Sunday, May 30, 2010

3 Day Weekend

The general tendency after a Friday selloff prior to a Monday holiday is an up day on Tuesday about 70% of the time. The first day of June is positive about 80% of the time. Together this means the probability of an up day on Tuesday, June 1, is about 94%.

Without respect to elliott wave analysis, overall the current market behavior resembles that of the summer of 2007 which had selloffs in February/March and July/August. This year we have had selloffs in January/February and April/May. Then, the SP500 exceeded the July high before the advent of the most recent bear market. I think we will see something similar this time around but without the same bear market, just yet. If you take a look at a weekly candle chart of the SP500 you will see the similarities in behavior.

In order for the pattern to hold, we need to see an up week for the first week of June followed by a couple of weeks of consolidation and then a multi-week run to retest the April highs. Let's see how the shortened week plays out.

Happy Memorial Day!

Friday, May 28, 2010

Three Interpretations

As one reader pointed out, this week's low could be minor wave 1 down and we could now be in wave 2 up, but there are three valid interpretations of the wave structure. I have labelled them in different colors in the order of probability.

In my opinion, the most likely scenario is that we have completed a 3 wave [a], [b], [c] (cyan labels) decline from the 4/26 high. We will now likely embark on a long drawn out 3 wave advance that will be more complex and choppier. Ideally, the bulls would like to see a test of the April high or a new high which would mean we are in a flat correction which will end with a sharp 5 wave decline this fall to complete wave [X] down. This would lead to a renewed uptrend next year and possibly into 2012.

The next most likely scenario is that we have completed 5 waves down from the 4/26 high in wave A or 1 down (magenta labels). There is no way to know for sure, but I am leaning toward A simply because my larger cycle work is pointing to a continuation of the rally next year as stated above. So this would mean we have just finished the first leg of a zigzag, which could become more complex of course. Wave B or 2 up would follow a similar course to the first interpretation except that we will definitely not see a new high although we could see a deep retracement.

I think the least likely view is that we have completed waves 1, 2 and [i] down (yellow labels). This of course is a very bearish view which should lead to a very powerful selloff in June. While I am not dismissing this outcome, I continue to doubt that all of the talking heads on CNBC could be right on this call, and the overall tenor of blogs and advisory services is negative, though a few see the bullish possibilities. This interpretation can be ruled out if we exceed the 5/13 high, and probably even if we come close to it.

One interesting idea that I read this week was the possibility that the extreme nature of the May selloff might have been enough to satisfy the "4 year" cycle low due later this year as it did in 2006. If this is the case, we may find that the selling this fall is more muted than many are expecting.

Unfortunately though, we have several weeks of market action to get through before we can be certain which of the above paths we are on, but knowing that we can narrow it to three possibilites helps us to realize that this is not the time to be aggressively adding intermediate term long positions, but rather to be managing them into the summer high with a view of selling some or all when the time comes.

If we see the worst case scenario developing in June, there will be plenty of time to take on new short positions, but I will be passing on short signals for the next week while the current rally attempt plays out.

Thursday, May 27, 2010

Too Early For A Follow-Through

So far only the NDX has held above its 5/6 low and technically by IBDs rules we could consider a 1.7% rally today on higher volume a follow-through day. However, I don't think that would be a fair evaluation of the correction. The NDX is not lower than its 5/6 low only by virtue of the fact that it was harder hit intraday than the other indexes on 5/6. We should count the 5/25 low as the beginning point of a valid rally attempt, in my opinion, which would make today only day 2 of the rally attempt. Valid follow-through days cannot occur before day 4.

Another reason for caution is that many are considering the 5/6 "flash crash" day as a completed impulse from the 4/26 high, but looking at the daily charts the entire initial decline looks more like a 3 than a 5, which means we need at least one more decline and possibly two to complete a double zig zag correction.

One alternate view that deserves mention is that the entire move down from the 4/26 high is a 5 wave impulse. While not likely, the 5/13 high did not overlap the 4/28 low on any of the major indexes, so this is a possibility. If this does turn out to be the case, then we would expect the summer rally to hold under the 4/26 highs and have a 3 wave form. There will really be no way for us to know until well into the summer if this should be the case.

That said, I believe that this entire episode is a panic and not a crash. Markets always fully recover the losses of a panic. Crashes on the other hand take months and years to recover. We will most likely see an attempt at new rally highs this summer followed by a retest of the panic lows this fall into early December. If this panic has been severe enough to wash out the overly optimistic bulls, it may be that we do not have to see a significant decline this fall. Take a look at a chart of CME. It is possibly forming a very long triangle and in wave e now. If CME breaks out to the upside from the triangle this summer, it may be telling us that we are in wave [C] of x up already.

May 25 may mark the end of the correction, but it is premature to jump to that conclusion. We may need more downside testing to prove the bottom is in.

I am saying this for all of the bears out there that believe we are in primary wave 3 down. It is easy enough to say that we should trade without expectations, but we all have expectations and must ultimately take a position. I just don't think that conditions are right for the primary wave 3 wave count yet. In fact, as you may know, I don't even think that is the right count overall. Just be careful that you don't get fully loaded for bear only to find some long horns in your back side.

Wednesday, May 26, 2010

Working Lower

As I said in my mid-day post yesterday, we are likely headed for another correction low. I expect the SP500 to touch 1008, the 38.2% retracement level of the entire rally, intraday before the correction is over. However, nothing I am seeing at the moment is telling me that we are headed for a crash as so many are predicting. This selloff has been severe in its volatility but the SP500 is down only 12% on a closing basis which is not atypical for corrections. I believe that we will see the low for this correction by early next week if not this week.

I will be looking for a positive divergence with higher lows in the McClellan Oscillator to confirm that a bottom is in.

There are some notable exceptions in individual stocks and any near term rally may provide a good short term shorting opportunity, but vigilance against a violent rally will be required.

Tuesday, May 25, 2010

Anatomy Of A Trade - IAG

IAG was one of those rare trades that seemed like a layup. After a clear 3 wave decline, IAG formed a base that lasted about 10 weeks with a handle. My expectation was for a test of the previous high. Gold was heading for a retest of its previous high as well, so overall the trade appeared to be a high probability setup. My plan was to buy a breakout above the high of the handle, to exit 2/3 on the first signs of exhaustion and the rest near the previous high. In retrospect I could have probably held on for one more day, but everything is clear in retrospect. Overall, this was a respectable trade and I would definitely take another similar setup if I see it.

One More Retest Of The Today's Low

The intraday pattern is saying that we will see one more low either today or tomorrow to complete the decline from the 5/13 high, but a low is near.

Could The Crowd Be Right This Time?

Last night I showed a chart of the extreme pessimism in the market. This morning Mark Hulbert posted an article on Marketwatch which says that his survey of market timing newsletters, some 300 newsletters, are now 45% short - down from 80% long just 3 weeks ago. This is one of the biggest shifts in sentiment we have ever seen and not one normally associated with tops. It's hard to be a contrarian, but now is the time that contrarians stand up.

The intraday pattern appears to be a triangle. Triangles form before the final wave of a movement. The current down move appears also to be a 5th wave down from the 5/13 high, and although it could be severe, 5th waves are ending waves. We will look for divergences. Should today's low be the end of the move down from the April 26 high, the next likely movement would be a 3 wave upward correction in wave B or X up, which should retrace at least 50%, if not 62%, of the decline. This upward correction will likely take many weeks and be very choppy. A complete retest of the high would be the most bullish outcome, but we are far from that outcome at the moment.

In any case, a retest of the Feb 5 lows is in store for today it seems and possibly lower. Fib support for the Dow is around 9460 and the SP500 is around 1008. We need to find support above those levels or we may indeed be headed for a greater crash and the crowd may indeed by right. I've just never done well going with it, and I don't plan to change my behavior at this stage of the game.

Monday, May 24, 2010

Extreme Pessimism

Pessimism as measured by the 50,5 PPO of the equity only put/call ratio has reached an extreme. Oftentimes the final low in a correction will occur after the extreme in pessimism as occurred with the low in March 2009, but I believe that we will be building a base at current levels for a move higher. How high we go may be in question, but I think the low for the summer is probably near at hand.

Looks Like A Triangle

It is beginning to look like a triangle of small degree is forming on the intraday charts which could go either way, but probably means a retest of Friday's low will occur soon. As long as markets hold support on that retest, then a more substantial rally should follow.

Sunday, May 23, 2010

Big Picture Update

I presented the above chart last month to show the important levels in the SP500 that have been created over the last 10 years. I calculated what I am calling the Decadal Pivot at 1160.75. In March we broke above the Decadal Pivot on the second approach only to fail back below it dramatically in May. Many are interpreting this severe decline as the beginning of the resumption of the secular bear market, and we certainly have to give strong consideration to that view. However, looking at the big picture we see that so far the SP500 is still trading within the same congestion zone that developed in 2004 and 2005. Therefore, I believe it is premature to be calling this a resumption of the bear market.

It may well be, but until we see a confirmed weekly close, preferably two or three weeks, below 1060.75, which is the bottom of the congestion zone, we should probably view the recent action as the work of consolidation, however violent, in preparation for the next move higher.

There are really on three outcomes from this point for the rest of the year: 1) the market continues to break down below the congestion zone confirming the bear market, 2) the market rallies to the decadal pivot and then turns down, or 3) the market rallies to the upper end of the congestion zone at 1260.75. After 2) or 3), the market could still fall below 1060.75, but until that happens we should expect many months of base building rather than an immediate decline. Remember, the market consolidated sideways for almost 20 months in 2004 and 2005. It doesn't have to repeat that action now, but it is a more likely outcome after the historic rally that we have just experienced.

At the moment, I personally think the probability of the 3 outcomes are about equal, which means the probability of a substantial rally into mid July to late August outweighs the probability of a continuation of the decline. The conclusion is that this is not the time to be heavily short this market, but rather to be looking for confirmation that a new short term to intermediate term rally is underway to initiate new long positions, with conservative allocations, or to be waiting for an opportunity to sell existing positions at higher prices. Only a sustained break of 1060.75 will alter that point of view.

Friday, May 21, 2010

Constructive But Not Impressive

Today's action was certainly constructive if not all that impressive. The Qs came down to my cited support at 43.58 with a low of 43.49. Volume was higher across the board. The VIX popped up to a level that before 2008 would be associated with a bottom. The Absolute Breadth index reached a level equal to its high at the March and July 2009 lows. All in all there is good reason to believe that we may have put in a multi-week bottom today.

However, the NYSE index undercut its Feb 10 low, which is a big negative. Also, the fact that the SP500 undercut its May 6 low probably means that at most we could see a retest of the April high this summer for a double top as opposed to meaningful new highs. It's too early to make that call yet. We need to see how the next one to two weeks plays out.

One comparison with the action over the last 4 weeks that stands out is the top in 2000. Although the initial downmove was more severe, the topping action this summer may be similar as most indexes rallied the rest of the summer after the initial low in May. This was followed by a severe selloff that lasted the rest of the year. The reason that I think this comparison may be valid is that it conforms to the pattern of the 10 year cycle. The difference this time I think will be that we rally to new highs in 2011 and 2012 before the final meltdown begins.

In any case markets are severly oversold, and a rally to the 50demas is the minimum objective before more selling is likely, in my opinion. I bought the QLD.

An Alternate View

In my post on May 1 titled "Will The Real Count Please Stand Up" I presented two wave counts for the Qs and the Wilshire 5000. While reviewing other indexes last night and this morning, it has become clear that some have already violated their May 6 lows and the NYSE is within spitting distance of its February 5 low. This raises the odds that the alternate count for the Qs as an impulse is the correct count, or at least some other count that considers the rally from the March 6/9, 2009 lows complete. Note the broken channel line above.

However, all is not lost. A substantial rally that likely will take most of the summer is still the most probable path from here regardless of which count is correct. I took a look back to 1987 at oversold conditions of the McClellan Oscillator and I could not find a single instance when a severe oversold condition in the oscillator did not lead to a significant rally.

Let's take a dim view of things for the moment. Major support for the Qs is in the 40 to 42 zone if current levels do not hold. In the summer of 2000, all of the major indexes rallied at least 61.8% off of the initial low after the top. A 61.8% rally here would take the Qs back to 46 to 48, around the May 13 high. So, we can conclude that if we approach, but do not exceed that level by late July/early August that the intermediate term bullish case is dead, and it will be time to sell stocks.

At the moment let me be clear. I only have one short term long position. I have either sold or been stopped out of all other short term long positions. I still maintain a number of intermediate and long term stock positions. I am short the IWM, SLV and VRTX. I am out of gold positions. So, the question for me is when to dump the short term and long term positions.

I am still of the opinion that a case can be made for an unexpected rally this summer that carries markets to new highs, but that argument is on the ropes, so I am preparing for the alternate case that we have entered a more substantial correction of the rally from the March 2009 low. I still do not agree that this is primary wave 3 down. I believe that whatever form the wave count takes, we are at worst in wave b or x of the rally. Wave c or y up should follow to take the indexes near the all time highs by sometime next year.

Thursday, May 20, 2010

It's Not As Bad As It Seems IMO

The above is the bullish wave count for the correction that began April 26. As long as the May 6 low is not violated, I believe the above count is the best interpretation of market behavior over the last 10 days. It appears that the Qs are in a 5th wave in wave (c) of [ii] down which should bottom tomorrow morning around 43.58 to 44.17. Note the positive divergences that have developed in RSI and MACD on the 15 minute time frame.

Both the traditional and ratio adjusted NYSE McClellan Oscillators made 3 year lows today. I am sure that many are interpreting this as a shock which is indicating the initiation of a new bear market downtrend. I have heard this interpertation many times, but do not recall an instance where it actually ended up being correct. What we can say is that at the moment the market is more oversold than it was after the October 2008 crash. To me that is saying a lot.

I am of the opinion that barring a breakaway gap down, that a barn burner rally is imminent. It probably won't happen tomorrow with options expiration, but we should see something by Monday or there may be problems with the bullish interpretation.

The SP500 on the other hand is much closer to violating its May 6 low, and this would also be problematic for the bull case.

One More Downmove To Go

The rally over the last two hours has been an upward 3 wave correction, which points to more selling into the close. However, this should be the last wave down for wave [ii]. Obviously, once we see the nature of the ensuing rally, which should be sharp and significant, we can evaluate the potential for a continuation of the broader rally.

Wave [ii] Down Should Be Nearing Completion

I originally expected that wave [ii] down would extend out in time with (b) of [ii] moving higher over the next few days. It appears that the market had other ideas as wave [ii] down is completing sooner.

For the Qs:

Wave (c) of [ii] = (a) of [ii] at 45.11. This target has been hit and exceeded.

Wave (c) of [ii] = 1.382 x (a) of [ii] at 44.17.

Wave (c) of [ii] = 1.618 x (a) of [ii] at 43.58.

Note that the lowest expected target for (c) is still above the 2/5 low. If we close at the lows today, then I expect that the lower target will be hit.

So far, as bad as it feels, all of the action can be explained as a 2nd wave. However, we are fast approaching the uncle point. Even then, the market should not head straight down, but should have some sharp rallies where stocks can be sold.

Now I'm Getting Scared!

Well, not really, but the sudden drop in the futures this morning is unnerving to say the least. Many elliotticians are calling this a 3rd of 3rd wave down, and perhaps in retrospect I will agree with them, but the fact is that we are still above the 5/6 lows. It would take a drop of 4.3% in the Wilshire 5000 from here to take us below that level. It would take a drop of 7.5% to take us below the 2/5 low, which is the true level from which we would say there has been a major swing change and an invalidation of my wave count.

To me, the current decline appears as a 2nd wave retracement of the rally off of the 5/6 low, and as long as markets remain above that level, that seems to be the logical stance to take regardless of the fact that the Dow could fall another 575 points before violating the low. Also note, the SP500 would have to break 1044 to make a 3 month low.

According to the work of Robert Prechter, 2nd waves tend to push sentiment to a greater extreme than was seen at the origin of its preceding 1st wave. Isn't that what we are experiencing now? Fear is greater today that it was on 5/6.

What if I am truly out to lunch with this view, what then? Even after the markets had broken down on 9/5/08 to the lower daily Bollinger band, there were 3 rallies to the 20dma. There will be a sharp rally back to the mean at some point. If my current views are off, as seen by a break of the 5/6 lows I will dump my long positions on such a rally and add short positions. As bad as it looks right now though, I don't think I wrong yet. If that day, or moment comes, I'll let you know as soon as possible because while some part of my ego would love to be right, I am more concerned about making money than being right.

Wednesday, May 19, 2010

Are You Scared Yet?

This morning's selloff has filled the gap from the 5/7 close on the Dow and SP500. I think this is a positive. The Qs have come close - within 0.15. In general, Wednesday's tend to be turnaround days. We also have options expiration Friday. So, I expect that we will see the markets begin to move higher this afternoon, but then again, I thought they would move higher yesterday afternoon as well.

The Euro has moved up in 5 waves from yesterday's low. If it can gain some traction, that should begin to turn the tide.

Silver has continued its selloff and reaffirms the double top.

This continues to be a difficult trading environment and reacting to extreme moves is probably not the best approach. I am looking for buying opportunities against the 5/6 low instead of trying to short this market with the crowd. I think any positive turn in the news could spark a huge short covering rally and turn this market around, but it may take 2 to 4 weeks.

Not A 3rd Wave

I may be proven wrong at the end of the day, but anyway you look at the intraday squiggles, they do not look like the 3rd wave of an impulse to me. I really only see too possibilities, one more bullish than the other. The first is that wave (b) topped yesterday and this is wave (c) of [ii], which should finish by midday, or this wave b of a flat in wave (b) and wave (b) is still in progress.

Either way, we should fill the 5/7 gap this morning and that may be a positive. The overall action suggests that wide swings will continue for some time, but I am not yet convinced that we have made a bearish turn yet. Or course, a break of the 5/6 lows will change that view.

Can the majority be right about a crash? If this is a crash in the making, it is the most telegraphed crash in the history of the market. The well known Richard Russell of Dow Theory fame is saying that if we break the 5/7 closing low, markets will crash.

The McClellan Oscillator is working on a higher lows pattern at a very deeply oversold level. If a series of higher lows does develop, it would be very bullish.

As bad as it is the Qs keep trading around the January highs, this is bullish - not bearish. Pre-market the Qs are at 46.43. The January high was 46.64. The 2/5 low was 42.12.

They are saying the ban on naked short selling in Germany is in response to a yet to be revealed bank problems, a la Lehman. Isn't naked short selling illegal anyway? I must admit I don't get this one. Anyway, don't be surprised if whatever it is is revealed over the weekend. If it is not as bad as is feared, markets will rocket higher.

Meredith Whitney is calling a top in banks. Can she be right twice in a big way? I pointed out in a previous post that both financials and housing stocks are tracing out a very clear double zigzag. There is almost no ambiguity. That means that at the least we will see a retest of the April highs in these sectors. Can the market crash without these two sectors?

Dennis Gartman is telling his clients to sell gold. The price is falling and the action confirms that the recent move in gold and silver was wave B of a flat correction. We will see a move below the 2/5 lows, but that should be a buying opportunity, not another signal to sell.

I discussed oil last night. We should be coming in on some sort of near term bottom. The following rally will tell the tale.

I must admit that the recent action makes me think I should be daytrading, but in a couple of weeks, I feel confident that I'll be glad I am not.

Tuesday, May 18, 2010

What's Up (Or Down) With Oil?

Overnight stock futures are red again, and oil is down as well. Is there a bottom in sight? The 38.2% retracement of the current rally is 66.54. The Sept 09 low is 65.05. Other than that there is little support for the current decline. However, all is not lost. There is still a 50/50 chance that the current decline is wave C of a flat correction. If so, the bottom is imminent. On the other hand, it is beginning to appear that the rally from the 7/13/09 low is an ending diagonal triangle with a target of 58.32.

I really have no idea which view will prevail, although I do believe the outcome of the current stock market correction hinges on which way oil goes. If oil continues its decline, then we have to call into question any meaningful rally in stocks. If oil rallies, then stocks should rally too.

One reason I am leaning toward the view that the current decline is wave C of a flat correction, is that the pattern in copper (see the JJC) is almost certainly a flat correction which is nearly complete. The pattern from the January high is 3-3-5. Oil has lagged copper by 0 to 2 days since the beginning of the year. Copper only needs one more low to complete 5 waves down. So we should see a bottom in oil within the next week with at least a 2 to 4 week rally to follow. Once the rally is complete we can evaluate whether or not there is any hope for oil to continue higher to new highs for the year.

Another Upswing Should Begin Soon

Wave b down of (b) up is nearing completion. Wave c up of (b) up should begin soon for a retest of this morning's high. Today's downside action is clearly corrective and should NOT lead to immediate downside continuation.

Is It Over?

It is possible that this morning's high is the high of wave (b) up, but it is more likely that wave (b) is just developing as a more complex upward correction that will extend in time. We would at least expect the 5/14 gap in the Qs to be filled at 47.84 before wave (c) begins.

Monday, May 17, 2010

3 To 8 Day Upmove Underway

Today's reversal off of the midday low marked the end of wave (a) of [ii] down and the beginning of wave (b) of [ii] up. Wave (b) will most likely last anywhere from 3 to 8 days depending on its complexity. Afterward wave (c) of [ii] down to retest today's low will follow into the end of May or the first of June.

CNBC had another analyst on today who is calling for Dow 5000 by the end of the year, but to be fair, this analyst did say he expected another new rally high before the real selling begins. Mark Haines joked that this guy should call back if he changed his views before January as they would likely be calling him for their "Remember That Crazy Call" stories. Although I am sure that Haines was talking about the Dow 5000 part, it is interesting that he didn't specify, and his lack of respect for the guest's well thought out views was clear too.

However, the biggest takeaway is the fact that they have had someone on almost everyday that is predicting new lows in the Dow. Even though half of these analysts qualify their prediction by saying that the new lows will be months to years in the future, I find it interesting that CNBC chooses to bring them on during the current correction and to headline their predictions of Dow 5000, etc. They are clearly playing to the perceived fear among traders and investors and this speaks to the real pessimism that has developed since May 6.

If we think back to the top in October of 2007, perhaps I am wrong, but what I remember is that most guests on the show were talking about a continuation of the bull market and how remote a bear market was at that time. They continually played up Bernanke's reassurances that the housing market was not a bubble, etc. That is the kind of commentary I will be looking for when we are at the real top of this rally.

Saturday, May 15, 2010

Anatomy Of A Trade - GILD

I first noticed the potential opportunity in GILD a year ago. After rallying in a double zigzag from Oct 08 to Feb 09, GILD declined in 5 waves to the Mar 09 low. There was no point going short then as a major market rally was imminent, so I just kept watching it, and watching it, and watching it, for a year. Fast forward to Apr 2010, GILD was now moving down as the market was grinding higher and formed a small bear flag.

I entered an order to short a 3 day low at 45.10, about 0.10 below the 3 day low. I was filled on 4/8 at the dead low of the day just in time for a 4 day rally in the stock. Well that was disappointing, but I was not stopped out with my initial stop at 48.65.

6 days later GILD gapped down. I waited for another down day to cover 1/2 the position on 5/3. Now GILD has come within pennies of it's 2008 closing low, a level not seen in a year and half. We have positive divergences in the RSI and MACD, and price is moving away from the lower Bollinger band which has turned up. At the same time, the market may be making a higher low after the 5/6 selloff, so it is time to cover the rest of the position for a gain of 16.2% in 27 trading days.
The main reason I waited so long is that it appeared GILD was forming a large triangle. When I went short in April, it had just completed wave e of the triangle. Now, GILD has completed a large ABC decline from the Feb 08 high. I should move up in an wave (C) to retest that Feb 09 high. I don't want to take that trade as the longer trend in GILD is down. The pattern probability is not high as some other variation could show up. However, if the Feb 09 is retested, I will be looking for a short trade.

With regard to the selloff on May 6, it has now been established that a large money manager, Wallace & Reed, entered an order to sell 75,000 SP eMini contracts in one large block as a hedging strategy. This was an abnormally large order, apparently, and in a great example of herding, other large speculators began selling too. This information, as far I as I am concerned confirms that the week of May 7 was not the beginning of a new downtrend, but just a panic in a still ongoing cyclical bull rally. Remember that before the crash of Oct 08, the market had been declining for almost a year. The May 6 panic does not mark a top in the market, but does demonstrate that large speculators believe the market is vulnerable at current levels and want to hedge their risk. Perhaps they should try selling 1,000 contracts at a time over the course of a couple of days. Of course, as always, come to your own conclusions. This is just my opinion.

Friday, May 14, 2010

Another Observation For The Day

The Wilshire 5000 index closed today at 11876.32. The January high was 11873.48. The traditional McClellan Oscillator closed today at -246.87, which is more oversold than at the lows of most of the pullbacks during the 2002 to 2007 cyclical bull market. If we were close to the January low, I might take a different view, but the fact is that pessimism has swung very rapidly to the bearish extreme (see Mark Hulbert's Commentary today on Marketwatch), which supports a continuation of the rally - for the time being. We will probably continue to test the January highs until the market has time to build a base for the next move higher.

A move to new highs after the events of last week is what is needed to solidify the bull market optimism in preparation for a more significant decline.

As Expected

The selloff today was highly predictable as stated earlier - something to remember for those that trade e-minis. However, we are probably fast approaching the end of wave (a) of [ii] down. Whether we stay down the rest of the day or rebound somewhat this afternoon, we should see more rally in wave (b) up next week. Thereafter, another sharp selloff should bring the recent chaos to a conclusion.

On the other hand, if we breach the February lows on the next selloff, then all bets are off for a substantial summer rally, and we will have to look at the alternatives.

Weak Close On Thursday

With a 5 wave impulse pattern complete and markets closing near the lows yesterday, we can expect some significant selling today. When Thursday's close is in the bottom 10% of the range the probability is high that the following Friday will close down significantly.

Thursday, May 13, 2010

Wednesday, May 12, 2010

Have We Seen The Top?

It is truly amazing how quickly traders have become pessimistic. In particular, I like watching Fast Money on CNBC during emotional market periods because these guys tend to get it wrong during near market turns. When the trend is in force, they do well, but not at turns.

For example, during the two weeks leading up to the 3/6/09 bottom, no one on Fast Money thought it was a good time to buy stocks. They didn't recognize the extreme in market sentiment. Likewise, last week as the market was crashing, they were quick to ring the alarm bells. I haven't had a chance to watch this week due to work conflicts, but overall the sentiment turned quickly from its extreme optimism at the end of April. Today, CNBC trotted out the Black Swan guy, Nassim Taleb. They were trying to get him to call last week a Black Swan event. He would not take the bait though, and called it a Gray Swan or a White Swan even.

I think in a few weeks, we will see that although last week's action was a tell, it was not the beginning of a new downtrend.

Solid Close

Markets closed above the crash day highs today, and although volume was lighter, the recovery of the entire selloff in 4 days is no small feat. The intraday action is inconclusive at this point. We could continue higher into next week or retest the January highs again before moving higher. I don't think we have completed the advance off of the low just yet, but there isn't really enough information to draw a firm conclusion. More likely we will see a short term top early next week. In any case, this is not a time to be shorting in my opinion, but a time to wait patiently for new long setups and the eventual confirmation of the resumption of the uptrend.

Dow Approaching New Recovery Highs

The Dow completed a small degree impulse from Tuesday afternoon's low. As long as 10734 holds, we can expect new recovery highs to above 11000 by early next week. This would complete an impulse wave that is most likely minor wave 1 of C of (Z). Thereafter, a 2 to 4 week pullback which holds above the 5/6 low should follow.

The optimal buy point for intermediate trades will be coming out of the secondary pullback. Again, this is assuming the 5/6 low is not penetrated.

Gold and silver may hold up until the current stock market advance completes, but it is not a certainty. The count in silver is rapidly approaching a terminus. I would expect silver to turn down first or coincident with gold.

Tuesday, May 11, 2010

Silver Setting Up For A Reversal

On 5/4 I stated that silver had topped. Clearly I was wrong. But the pattern still stays that silver is at or near a top. There is nothing about the action from the 2/5 low that looks impulsive other than the impulsive moves within the clear zigzags. Wave [b] of Y is almost certainly a flat correction in retrospect. The action today puts the SLV slightly above the point where wave [c] of Y = wave [a] of Y.

The fly in the ointment here is that gold closed at new all time highs today, and the metals have fooled many an elliott wave analyst over the last several years so we may find that some other more complex pattern is playing out in the days ahead.

I remain short the SLV against the 12/2/09 high. That may not be for long though, but sometimes these things work out.

Monday, May 10, 2010

One Possible Count For This Correction

At the moment I think the most likely scenario for the current currection is a double zigzag. We are probably near to completing wave B up and wave C down will probably take an extended period of time, possibly into early June. Even if the current advance completes as a 5 wave impulse, we should expect a considerable amount of time for consolidation prior to a continuation of the rally.

For those who follow Investor's Business Daily, today's action did not count as a follow-through as it occured on day 2 of the rally and on lighter volume than the previous day.

I will not be looking to add any new long positions from this point forward until we see a pullback on lighter volume that holds above the 5/6 low, and I certainly would not add new short positions until we see that the current rally is going to fail on increasing volume.

Friday, May 7, 2010

20 Month Cycle

I have discussed at length in the past that what is usually called the 9 month cycle is actually 10 months on average and is half of a larger 2o month cycle which varies in length from 18 months to 22 months. The span from the 3/6/09 low to the 2/5/10 low is within one day of being 11 months, or half of the larger 22 month cycle. If we project an equivalent time length for the second half of the cycle, then the projected bottom date is 1/6/11.

11 months is just shy of 48 weeks and we have most likely completed a smaller 1/4 cycle of the 11 month cycle of 13 (12 +1) weeks at yesterday's low, which is a mirror of the 11/2/09 low that occured 13 weeks before 2/5/10. It would be tempting to continue projecting forward 12 weeks at a time, but looking backward into 2009, we see that the next previous major low occured on 7/8/09, which is 17 weeks previous to the 11/2/09 low . Mirroring that low forward projects the next major low to occur on 9/2/10+/-. Assuming some right translation of the cycle high, we can expect the high of the cyclical bull market rally to occur sometime in the time frame of 7/22/10 to 8/5/10. It is interesting to note that a number of significant turning points have occured around the third week of July including a penultimate top in 7/16/07.

I had previously indicated that a 20 week low was due in late June. I believe that is incorrect as the above analysis shows.

If markets continue their decline from here as some suggest, then the above will be invalidated, but if markets continue higher as I believe they will, I think the most likely time frame for a high is mid-to-late July, with a possible double top in mid-to-late August. We can confirm that a top is developing this summer by looking for major divergences in various breadth indicators as well as momentum indicators. Thereafter, I am anticipating a significant 3 wave (not 5 wave) decline into a mid-December low. The worst of the decline will most likely come in October and November.

Based on my analysis of the decadal pivot in the SP500 that I presented previously on 4/23, I suspect that the correction this fall will retrace an equal distance below the pivot as the expected high is above it this summer, but most probably no lower than 950.

Robert Prechter has done some very nice work in his latest Theorist for a projected nominal low for the secular bear market in 2016. Please check it out via the link above. I differ with him in that I think we will see a second major leg up into late 2011 or early 2012 for this cyclical bull market, and then a major move down into 2016, as opposed to continuing down from this fall's coming selloff.

I also disagree with his understanding of the head and shoulders top formation that has developed over the last decade. Tom Bulkowski at has done a lot of nice statistical work on patterns, and according to his work only 55% of head and shoulders tops meet the projected price target. I don't know what the distribution of his results are, but my previous experience suggests that a more probable target is about 2/3 of the % meeting the target. For the Dow this works out to about 2,777 points. Subtracting that from the 3/6/09 low gives us a bear market target of 3693. I have believed all along that the most likely target zone for the bear market is the 1987 high of 2747 to 38.2% of the all time high or 5424. It is interesting to note that the lower trendline connecting the 2002 and 2009 bottoms projects to 5638 in July 2016 - pretty close to the 5424 target.

We can fairly easily project which target will be in play by seeing where we are in 2014 at the next 4 year cycle low (4 years from the low expected this fall). If we are already at the lower trendline in 2014, then we would expect the 2747 target. If we are well above the lower trendline in 2014, then the 5424 target will be the most probable.

These dates are quite some time away, but I think it is helpful to have some idea of the path that we are likely to take on the way to the bottom. Another thing that must be kept in mind if we breach the 5000 level in a significant way is that it will probably become increasingly difficult to short the market. Once we get to that level, we will probably just have to sit on the sidelines while waiting for rallies to go long.

Anyway, this is how I see it. I know it doesn't fit with the general expectations of the bears, but the widely accepted outcomes are not usually the ones that come to pass.

The Market Is Deeply Oversold

The market is as deeply oversold as it has been in the last 3 years. Some may view this as the kickoff to a new downtrend in the bear market, but I don't think so. The action this week reminds me of August 2007 when a hard selloff drove markets down near the March 2007 panic low. This was followed by a rally to new highs that was in fact the final high for the 2002 to 2007 cyclical bull market. I think that we are in a similar position now. We should see new highs this summer, but it may prove to be the final high of the 2009-2010 cyclical bull market. I am still leaving the door open for a continuation of the cyclical bull market after a deep correction this fall, but this week's action is most likely not the beginning of that correction. It is, however, the warning shot across the bow.

Thursday, May 6, 2010

GOOG Chart

Historic Action Doesn't Damage Wave Count

Amazingly, all three major indexes held above their respective February 5, 2010 lows in what turned out to be a classic [c] wave event. For those who are new to elliott wave theory, C waves, which come at the end of a 3 wave A-B-C correction, can be just as vicious and sharp as 3rd waves which come in the middle of a 5 wave impulse.

If today's lows hold, what this means is that the correction that we were expecting to take several weeks was completed today. Although it may take several weeks for the market to get going again and we may see a higher low in June, the most likely conclusion is that we should be on our way to new rally highs. The only thing that would derail that view is if the markets continued lower below today's low in the next few days, an outcome that does not appear to be likely given today's capitulation event.

There is little reason to be short this market for the next few days until we see what the real direction is for sure. I exited my short term short positions in AAPL and JBL today for nice gains of 14% and 7% respectively. Unforturnately, the sharp intraday movement stopped me out of a couple of otherwise profitable intermediate positions, which negated the gains. However, I used the rare opportunity to take positions in GOOG, CREE and RFMD just after the extreme lows were seen though not at the lows of the day. I think GOOG has bottomed and will head higher the rest of the summer, CREE should resume its uptrend, and RFMD is a small cap that may have potential to move above 12.50 later this year.

Today's action is an extremely rare event that can only be managed with experience. The best way to manage it is to do nothing. If we had been in a downtrend for the weeks preceding today's event, the story would be different, but for those who can put their emotions at bay, an event like today's is a great time to pick up stocks at cheap prices for quick gains.

Once things settle down, I will re-examine the elliott wave count to see where we might be headed.

Major Breach For The SP500

The SP500 has moved decisively under the January 2010 high of 1150.45, and that level may become resistance on any rally attempt. Support is now at the 200dema around 1102. The Qs, on the other hand, are still above the January high and should find support at that level.

Our working hypothesis that we will new highs later this summer depends greatly on markets remaining above the February low. A breach of that level will destroy the potential for new rally highs this year, although not necessarily for next year. Also, we will be on the lookout for a 4th and 5th wave in the current decline, which could signal a change in the trend if the overall length of the decline is deep enough.

Hypotheses about future market outcomes can help us navigate the trend, but when the premises for those hyposthes are violated, we must be ready and willing to change our stance to accommodate the real market action. We may be nearing such a point now. We should know within the next few days.

Wednesday, May 5, 2010

Nearing The End Of The First Leg Down

The Qs came very close to the cited target zone for the first leg down of the correction today, but it is unclear if wave A or W (This is a correction from the labelling yesterday as wave C) is complete as this morning's gap down low appeared to complete a third wave, and the action during the rest of the day was more of a sideways consolidation suggestive of a 4th wave. The McClellan Oscillator closed the day at -252.73 which is well within the area where short term bottoms are formed. However, we may need to see a divergence develop over the next couple of days before wave B or X up begins. It will be interesting to see just how much of a divergence we get at the expected double top at the end of May.

Oil got hammered again today, and it is beginning to look like the overall pattern since the July 2009 bottom is a very large ending diagonal triangle. If so, the April 6, 2010 high is probably wave 3 of (C), and we are now in wave 4 of (C). Also, if correct, we should expect oil to continue down to 75 to 76 in the coming weeks before a final upthrust to above 90. The final movement should only take about 4 weeks, and we could see a sharp spike in an overthrow before oil collapses in relatively short order back to the July 2009 low around 60.

This is disappointing because it means the economy is probably a lot weaker than is currently being portrayed in the media, and because the triangle pattern that appeared to be playing out would have led to much higher prices and greater profits for longs. Overall, this is truly a negative development.

Tuesday, May 4, 2010

Silver Has Topped

Yesterday, I said that gold and silver were probably near a turning point. Today, silver and the SLV closed decisively below their trendlines from the February low with a confirmed negative MACD sell signal. The pattern that has developed is a complex double zigzag with each leg breaking down into a double zigzag. If the behavior from December and January repeats itself, after wave W of (Y) down we should see an X wave rally that tops about the same time as the stock market tops later in May and which bottoms along with the stock market in June. The downside targets for the SLV are 13.76 to 10.83.

I suspect that gold also topped today, but it could make another new high while silver makes a lower high. Oil is working on wave c of a flat correction that should take it down to 78 to 80 before it begins its final runup to a top later this summer.

Stocks are probably in wave [iv] of C. We may see a brief pop up tomorrow or sideways movement with another leg down into Friday's employment report. Wave C down could be severe with downside targets for the Qs in the range of 47.49 to 46.64. This should mark the bottom of the current pullback which should lead to a retest or at least an attempt at recent highs.

If the current move down completes as 5 waves, which would probably take us into next week, then we will not see a complete retest of the highs before the expected low in June. Only time will tell in that regard, but a sharp reversal day would be a sign to consider short term long entries into the May top.

That said, I will be expecting IBD to call the "Market In Correction" in tomorrow's edition. If not, I would be surprised after the string of distribution days that has piled up. Those that follow IBD for intermediate term signals should wait for a 1% continuation move to confirm intermediate short entries, but be prepared for a whipsaw. The MACD is already on a sell for stocks.

Monday, May 3, 2010

Triangle Forming In Some Indexes

The Qs are forming a triangle, as well as a couple of other indexes. Given that the McClellan Oscillator closed today below zero on an otherwise up day, I suspect that this triangle will prove to be wave [b] of A for the current correction, which means it should break to the downside. Of course, an upside breakout would negate that view. The benefit for longs with a [b] wave is that we can expect some sort of rally into mid to late May if it proves to be one. We should know by tomorrow or Wednesday at the latest.

Oil continues to hold above support, and there is little reason to believe that it will not continue to consolidate for an eventual move above $90. However, gold and silver are probably near a turning point.

The next few weeks should prove to be volatile as the correction/consolidation unfolds.

Saturday, May 1, 2010

Will The Real Count Please Stand Up?

QQQQ Preferred Count

QQQQ Alternate Count

Wilshire 5000 Preferred Count

Wilshire 5000 Alternate Count

The above charts show my preferred and alternate counts for the Qs and the Wilshire 5000.

In my preferred count for the Qs, we have now completed wave (1) of [C], and we are now entering wave (2), which is a correction of intermediate degree. The equivalent corrections in wave [A] each lasted about 4 weeks, and I think we should expect something on that order now. The validity of this count requires that we remain above the February 5 low, but does not preclude a deep retracement toward that level. What I like about this count is that it does not violate any rules, wave (4) alternates in form with wave (2) and wave [B] corrects into the zone of wave 4 of (3).

My alternate count for the Qs shows that we have just completed wave [A] which means we are entering a correction of primary degree. Wave [B] would be correcting the entire rally from the March 9, 2009 low. There are two problems with this count: 1) a cycle high is expected later this summer, and 2) wave (4) does not alternate in form with wave (2) and is not proportional with wave (2). The first problem could be overcome with a large flat correction with wave (B) making a new high later this summer above the top of [A].

In my preferred count for the Wilshire 5000 index we have just completed wave A of (Z) of [W]. This is a complex triple zigzag. This fits well with the preferred count for the Qs even though the form is different, and will lead to the Qs making new highs about 1 month after the broader markets top later this summer, which is exactly what happened in 2007.

It would be cleaner if the Wilshire 5000 exhibited the same impulsive form of the Qs, but the more I have tried to make it work in my alternate count, the last chart, the less I like it. Nevertheless, it does fit well with the timing of the alternate count for the Qs.

The main points that I would like to get across with these elliott wave counts is that 1) the idea expressed by some technicians that we have just completed primary wave 2 doesn't fit with either of the counts for the Qs, 2) a top now doesn't fit with what I know about where we are in the cycle, and 3) if any of these counts is correct, we have much further to go with this cyclical bull market than many expect. In fact, it is possible, and I believe that this will prove to be the case, that we are only in the first major leg of this cyclical bull market - wave [A] or [W], and that the final high won't be seen until 2011 or even 2012.

Last year that just didn't seem possible to me or most anyone that I have followed, but that is the way it is playing out, and the strong move in the SP500 above the decadal pivot of 1160.75 this April supports that view. The only thing that could derail any of the above is a powerful impulsive move down below the February 5, 2010 low. And even then, we can't be sure that such a move would not simply be wave (A) of [B] or [X].

The action this week has probably demonstrated to overleveraged longs what being on the wrong side of a difficult market can do, but the same can be said for the bears that are continually trying to catch the top of wave [2]. There was a time to try for that, but it has passed, and we need to let the current cyclical bull market play itself out before trying to ride that train again.