of Capital = Small Gains - Small Losses - Large Losses

Eliminate the large losses and we have:

Churning = Small Gains - Small Losses

Or add large gains and we have:

Roller Coaster = Large Gains + Small Gains - Small Losses - Large Losses

But if add large gains and eliminate large losses we have:

Success = Large Gains + Small Gains - Small Losses

We eliminate large losses by using an appropriate initial stop loss. We keep losses small by using a trailing stop or exit criteria that follows price. We also keep losses small by following the trend of the broader market. We allow small gains to grow into large gains by not taking profits at an arbitrary price.

Of all of the above, keeping losses small is by far the most important. Examples of trailing stops are fixed percentage and volatility stops. Examples of exit criteria that follow price are N bar lows and highs, moving averages and ratchet stops that move with prior swing lows or swing highs. Implementation of one of these trailing stop methods is a must in order to realize success.

The one thing that may trip up many traders is that a trailing stop may actually reduce the win rate for a trading system, but that is far less important than keeping losses small because small losses will boost the profit factor dramatically. Also, the trailing stop reduces the time in a trade and thus gives traders more opportunities to trade which can increase the total profit.

The profits will follow if we are willing to take losses. This is the most important thing.

Tuesday, February 16, 2010

Not A Follow Through Day

As exciting as today's action was, it was not a follow-through day because today's volume was lower than Friday's volume. The Nasdaq 100 was the weakest of the large cap indexes which is not a good sign either. For the SP500 1100 to 1104 should prove to be strong resistance going forward.

The chart above of the IWM shows that it has merely retraced back to its broken channel line. While the 200dema offered recent support (green arrows), notice how the median line proved to be significant resistance (red arrows) during the first leg of the rally. Now that the lower channel line is broken, it should also prove to be significant resistance.

From the bullish perspective, there should be some additional upside after today's advance. The higher wave B goes, the more the downside in wave C will be mitigated once it gets underway.

Sunday, February 14, 2010

Points Of View

I want to discuss something today that is very relevant to the current market and that is how different analysts can look at the same chart and come up with different conclusions and how we can eliminate the confusion in how to act on those differing points of view.

Do not confuse the numbers on the chart above with elliott wave labelling. They are simply a refence to the following points:

1. Point 1 is the critical area on this chart. Most elliott wave analysts that I read are calling it a truncated 5th wave of wave a down. This is extremely important because calling it a truncated 5th wave completely changes the analysis of everything that follow it. If it is not a 5th wave, then it is a 2nd or b wave.

2. Point 2 is the decline from oil's all time high. Again if point 1 is a 5th wave, then we have 5 waves down which means that another 5 wave impulse down will follow. If it is not a 5th wave, then the decline is a 3 wave movement and another decline to new lows is not assured.

3. Point 3 is the one area where there is little dispute on the form as it is clearly a triangle. However, is it a 4th wave or an X wave?

4. One's view of point 4 is completely dependent on points 1 through 3. Either it is the end of double zigzag upward correction, wave b of B of an expanded flat correction, or it is wave 5 of A.

5. One's view of point 5 naturally follows from one's conclusions about point 4. If point 4 was the end of a double zigzag upward correction, then one should hold short as oil is about to implode. If point 4 is wave b of B down of an expanded flat correction, then one should be building a long position for wave C up which is about to take off anytime. If point 4 is wave 5 of A, then one should be out of the market waiting for wave B down to complete in anticipation of the start of wave C up.

This little exercise demonstrates why trading only off of elliott wave analysis is fraught with danger. During corrections there are often too many possible outcomes. If the number of possible outcomes is greater than two, the entire process is not helping us increase the probability of success. Of course, there are times when the probable outcome using elliott wave analysis is much greater than 50/50, and traders should use those times to their advantage. But when the probable outcome is much less than 50/50, elliott wave analysis should become secondary to other methods. It can still be very useful in that once outcomes have been eliminated due to market action, risk and targets can be re-evaluated.

So, given all of the above, how does one trade oil? Fortunately, there are any number of useful technical methods that can be used. For the daily time frame, trading crosses of a short term moving average with a medium term moving average would have been very profitable, e.g. the 6dema and the 26dema. Also, using Marketclub's 3 week/3 day trade triangles would have worked as well as the MACD. For the weekly time frame Marketclub's 3 month/3 week strategy would work as well as crosses of medium term and long term moving averages, e.g. the 20 week and 40 week. In the latter case, the method is to enter long when price rises above the lower of the 20 week and 40 week MAs when that MA itself has risen for two consecutive weeks, and exit when price falls below the lower of the two MAs and that MA has fallen for two consecutive weeks. On the weekly time frame, my analysis shows oil to be neutral using the 3 Month/3 Week approach and long using the 20 week and 40 week approach.

However, we should not forget the most basic analysis of a market and that is the definition of a trend as higher highs and higher lows, or lower lows and lower highs. At the moment, there is a clear and definite uptrend in oil with higher highs and higher lows. Until a prior low is tested and that test is violated AFTER an intervening lower high, we should assume that the trend in oil is up regardless of other analysis. The trend is weakening at the moment, clearly, but patience in waiting for an exit may be rewarded in a resurgrence of the trend.

Finally, we should use intermarket analysis and cycles, when available, to weight different points of view. The seasonal cycle in oil calls for a low in mid to late February with highs in May and September. It hardly seems prudent to jump on a bearish case until we see a failure of the February swing low that would normally come at this time. What about intermarket analysis? Tom McClellan has shown that the price of oil follows the price of gold with a time lag of 4o days +/-. Sometimes this seems to work precisely, and at other times, less so. Right now, the precision is off, but the general approach would be to wait for a breakdown in gold BEFORE we position for weakness in oil. For example, gold made a lower high in July 2008 while oil was making new highs. This was a clear divergence that warned of oil's coming decline. Recently, gold made a lower high on the daily and weekly time frames that warned of the recent selloff in oil, but on the longer term monthly time frame, we do not yet have divergence.

Finally, looking at the above chart, we see that oil is resting comfortably atop the 50 and 200 week emas. Until this support is broken, we should assume that the uptrend will continue.

Putting this all together, the weight of the evidence at the moment is toward a continuation of the uptrend in oil. Either oil will continue immediately higher from here in wave C up, or will come a little under the February low and then head up in wave C up. Only if oil forms a low in February that is then violated decisively should we conclude that January was the top of the countertrend rally that began in January of 2009. Then, we would use the wave c down interpretation to determine risk and targets for the decline.

I remain long OIL expecting a continuation of the uptrend in wave C up, but awaiting a break below the still developing February swing low to confirm a change in the trend.

In conclusion, on its own, elliott wave analysis can lead to arbitrary decisions and poor trading outcomes, but coupled with other technical analysis, the most probably outcome can generally be determined with a clear rationale for taking and exiting positions.

Saturday, February 13, 2010

A Small T Suggests More Rally Next Week

If you haven't been following Terry Laundry's T Theory sites, I suggest you check them out. What I like about his work is that it is completely unique and thus allows for independent corroboration of other methods. According to Mr. Laundry a small T formed this week that projects 5 more trading days of rally. Go to T Theory Calculations to see what he has to say.

The only thing I might add is that this small T doesn't necessarily mean higher rally highs next week. After following T Theory for some time I have seen on more than one occassion that a samll T projects a lower high. He may disagree, but what we may see next week is 1) a minor new high on Tuesday followed by a selloff into midday Wednesday and a rally into Friday with a lower high than Tuesday. This is all speculation, of course, but the elliott wave pattern is clearly corrective so whether the market diddles around another week or not will not change the next move except to alter the final targets for the correction. One possibility that has come to the forefront in my thinking this week is that wave (B) could turn out to be a triangle. This would allow a lower high with wave [e] of the triangle terminating at the end of the small T. The outcome of this pattern would be LOWER correction targets. Another point regarding this small T is that it may be supportive of the action in commodities next week.

We have now consumed almost 12% of the year with little to show for it, but an important buying opportunity should be near at hand. This could well be the last significant intermediate term buying opportunity for many months if not years to come.

Friday, February 12, 2010

Rally Hanging By A Thread

The one undeniable thing about the market action this week is that it does not look impulsive - it does not look like the beginning of a new upleg in the larger rally. But - it is still possible that we will see a slight new high next Tuesday. After that it should be down to a new correction low.

The one fly in the ointment for an immediate move down in wave (C) is that next week is options expiration week, and oftentimes there is an upward bias during options expiration week, but not always.

The MACD is trying to hook down for a negative divergence sell signal on the 30 minute chart which is another clue that the countertrend move is coming to an end.

The pattern this week in oil looks more impulsive but it's hard to read. I would like to see it hold the 2/5 low of 69.50, but at least 68.59 to maintain the longterm uptrend. Any advance toward 78 next week would almost insure that the trend is turning back up, and when it does, watch out because we are likely to see a rapid advance toward 100 followed by 122 if 100 is broken. Of course that is all dependent on those levels holding firm.

Gold is also trying to turn back up. I would expect the commodities to move in tandem. It looks like the dollar is putting in a near top that could support the trend in commodities. The dollar has support at 78 and its 200dema, but if those levels are broken it would add even more fuel to the fire for gold and oil.

In summary, I am looking for the stock market correction to resume in force sometime next week, but I don't expect the correction to last past the end of February. There are a number of cyclical forces that should be coming to the aid of stocks by that point. These same forces will be probably also be supportive of gold and oil. Also, I am not expecting the Qs to move much if any below 40 or the SP500 to move below 1010 to 1020. Thereafter, the bear market rally should return in earnest. However, if these levels are broken then a much weaker wave c rally will be the result.

My current targets for wave c of the bear market rally are 55 to 60 for the Qs, 1320 to 1370 for the SP500 and 11600 to 12500 for the Dow. These are very approximate and depend on the depth of the current correction.

Thursday, February 11, 2010

Rally Probably Complete

Instead of moving below yesterday's low the Qs held above it today forming a very clear running triangle. A sharp C wave rally followed that lasted the rest of the day. We may still see a minor new rally high tomorrow, but it should be down from there. I show an alternate outcome that allows for a double zigzag to form. If it does, then the next target is 44.82+/-.

Given that the Tuesday following 3 day weekends is often an up day, the alternate view is a fair expectation, but coming under 42.76 on volume should greatly reduce that chance. As mentioned in my earlier post today, I am now half short the Qs from near today's high. Trader's can use a number of other signals to add to positions. I will be looking for a 3 day low coupled with a turn down in the MACDH.

If time symmetry plays a role, we should expect a low on March 3 or maybe slightly earlier.

Rally May Be Complete

The pattern that developed this morning makes a very nice running triangle for wave B. So far today, the high for the Qs is 43.78 which is just 0.04 away from the point where wave C of (B) would equal wave A of (B), assuming this morning's low is wave [e] of a running triangle. Volume is also running light today. I am now half short the Qs against the January high. I will add to the position once the downtrend resumes. If this analysis is correct, we should see some selling into the close today, more selling tomorrow, a small rally on Tuesday and then a resumption of the downtrend by Wednesday.

There is always the danger that this (B) wave rally will develop into a larger combination, but since it can count complete, I am willing to take the risk.

Wednesday, February 10, 2010

Rally Continues As Expected

The countertrend rally continued today with a small move up in wave [b] of B up, but wave [c] of B down began by late afternoon and should continue into Thursday. So far this rally is following the expected path which projects a top in wave C between 43.90 and 44.75. The most important point in looking at the pattern of the rally is that the waves are overlapping 3 wave movements that are clearly corrective. This means that once this rally is over, however long it takes, the next move will be an impulse down in wave (C). Currently, I am projecting wave (C) to bottom around 40 to 41. Only a strong break below 40 next week would alter the outlook.

Tuesday, February 9, 2010

More Rally To Come

The nature of today's action was sufficient to rule out the alternate count I posted yesterday. It appears that wave A up is complete and wave B down is underway. The rally is clearly corrective as wave A is a double zigzag and so far wave B down is showing corrective qualities as well. I expect that we will see sideways to down action for tomorrow into Thursday with a final push up in wave C of (B) Friday and Tuesday next week. Thereafter the correction should resume in force.

The media fanfare aside, today's rally was rather unimpressive. Being day 3 of the rally as well as less than 1.7%, it did not qualify as a follow-through day either. It will be interesting to see if we get an IBD follow-through call on Friday or Tuesday. If so, I believe it will be a false one and traders should wait for additional follow-through to prove it should it occur.

I will be going short a half position in the Qs if it approaches its 50dema. I will add to the position on a resumption of the downtrend and exit the position near a measured move target where wave (C) equals wave (A). The only logical place for a stop is above the January high. While not ideal this does give an almost 2 to 1 reward to risk ratio.

I will be exiting all short positions as we approach the bottom of wave (C) and looking to go long sector ETFs in my core positions.

I got some nice help today in my GME short position with a downgrade. Although I originally calculated a target below 12, I now believe it will bottom near term just below it's November 2008 low as the latest down move does not appear to be impulsive. It is probably a B wave of a long drawn out triangle or flat. So I will be exiting that position as well as wave (C) comes to a close. Only a sharp move on volume below 15 would alter that outlook.

Monday, February 8, 2010

Countertrend Rally Still In Progress

The countertrend wave (B) rally that began late Friday afternoon continued today, albeit without much to show for it. It appears that wave [a] completed this morning and wave [b] is underway. Wave [b] may already be complete which would lead to an immediate rally tomorrow morning, but there is always the possibility of a flat correction where wave [b] makes a new correction low followed by wave [c] up. A triangle is also a possibility, but we will need more information before coming to that conclusion. If the market breaks down below Friday's low on strongly increasing volume and breadth then the rally may be over.

While I believe it to be a remote chance, if the Dow were to fall damatically below 9556 over the next couple of days, then I would have to reconsider the above analysis. The equivalent level for the SP500 is 1011, and for the Qs it's about 41.20. Of course we may get down to those levels by the end of the correction. I am just not expecting it in the next two days.

It looks like it will pay to remain short during this countertrend rally if this is all the bulls can muster, but I suspect they will try a little harder before the week is out. While it is a subtle point, the MACD on the 15 MIN and 30 MIN charts made a slightly higher high than it did during waves [iv] of 3 and 4. This suggests that there will be at least one more rally attempt.

Sunday, February 7, 2010

Fear Not Yet At An Extreme

The equity only put/call ratio (CPCE) is an excellent way to gauge greed and fear in the market. In general when the CPCE reaches into the 1.0 to 1.1 zone and the 10MA of the CPCE reaches the 0.85 to 0.90, the level of fear is commensurate with at least a short term bottom. Friday, the CPCE broke out above an important downtrend line confirming the correction that began on January 20. The PPO of the CPCE has yet to break out, but it appears it may break out soon. Prior important bottoms occured when the PPO reached the 20 to 30 zone, but at least above 15, which it has yet failed to do.

We can conclude from the above that although the level of fear has risen recently, it has not yet reached a level that would support an end to the correction. We should be able to pinpoint the end of the correction when the CPCE approaches prior extreme levels.

A rally of 1 to 5 days should occur next week. Traders should be cautious about entering new long positions as the rally could end without warning. The best stance would be to wait for new short setups toward the end of the rally with the view that the next leg of the correction will follow soon. The expected completion of the correction is the end of February to the first of March.

Friday, February 5, 2010

Wave (B) Up Underway

A positive divergence buy signal occurred in the final 1/2 hour for the Qs suggesting that wave (B) up is underway. This rally could be as short as 1 day or as long as all of next week. I show an alternate count above that has wave 5 down completing last Friday and today's low as wave B of a flat correction. If the alternate holds then a sharp wave C rally Monday and possibly into Tuesday would complete wave (B) up. If today was wave 5, then we should expect a 3 wave rally that lasts most of next week.

The fact that the Qs have bottomed in wave (A) at 42.12 above the 40.15 level is a bullish development that likely means that the Qs will bottom in wave (C) around the 40.15 level and not the lower levels of 36.14 to 38.62. If the Qs hit 40 at the end of February I will be a buyer.

The pattern in the Dow and SP500 appears to have completed wave (A) as a 3 wave zigzag decline. If correct, this is a also bullish development since it means that once the correction is over new rally highs will be seen.

Thursday, February 4, 2010

5 Waves Down In The Qs?

The market action today was awful (for the bulls) particularly in the Dow and the SP500. The Qs were not far behind but the selling was not quite as severe as it could have been given the beating that the SP500 took. One thing that stands out to me is that the Qs could be completing a 5th wave down now. Notice how wave 4 above stopped exactly on the parallel channel line to waves 1 and 3. Also, notice how waves 2 and 4 have a different character. Wave 2, a zizzag looks almost like a flat, while wave 4 was sharp and deep. These differences seem to fit the guideline of alternation between waves 2 and 4. And finally, notice how the positive divergence in the MACD continues to develop.

I think wave (A) down should finish tomorrow approaching, if not hitting, the 200dema around 41.20. I may have been premature in calling the bottom of wave (A) on 1/29. We don't have a limit on how long wave 5 of (A) can be since wave 1 is the shortest wave, but we would not expect it to be longer than wave 3. Going below 39.96 would make wave 5 longer than 3 and raise the odds that wave (C) is underway, or that we are in wave [3] of 3 down of (A).

Another reason to suspect that the latter is not the case is that the McClellan Oscillator did not make new lows today, which is another positive divergence. It is also a rare occurrence when markets do not respect support at the 200dema, so at least some sort of bounce should materialize in the next couple of days. For that reason, I still think it is inadvisable to add new short positions at the present time.

If the above analysis is correct, we would expect a 3 wave bounce in wave (B) up toward the 50dema, but at least to the 20 to 26 demas, followed by wave (C) down. Wave (C) down should provide the best short term shorting opportunities.

Presently, I am short using the SDD and the SEF, as well as short AMZN, AAPL, PCLN, RIMM and GME. This weeks rally merely served to create bear flags in these stocks and many others. I am close to being stopped out of my OIL position. I remain long several positions that have done well and which I continue to expect will do well in wave c up of the bear market rally. Thus, overall my account is suffering a drawdown at present, though not too severe due to the short positions.

In retrospect, I should have avoided some short term longs in January and bailed on the long Qs position sooner, but if we could make money looking in the rear view mirror, anyone could do it.

That Was Fast

Well it didn't take several days for the GLD to breakout as gold has fallen over $40 this morning. The question now is whether the downtrend will accelerate or will gold find support at the previous highs.

Support at the 200dema for gold is at 1033, the previous all time high is 1029 and a measured move target from the January high is 1011. With gold currently at 1068, it doesn't make much sense to be heavily bearish against this support. On the other hand if support fails on the second try, we would certainly want to go with it.

Oil is also getting hammered today, but it remains above critical support at the December low. One frustrating thing about trying to trade the commodity via the ETFs is the tracking error and hidden expenses. From the 9/25 closing low to yesterday's close, the commodity was up 16.72%, but the OIL ETF is up only 11.05%, the USO ETF is up only 10.83%. This makes it difficult to maintain a proper stance with respect to the commodity since you are losing ground even when the commodity is above technical support. I usually try to trade the ETF based on the commodity, but I will have to work on position sizing to offset the tracking error.

GLD In A Trading Range

Gold and the GLD is clearly in a trading range supported by a positive divergence in the MACD. The question is: which way will it break out of this range? Bulls will see a completed ABC correction. Bears will see a 1, 2, [i], [ii] count. One thing is for sure: you can't have 5 waves up and 5 waves down in sequence as the move from the low of December to the January high and then the January low appears. So, if the current move completes as 5 waves up toward the January high, the bulls are right, and if the current move completes as a 3 wave move below the January high, then the bears are right. We will have to wait several days to weeks to know for sure. Patience will lead to a solid trading setup. Jumping the gun is a coin toss.

Tuesday, February 2, 2010

Wave (B) Up May Be Underway

Today's action likely completed wave A of (B) up. We should see a brief pullback in wave B down and then wave C up. The entire process may last the rest of the week. Thereafter, wave (C) down should follow. The alternate view is that the current move is a 4th wave and wave 5 of (A) down will follow. Either way, more downside is expected by late this week or early next week.

The ideal time to add short positions will be near the conclusion of wave C up. For the Qs this may be as high as the 50dema currently at 44.57. If so, then wave (C) would project to 40.56 to 38.08. Both of these levels are near the levels projected by the January range. We will have to see how far this countertrend rally carries before revising the projections.

Oil keeps bouncing off of its 200dema. This is generally quite bullish. As long as the December low is not violated significantly, the trend in oil will remain up, even if it is a slow one. I suspect that once the stock market correction is over, oil will make a big move.

The XHB is showing relative strength. This is another reason to believe that the current downmove in stocks is just a correction and not the beginning of a new leg down in the bear market. At the same time the XHB appears to be forming a large B wave triangle which tells us that after wave C up is complete, the bear market will resume, in the XHB at least.

Semiconductor stocks look ripe for another wave down once the current countertrend rally is over.

Monday, February 1, 2010