Friday, July 30, 2010

Marc Faber On Dow 1000

Interesting comments by Marc Faber: CNBC article

Looks Like More Sideways Action

While the overall response to the GDP report was positive today, unless we see immediate upside on Monday, it appears that today's rally will end up being a 3 wave affair which means that the current pullback has more to go either in time or price before the rally can move higher. One thing that does stand out is that the character of the pullback is definitely corrective, so we are still looking for higher prices in August, even if they do not meet the expected targets.

The NYSE Summation Index has yet to show any sign of weakening and has moved well above the critical +400 level that marked the top of previous bear market rallies and bull market declines. This provides additional support for the view that the rally has more room to run.

At the moment I am only 40% long on index positions and it is hard to see adding more until the Qs are able, or appear to be ready, to take out the January high at 46.64. The Bullish Percent Index for the Nasdaq Composite is still standing below 50 at 47.73. This is hardly a ringing endorsement for the rally.

I still see the rally moving higher into late August. A new rally high would leave 5 overlapping waves, which would imply 7 waves to finish a double zigzag, which is beginning to look like the probable outcome. The Cabot Trend is still on a sell, but most of the trend following strategies are on a buy or neutral. The Weekly/Daily strategy will go long next week on a new rally high.
I think all there is to do for now is sit tight and wait for opportunities to sell in August.

Thursday, July 29, 2010

Flat Bands Suggest Big Move Coming

I still am not feeling well, but I thought the above chart was important to show tonight. Notice how the 12 period bollinger bands on the weekly chart of the Qs have gone tight and flat. This condition does not happen often and when it does it usually only lasts about 6 bars max. This would suggest that even if the rally continues into late August, the upside will be limited to around 48+/-. Frequently, a market in this condition will pop in one direction and then reverse sharply in the other direction. This is a highly probable outcome unless the rally accelerates now to relieve this condition.

Notice how the weekly MACD is trading sideways during this rally below the signal line - not a particularly bullish configuration - the opposite of Feb 2009. A late buy signal near the upper bands would suspect.

The RSI is at the midline and not moving up. Again this is indicative of a weak uptrend.

The various charts that I have presented over the last couple of weeks all seem to be saying the same thing. (Is this my personal bias?) The rally will likely continue into late August, and then a selloff will ensue. This is a profit taking market. I would not be taking new long trades much after the middle of next week due to the risk of an unexpected downside reversal.

On the positive side, the NYSE Summation Index moved above the critical +400 level this week. If it can sustain above +400, the rally should continue as expected for the time being.

Could Go Either Way

I think the market could easily go either way tomorrw, with the bias to the downside. Even if we get a selloff, the tenor of the decline from the recent high so far has been corrective. This leads me to believe that we are in the middle of a double zigzag upward correction. If so, the Qs would target 1.382 to 1.618*(46.72-41.77)+41.77 = 48.61 to 49.77. The 48.61 level fits in perfectly with other projections, so that area may be where we are headed after all. Just expect some volatility on the way.

One of my long term holdings that I have discussed many times on this blog, QCOR, exploded higher today after its earnings announcement last night. My next target is in the 18 to 20 area.

Wednesday, July 28, 2010

Under The Weather

I seem to have picked up a flu-like virus and am pretty out of it. I may not post the rest of the week.

I just wanted to say that the market is pulling back in light volume ahead of Friday's GDP report. I think it may end up being a positive surprise, but even so the current pullback could continue with the SP500 heading toward 1100 to 1090 before the rally resumes. I would not view selling on Friday as a reason to bail unless it was unusually severe and on heavy volume. Even then, we would really want to wait for downside follow-through next week before assuming the trend has changed.

Overall, it looks as though the rally will continue into late August as expected.

Monday, July 26, 2010

Market Becoming Overbought

The market has reached a point as evidenced by the NYSE McClellan Oscillator that usually signifies an overbought condition. Rarely it has indicated the initiation of a new long term uptrend. That is probably not the case here as volume is lagging severely. It would be prudent to wait for a pullback before entering new long positions. The pullback may begin anytime. I don't think we are at a rally top yet, but we will probably see a declining tops pattern in the NYMO as occured last year, which will warn of the impending top.

Sunday, July 25, 2010

Another Clue

Take the time to look at a chart of IBM. You will see a flat correction in progress. IBM is close to breaking out in wave c of B up to around 140. This will get everyone excited, but should lead to a probable let down as wave C down to below 116 will quickly follow. This is a very clear pattern that has been setting up for weeks. It is slightly possible that this is a triangle, but it really doesn't have the characteristics of a triangle. So, we have another clue as to the completion of wave B up for the markets when IBM hits 140+/-.

Now, my friends, please tell me how we are at the beginning of a new bear market decline if IBM is in the middle of a flat correction that will complete by late September or early October to be followed by new highs?

A Look At The Big Picture

I thought I would step back and take a look at the big picture with the SP500 today. In previous posts on this chart, I have pointed out what I call the Decadal Pivot (DP), which is the midpoint of the range of the previous decade, 2000 to 2009. It is interesting to see how the market traded below for a time and then above for a time the 1160.75 level in 2004 and 2005.

In the current decade we have traded up to and slightly above the DP not quite making it to the previous congestion range zone high. We are probably working on a new congestion range zone.

At the moment it looks improbable that the SP500 will make it back through the DP during the current rally. 1160.75 would be a 71.7% retracement of the April to July decline. The 61.8% retracement is exactly 1140. The January high was 1150.45. Given the generally lackluster breadth of the current rally, the poor response to earnings announcements and the weak performance of market leaders, it is most likely that we are in a B wave up from the July 1 low. A measured move up from this week's low projects to 1145.43, so we see there are a number of resistance levels with confluence in this zone. Thus, we see that the zone of 1140 to 1160.75 will probably be where the market tops out. The sooner it gets to 1140, the more likely it will make it to 1160. The time window based on cycles and seasonals for a top is the end of August. So, the likelihood of reaching 1160 will depend on getting to 1135 to 1140 by mid August.

If we assume for a moment that the SP500 will make it to 1160.75, we can also project a measured move target for wave C down to 951.86, which corresponds to support at the June 2009 high, the December 2002 high and the trendline from the October 2007 high. This represents the most likely downside target for a fall selloff, and is only about 60 points or 6% below the July 2010 low.

Now, the question is whether we will get there slowly or quickly. Truly there is no way to know, but I suspect it may be quickly. If we can get up to the 1160 level, that would be close enough to the April high to allow for a flat correction, and wave C down could happen in as little as month as a sharp impulse wave, further exciting the elliott wave crowd who are looking for the mythical primary wave 3 down to really get going. On the other hand, a modest rise would lend itself to a double zigzag correction that might last well into November. Either way I think we will know it when we see it.

I have changed the name of the System Tracker to the Strategy Tracker and updated it to reflect the lastest signals. The fact is that a Trading System requires risk management, position sizing and money management, which are not described. The Tracker shows several intermediate term trading systems, most of which have performed quite well over the last three years. I will be adding a new one to the list in the near future. It is quite simple and has performed very well recently.

If you like my work, please share it and mention this site as you communicate with other traders. It is my hope that the lessons that I have learned will be a benefit to others who desire success as traders.

Friday, July 23, 2010

Dire Predictions

Normally we would have expected some selling on Friday after a large rally on Thursday. The fact that the rally continued into the close today speaks to the upside potential, I think. Markets still face some resistance next week, which may not be breached on the first try. The Qs are coming back to the January high of 46.64 while the SP500 is approaching the 50% retracement level of the decline around 1115. Once these levels are surpassed, there should be little holding the market back from a strong and sustained advance toward the April highs, if not all the way back to them.

The number of dire predictions for the stock market is about as great as I recall seeing since I have been trading. Perhap it is just that I read so many blogs and websites, but there are prognosticators of all kinds joining in on the doom and gloom predictions from notable economists, cycles analysts, financial astrologers, elliott wave technicians at all levels, and on and on it goes. They all seem to be lined up on the same side of the fence. If my recollection serves me well, in prior times of market turmoil there seemed to be some disagreement among these diverse groups. At the present it appears that most retail investors are in the bearish camp, and it just doesn't fit my contrarian sense to join in with both the retail investors and all of these market commentators. In addition, the financial news media is not exactly cheering the market on either. I don't mean that we can't see more selling, but I can't imagine that an immediate resumption of the bear market against the current sentiment backdrop will occur.

I think we will eventually see a retest, or least an attempt at one, of the 2009 lows, but it is going to be awhile. ( I think it could be as late as 2012 before the current rally tops out.) At some point between now and the end of the year, the shorts and those on the sidelines are going to be rushing into this market. Being short will be a costly position to be in.

Thursday, July 22, 2010

Rally Taking Shape

The rally is beginning to show itself, while breadth and volume remain muted. Perhaps it is just the summer doldrums, but it seems to fit the B wave profile we have been talking about. Thursdays that close near the top of the range tend to lead to Fridays that close down, so I wouldn't be surprised to see some selling tomorrow. Even so, I think we will see a solid breakout above the downtrendline by the end of next week with follow through into August. Things may remain choppy for a few more days, bit once the crowd realizes the breakout is for real, the short covering may become fierce.

Today marked another buy signal as the Qs made a 3 week high. We now have 3 systems on a buy signal - MACD, IBD, and 3 Week. The Cabot Tides system remains on a short signal, but the Cabot group issued a buy signal this week. The discrepancy is that the long term Cabot Trend remains on a sell, but they feel like it will turn up soon. On the other hand, I do not see a solid buy signal according to the Tides criteria. I will maintain the system on a short signal until I see a change in character.

Oil is close to re-igniting its uptrend. Today's high was also the 61.8% retracement level of the decline from the May high. A solid close above 80 may be all it needs to get going. It will have to hurdle channel line resistance around 83.50 in order to make it back to the May high.

I see it has been about 2 to 3 weeks since I updated the System Tracker. I need to do some housekeeping and clean up a couple of errors as well. I will try to get that done this weekend.

Futures Up This Morning

Positive developments out of Europe are the supposed catalyst for this morning's move up in index futures. However, a more likely explanation is that a high TRIN reading last Friday and elevated TRIN yesterday coupled with rising bearish sentiment indicates that the seller's have been exhausted. If the SP500 can close above yesterday's high, it will confirm that the pullback is probably over. Once the downtrendline of the April to July correction is broken, we will be watching the overall pattern development to see if it evolves as 3 waves as expected or it turns into a 5 wave impulse. The former would indicate a probable flat correction with a retest of the July low this fall. The latter would put the shorts on their heels after another pullback with a higher low in September.

Wednesday, July 21, 2010

Tuesday, July 20, 2010

Qs Headed Higher

The market still has some work to do, but the recent buy signals are still in force as the Qs reversed at the 50% retracement level of the July 1 to July 14 rally. A number of stocks are showing bullish patterns. TXN, mentioned yesterday, reversed off of cited support and looks ready to head higher. So far, the response to Apple's earnings has been positive, which should provide additional support for the rest of the week.

I did get stopped out of SNDK this morning. I "knew" that as soon as I was stopped out, AAPL would be up on the earnings news and SNDK would be too. It is trading at 43.10 after hours after hitting a low today of 39.45. However, the inability of SNDK to hold its July 1 low is not a positive development and it will probably trade lower after the current rally is over.

The fact is that we never "know" anything with respect to the market. We are only "speculating". In general I do not touch stops unless there is a market impact on a stock that would lead to a probable reversal. By that I mean some kind of extraneous news or other event that is causing panic selling. After establishing a low on that type of event, the stop can be placed under that day's low. We are trading probabilities, and getting stopped out of one trade doesn't mean anything in the long run.

The key is to keep trading the strategy according to your plan, and it will work out over time assuming the strategy has a positive expectancy. The MACD has given us two buy signals since June 1, and I believe we will soon see the positive results. Imagine all of the worry and hand wringing that has been going on with many traders and investors. Yet, all there is to do is to follow the signals.

Monday, July 19, 2010

TXN Looks Higher After Near Term Selling

The earnings news continues to disappoint as TXN and IBM are down after hours. SNDK is getting hammered in sympathy with AAPL. I will be stopped out of a short term long position in SNDK tomorrow morning unless something unexpected happens overnight. It will be interesting to see if it rebounds after it reports earnings on Thursday or falls futher. Even though TXN is being sold this evening, the chart shows that it should find support at the 50% to 61.8% retracement zone after the impulsive move off of the 7/1 low.

This week is shaping up to be a rough ride, but it is still way too soon to bail on this fledgling rally. The sentiment is just way to bearish to expect a downside breakout right now, in my opinion. That doesn't mean the market has to rally over the next several weeks. Perhaps it just treads water before a fall selloff. If it does, it will be a doozy of a selloff. But let's not get ahead of ourselves. We have several weeks to go before things would most likely turn nasty.

There was a very good interview with Michael Covel, who wrote the book "Trend Following", at Financial Sense - News Hour this past Saturday. It prompted me to take at a look back a simple trend following strategy that I have toyed with in the past in a new way. The results were surprisingly positive, and I will share them with you in the near future.

Saturday, July 17, 2010


Just a follow-up on my comments about the MACD this week - I bought the QLD yesterday at 54.50, just below the 400dema, as the Qs remain on a MACD buy signal. Decide for yourself whether this is an appropriate action to take. I think it was.

As long as the MACD of the Qs (the MACD, not the Qs) remains above its low on 7/6, this signal will remain in force, even if the Qs fall below the 7/1 low. The risk for the QLD is greater than 11% at that point.

Friday, July 16, 2010

Market Geometry

From time to time I like to play around with the internal geometry of the market. Corrections often lend themselves to elliptical constructions that constrain the market's movements. By no means am I suggesting that the market has to stay within the ellipse, but as long as it continues to move along the upsloping green trendline, the path of least resistance will be to the upside. However, the Wilshire 5000 must hurdle the 11700 level at the horizontal green line, the major axis of the ellipse, in order for it to have a chance to reach the upper right quadrant of the ellipse.

The intersection of lines of resistance in mid-August suggests a more bearish possibility if the market moves below the upsloping green trendline and also remains below the lower channel line of the entire rally. These lines intersect with the green major axis in mid-August.

From this we can conclude that if we do not see a sustained move above 11700 in the Wilshire 5000 well before mid-August, the rally will likely fail from below that level, but if it can move above it before then, we could see the rally extend to approach the April top in early September. After that it could go either way.

Rally Still Intact

Today was a shakeout day. It will serve a good purpose as bearish sentiment has been rising even in the face of the recent rally off of the July 1 low, and the selloff today should reinforce that sentiment. I don't expect that next week will be smooth sailing by any means, but with the low in the Qs today at 44.30, just above the cited 44.00 to 44.27 support zone, I would expect we will see a positive day on Monday. The MACD remains on a buy signal as well as IBD, so there is no reason to rush to the exits.

GOOG behaved pretty much as expected. Again, I would not be surprised to see it find some support early next week. BP has finished the first leg of its 4th wave upward correction. It reamains to be seen what form the correction will take, but a triangle is a good bet.

The action we are seeing so far is consistent with a B or X wave. I know Robert Prechter is putting out a special report this weekend. I haven't seen it, but if I had to guess, it says something like a sharp 3rd of a 3rd breakdown is dead ahead. I don't mean to be disagreeable, but I will wait for more concrete evidence before positioning in that direction. So far, this year the markets have pretty much followed the script for a mid-term election year as can be seen at . Even the current selloff is right on cue, so I am more inclined to think that the current rally has more to go.

For a clear elliottwave short setup, look at gold. Gold is ticks above from completing a clear 5 wave decline from its 6/21 high. After a brief rally, further downside should carry gold down to at least the 1029 to 1045 zone. At that time we can re-evaluate for further downside potential. The GDX is breaking down ahead of gold and may be a better way to trade the short side.

Patience is key as the difficult trading environment continues. There will probably be short opportunities this fall, but it is too soon to position for the downside right now.

Pullback Accelerates

Today's action confirms that the expected pullback is in progress. Volume is running light so far which is a good sign. Support for the Qs is in the 44.00 to 44.27 zone. The most likely path for the pullback is a rally into Monday and/or Tuesday after an initial low today followed by a retest of today's low next week. Thereafter, the rally should resume into late August albeit with some additional shakeouts to keep everyone honest. Additional support for the Qs is in the 43.79 to 43.31 zone. This is not a time to panic out of long positions.

Thursday, July 15, 2010

GOOG Disappoints

GOOG disappointed after hours and the stock is down about $20. In some respects, this was not at all a surprise. The chart had already portended a possible reversal as the rally from the July 1 low completed this afternoon as an impulse - at least it appears to be one, and we already have the broader markets in the beginning stages of a pullback. However, Google probably still has upside potential with a target around its February low and the upper downsloping channel line. Barring a sudden change in character and a breakout above the channel line well in advance of the expected late August top in the markets, that is the most we should expect. A 50% retracement of the overall decline is a fairly common occurence. With the confluence of resistance just below that level, a fake-out breakout bull trap would not be surprising.

Pullback Underway

The first leg up of the July/August rally is over and a pullback has begun after markets hit resistance at the downsloping trendline of the April to July correction. The pullback will probably not be too severe. After it is over, it will probably appear as more of a flag or sideways consolidation. However, the pullback may last well into next week. This is the time to wait patiently for setups to develop while not exiting existing positions prematurely. The Qs may fall as low as 43.50 to 44.00 before they find a footing. On a positive contrarian note, the % Bears exceeded the % Bulls in the Investors Intelligence weekly sentiment index for the first time since early 2009.

I will be looking to go long on the MACD buy signal during this pullback as long as the MACD remains above its signal line. I will remain long on the IBD follow-through as long as IBD does not call a correction. I will be looking to add on a move above the July high in August should it occur, as July is the low month of the correction. I will also be looking to add on a breadth thrust as indicated by the Nasdaq 100 Bullish Percent Index, $BPNDX, moving above it 34dema. At that point I would be fully allocated to index long positions.

I will be looking to exit index longs on an approach to the April or May highs depending on the form of the rally in anticipation of another selloff this fall to complete the entire correction. I will be looking for clues of exhaustion, such as momentum divergences and breadth divergences, which should be prevalent if this is fact a B or X wave.

I know don't about how others are feeling at the moment, but for me it seems as though I am in a holding pattern. It seems clear to me that markets will move higher after this correction is complete, and yet it also seems clear that it may be 3 to 5 months before it is. Trading the swings in this correction has been difficult, though certainly a good opportunity to hone one's skills, but I am ready for the next major leg up to truly get going.

Tuesday, July 13, 2010

Intel Shines

The positive earnings report from Intel will no doubt push markets higher tomorrow morning, but trendline resistance is still just ahead. I think it is unlikely that a break of the trendline will occur on the first try, and the action today still failed to best the point and percentage gains on July 7, which suggests that a small degree 5th wave is extending.

Looking back at past strong rallies over the last few years, the most likely course is still a short 3 to 4 day pullback with a sharp intraday shakeout before the markets can move higher. There's nothing to say that a pullback must happen, but I will hold out for one before adding to existing index longs on the MACD buy signal. I am partially long based on the IBD signal and previous MACD buy signal and looking to add as the opportunity presents itself.

The point gain of the current rally is about the same as the June rally. It needs to exceed the June rally in both time and points to confirm the strength of the rally. Sentiment continues to support a greater rally than we have seen since the May panic. If we see a bona fide breakout above the downsloping trendline, a retest of the April highs is not out of the question before another swoon this fall to complete the correction. In the unexpected event that we see a 5 wave advance, we may conclude that a shallower correction this fall would be an alternate buying opportunity rather than a retest of the July low.

SP500 Projection

Futures are up again this morning so it looks like a test of the downtrendline is in order before a pullback begins. I have drawn an idealized projection of what we may expect over the next few weeks. The markets will pullback after hitting the trendline, and then break through and pullback to the trendline. After a successful test of the trendline, we can project a target equal to the deviation from the trendline at the 7/1 low, which works out to be just above 1160. The 61.8% retracement of the decline around 1140 may be a higher probability target.

I have a projected top date around the end of August, so if those targets are exceeded well before then, higher prices might be seen. We still have a long way to go before any conclusions can be made in that respect.

Monday, July 12, 2010

Ready For A Breather

The news from Alcoa and CSX appears to be upbeat, but today's narrow range and light volume indicate that the impulse is probably complete or nearly so. A 3 to 4 day pullback would not be out of the ordinary. Interestingly, the Qs topped out today almost at the same place they did on February 19 before a 4 day pullback began. The high that day was 45.05 and today it was 45.03. Coincidence?

We also got the MACD buy signal today. I think it would be prudent to buy into a pullback at somewhat lower prices rather than go long on the open tomorrow. Hopefully, the pullback will not be severe enough to put the MACD back on a sell. The action the rest of this week should give us a good indication as to how the rest of this rally is going to go.

Market Breadth Paints A Mixed Picture As Well

I found these two chart setups on the blog. The top one was by John Murphy and the bottom one was by Arthur Hill. These charts really do paint the picture of a B wave as we have been discussing. I have updated the charts to July 9 and added my notes.

The top chart shows just the NYSE Summation Index. The 400 level has been the dividing line between bull and bear markets for the last few years. We can see that we are now well below the 400 level indicating a bear market or correction in progress, which is no surprise. Note, however, how the NYSI topped out around 400 during the bear market rallies during 2008. We will be on the lookout if and when the NYSI approaches that level during the current rally.

The bottom chart shows the NYSE Summation Index with the NYSE McClellan Oscillator below. Arthur Hill points out that moves in the NYMO from below -50 to above +50 indicate a breadth thrust and a rally underway. In this case, we had a breadth thrust followed by a lower low in the SP500 and a higher low in the NYMO for a positive divergence. So, we have two indications for a rally.

I think these are perfect indications that a B wave (could be a 2nd wave) is in progress. We would expect the NYSI to rise at least above 0 and probably to the 400 level before turning down. If it turns down in the 0 to 400 zone, we will know that wave C down has started. If it breaks out above 400, then wave [C] or [Y] up has most likely begun. We can also look for a negative divergence in the NYMO for a clue that wave B is ending.

Sunday, July 11, 2010

Mixed Picture For Alcoa

The impulsive pattern continued its development in the stock markets this week as they finished the week on a positive note with 4 up days in a row. Friday's action likely completed a small degree 3rd wave in the still incomplete impulse. Waves 4 and 5 should complete by Tuesday or Wednesday this week. Afterwards a small pullback would be expected before the advance continues, unless we see the impulse subdivide into a (i), (ii), i, ii. Though this would be a lower probability outcome, it would be confirmed by a single day advance on higher volume than occured on Wednesday, July 7, before a pullback begins.

Alcoa reports after the close tomorrow. The technicals for AA are bullish overall. However, the short term picture is mixed. The most common targets for a head and shoulder pattern are 50% and 61.8% of the height of the pattern. Many traders use the full height of the target, but I have rarely seen that outcome. From an elliottwave perspective, we either have a completed pattern as the January low completed a flat correction, which is followed by 7 waves down from the April high, or the pattern is incomplete as the January low was the end of the initial impulse, wave A, and the current impulse wave, wave C, requires one more move down to finish.

If the former is the case, then AA should move up strongly this week. The positive divergences in the MACD and RSI support this view. If the latter is the case, then look for another low for AA down to the 9.32 level before it takes off. A solid move above the January low of 12.26 should mean AA is on its way to new highs, even if it takes awhile for it to get there.

The take-away from Alcoa's chart, as I see it, is that even a disappointing earnings announcement should not derail the current rally as any selloff should complete the current pattern and AA should begin to rally by the end of the week.

Thursday, July 8, 2010

Impulsive Development

The breakout above the short term downtrend line heralded the follow-through day yesterday. Today the market continued by confirming the breakout above the upper channel line that has developed since the low on 7/1. This type of channel breakout usually indicates that the character of the move has become impulsive as opposed to corrective. It looks like we are near the completion of a small degree third wave. Another pullback tomorrow followed by new rally highs Monday and/or Tuesday would complete this first impulse wave which I believe is most likely wave [a] or wave (1) of [a] of wave B or X up from the 7/1 low. It is a little early to make projections, but the most likely initial target is for the Qs to fill the gap from the 6/28 close at 45.11 up to 46.00. We can project a target from there for wave B to the 6/21 and 5/13 highs of 47.68 and 48.79. Higher prices are possible but this is the most likely target zone.

I like the fact that today there were a number of articles and posts calling this a bear market rally and an oversold bounce, and the Investors Intellegence weekly polls continue to get more bearish. If the current move can complete as an impulse, it should confirm that several weeks of rally are underway. This is not a time to be wildly bullish. B waves can terminate unexpectedly. Short term longs should work well, and the wave B highs will be a good place to exit poorly performing intermediate term trades that were not sold in the May/June selloff.

Wednesday, July 7, 2010

Follow-Through Day

Yesterday I said: "That could change with a strong one day rally that closes well above today's high as the fledgling pattern could morph into an impulse. It really does depend on tomorrow's action...At least we have a setup now for a follow-through day. A 1.7% rally tomorrow or later on higher volume than the day before will qualify".

Well, we got both a strong one day rally that closed well above yesterday's high on higher volume and a follow-through day. We are now about two days away from a positive divergence MACD buy signal. Given that this will be the 3rd follow-through and the 2nd MACD buy signal since the April high, the market should be able to carry into the mid to late August time frame before the next possible high. This assumes, of course, that we do not break down directly tomorrow after the unemployment claims number comes out.

I believe I said about two weeks ago that shorting a breakdown below the February lows would be dangerous. Now you know why. If we are to see a major intermediate term sell-off, it should come after the next high in August. That is now 5 to 7 weeks away.

The 61.8% retracement of the entire decline from the April high for the SP500 is around 1140. If the SP500 can make it back above 1131, the June 21 high, to 1140 or higher, it will confirm that the decline so far is a 7 wave correction, which will mean that regardless whether the correction continues, we will see the cyclical bull market move to new highs above the April highs. We are still weeks away from this possible outcome, but keep a lookout because this could very well rout the bearish case into 2011 or even 2012.

Not Every Triangle Works Out

Tuesday, July 6, 2010

Hardly Compelling

While we saw a positive close today, the action was not very compelling as it appears to be developing as a complex upward correction of some sort. That could change with a strong one day rally that closes well above today's high as the fledgling pattern could morph into an impulse. It really does depend on tomorrow's action. The longer it takes for this rally to get going, the lower the expected rally target will be. Even so, if we get a MACD buy signal I will be taking it on the positive divergence. At least we have a setup now for a follow-through day. A 1.7% rally tomorrow or later on higher volume than the day before will qualify.

BP continued its 4th wave rally today, while GOOG needed to retest its low again. GOOG should begin its rally soon.

Sunday, July 4, 2010

Why I Think A 6 To 8 Week Rally Is Imminent

Two widely followed stocks, GOOG and BP, are near reversals that should last 6 to 8 weeks. Such action in widely followed stocks usually coincides with turning points in the broader markets. For those who own GOOG, the upcoming rally would be a good place to sell shares before the next selloff to the 300 to 350 zone. BP should followup its impending rally with another sharp selloff to new lows. The alternate view on GOOG is that the triangle is wave X of a double zigzag which is the more bullish view. Either way rallies are imminent.

Friday, July 2, 2010

The Decimation Continues

We can see that today's rally occured in 3 waves. If the Qs fall under 42.09, a lower low may be in the cards before any rally begins in earnest.

What's The Worst Case Scenario?

According to Elliott Wave International and Robert Prechter we have just finished minute wave [i] down from the June 21 high, and we are now in minute wave [ii] up. Minor wave 1 down ended on 5/25 and minor wave 2 up ended on June 21. If this interpretation is correct, then a powerful minute wave [iii] down should begin sometime in July. Wave [i] was 972.27 points for the Dow. The typical minimum length for a 3rd wave is 1.618 x wave 1, but oftentimes is 2.618 x 1, so we can estimate the length of wave [iii] down as 1573.13 to 2545.40 points. Assuming a 0.618 retracement of wave [i] down, we can calculate downside targets for the Dow at 8649.62 and 7,677.35 for wave [iii]. Based on this we can see that if Prechter is right intermediate wave (1) down should end around the March 2009 lows and should do so sometime this fall.

At this point the probability that Prechter and EWI are right is rising, but we cannot know for sure until we see a 3 wave rally that fails to clear the June 21 high and a subsequent break of the minute wave [i] low. Even then there are other possible outcomes. A 61.8% retracement of the rally from the March 09 lows is certainly one. This could terminate as a large 3 wave zigzag. If Prechter is right then this will be the most telegraphed selloff in the history of the stock market. Even Standard & Poors is lowering its estimate and calling for a correction this fall. Almost everyone is on the correction bandwagon. Does that make sense? During the decline from 2000 to 2002, there were very few who called for the market to selloff. Most were busy calling bottoms. Few were calling for a selloff in August and September of 2008. Not until the market crashed were there calls for lower lows. Now all we've had is a significant panic selloff and the consensus is that the market is going much lower. I don't know, but I am having a hard time jumping on that train. If the intermediate signals line up in late July or August I will go with it regardless of what I think or feel.

The question then is what to do at the moment. Barring a substantial change in market character we should expect more selling this fall, so the prudent thing to do is to raise cash on rallies. I think it may be premature to go short as we will likely see some sort of rally over the next few weeks. While intermediate systems have gone short, better entries may be possible later this summer. Another failed follow-through day would be a great short entry as well as a MACD sell signal from a lower high.

Thursday, July 1, 2010

Picture Clears Up For SP500

While I believed it to be plausible that wave B up was underway, the market was in no mood to comply with my opinions. However, the picture has cleared up as we now have a very clear 7 wave decline that indicates the correction to date has unfolded as a double zigzag. The take-away from this is that it is a correction and will ultimately lead to higher prices. Either this is the first leg of a still ongoing correction or it is all of the correction and there is no way to know at this time. I suspect the former, which means that we have completed wave (W) of [B] or [X] of the still ongoing cyclical bull market.

The falling volume is not consistent with a developing 3rd wave. We also have a positive divergence developing in the MACD, which should not be ignored. Primary resistance for wave (X) up is the downsloping median line of the correction as well as the 200dema. 3 waves up to this resistance zone may be a selling opportunity. 5 waves up will suggest higher prices. The first leg down of this correction showed a fair degree of complexity. Typically corrections will run from simple to complex or complex to simple. Thus, we would expect the correction to become simpler in form as time progresses. This should make it easier from this point forward to follow the unfolding price pattern. Will it turn into a large flat or double zz? It's hard to say. One possibility that we must keep in the back of our minds is a large triangle. That would lead to contracting price movement over the next several months.

So far the pattern of highs and lows has followed the typical mid-term election year pattern extremely well. If it continues, we should see highs in late July and late August. The only question is whether or not late August is a lower high or a higher high, which means we have up to 8 weeks of waiting before the best shorting opportunity for intermediate term traders. In the mean time I will take a positive divergence MACD buy signal if it occurs.

Why Do These Things Always Happen When You're Not Around?

What a nasty start to the week and end to the 2nd quarter! I've been away with my wife and two of my sons at Virginia Beach for the National Junior Olympic Power Tumbling and Trampoline Championships since Saturday. My youngest son, Stewart, has been competing in the sport since he was six, and he is quite the competitor. He has advanced to the highest level of competition possible before moving up to Junior Elite. Senior Elite is the highest level of competition. The Junior and Senior Elites compete in world competitions. After competing in events in Quebec in 2007 and Belarus in 2008, Stewart could have moved up to Junior Elite last year, but decided to take another year to polish his skills to build a solid foundation before advancing. Those were good opportunities to meet the top competitors and see what it would take to get to the top.

This year Stewart fully expected to win gold in both the trampoline and double-mini events. While the competition was very good, he clearly had the skills and experience to win both events, but he didn't and was quite disappointed. After prelims, he was 2nd in tramp and 1st in double-mini and in position to win. However, he had some muscle pain in his left shoulder. He let that distract him from his mental preparation, which cost him. He finished 7th in tramp and 2nd in double-mini. He did have a solid finish on his final pass in double-mini which allowed him to take the silver. After a mental mistake that cost him several points on his first pass, he landed his second pass to finish second by 0.3 points on a positive note. Still, it was a great experience and he can now see how much work he has to do mentally and emotionally in order to be able to win at the next level. I would like to say that I am proud of him as is common, but that is a self serving statement. Truly, I am happy for him, as it is his accomplishment.

I came into this year on target with my 10 year plan and fully expecting to win big. I have the skills and experience to do so, but I haven't and I am disappointed for myself. I've made some mental mistakes which have cost me because I got distracted with my views on the potential future market direction. The problem is not so much whether I have been right or wrong with regard to those views, but the manner in which I have executed my plan. I deviated from my plan by being over allocated on the long side, which has led to a greater drawdown during the recent correction than I should have had. Now, I will have to nail "my final pass", the second half of the year to pull out a respectable finish. I know I can do it. This week my son taught me how.

The market has given up all but two possible avenues for a positive outcome for the rest of the summer. All but a couple of the trend following systems are on a sell, which says as much as anything. The charts are beginning to look like late December 2007 just before the plunge in January 2008, but we should be guarded in drawing such an obvious parallel. The action over the next week will tell whether we should commit fully to the downside. The first day of July closes higher 80% of the time after an early morning low. We then have a holiday weekend which also typically leads to a positive Tuesday. The market still has a chance to pull a rabbitt out of the hat.

The MACD signalled a buy for the Qs off of the rising 200dema on 6/2, and although price has violated the low of the swing, the MACD has not fallen below its low and the 200dema has only just turned negative. The Qs turned down from a flat 50dema. For the a true MACD sell signal, we will need to see the MACD violate it June low or the Qs rise to the falling 50dema with the MACD giving a new sell signal.

From an elliott wave perspective, I see that we are in some sort of complex correction, but it just doesn't look anything like what I have seen in the past that would indicate a 3rd wave breakdown. Even with all that has happened, the correction has not even hit the 20% level for the SP500. Yes, this correction could have been avoided, but I am not ready to commit to a full blown return to the bear market just yet. I am getting close though.