One Way Or The Other

Today's selloff in gold really got the bears going.  Even commodity bull Dennis Gartman said he believed it could be the beginning of a multiweek correction, BUT today's action in the context of the pattern in the price suggests that it could easily be wave [e] of a 4th wave triangle.  E waves often push the limits and then just as swiftly reverse course to everyone's dismay.  At this point, we need to see gold decline under 1315 to be sure that the uptrend is over.  Otherwise, a move to 1475 to 1500 could be beginning as soon as tomorrow.  The MACD would seem to be saying that the correction is the best bet, but there is really no way to know until gold shows its hand.

Squeeze Setup For The Qs

A squeeze setup had developed in the Qs.  It will trigger when the Bollinger bands move back outside the yellow  Keltner channels.  The direction of the trade is determined by the direction of the price when the trade triggers.  The DI+ & DI- indicators can be an aid to determining which way it will go.  At the moment it would be expected to breakout long, but things can change.

I expect the Qs will remain in a tight range the rest of the week and a breakout will occur next week.  The action today may have been a precursor to a coming selloff.  Commodities were hit the hardest today and this may be signalling what to expect with equities.

Key Levels

The selling today is on light volume so far, but it does show some impulsive qualities.  For the Qs, coming under last week's low of 54.21 and closing under the November high of 54.04 would go a long way toward initiating a correction.  The corresponding levels in the Dow and SP500 are 11518.44/11451.53 and 1251.48/1227.08, respectively.  I particularly like the look of the decline in the Russell 2000 which only needs two more waves to complete an impulse down from yesterday's high on the 5 minute chart.

I would not be surprised to see an initial impulse down followed by a 2nd wave rally into Friday to keep the opening 5 days of the year positive for the bulls.  This would lead to more intense selling next week.

The markets are wedging higher on declining volume from both the November and July lows.  Even if they manage to eke out another high next week, rising wedges almost always end badly.  If my hypothesis about a B wave is correct, and if the rally from the July 1 low is a rising ending diagonal in wave [c] of B, then look out because the July 1 low will be retested by early to mid March.  This is clearly not the consensus view, but it is one that should be appreciated.

Do The Bears Have A Chance?

I must admit that as hard as it is to conceive, I still believe that the current rally is a B wave.  That is just my opinion, and I know many disagree.  But there is a lot of work to do if the bears are going to have a chance in wave C down, whether it is a retest of the July low or just a 62% retracement of wave B.  Forgetting elliott wave for a moment, the two most important things that are needed to confirm a change in trend are:  1) the break of a trendline, and 2) a swing move greater than the largest counterswing in the current trend (Gann's method).  The third and final thing needed to confirm a change in trend is the break of the swing low created by the secondary reaction after the initial decline.

In this case, the decline in August was 89.54 points.  To be certain, we need to see a move below the last swing low, which is the November low of 1173 - a move of almost 100 points.  That would seem to be a tall order at the moment, but anything is possible.

JPM Completes 3 Wave Rally

This morning it seemed there was a lot of buzz about the financials being strong, but if JPM is any indication, it appears the rally in the financials is very near completion.  JPM looks to have completed a 3 wave rally in wave X from the July low.  There is a very clear triangle for wave [b], and wave [c] has reached the parallel trend channel for the move.  It could still move higher of course, but even so, the upside should be limited.  The downside target for wave Y is 30 to 32, which may be an excellent buying opportunity in a few months.

Long Correction In Progress For QCOM

QCOM has been in either a flat combination or a running triangle correction since it topped in May 2006.  The May 2006 top ended an impulsive advance off of the August 2002 low.  The current correction could last another 1 to 3 years, after which another impulse of intermediate degree should follow to the cited targets.

If the correction turns out to be a triangle, it would almost guarantee that a retest of the 2002 lows would follow the coming impulse.  A triangle would probably give the least time to complete the correction.  Whereas, a flat combination could extend for longer with a smaller triangle or double zigzag for Y.

The more bullish outcome would be a 3 to 6 month correction that does not retrace more that 62% of the July to December rally followed by a breakout above the recent highs.  This could indicate that wave (C) up is already underway.  A nice cup and handle base would give an excellent entry in that case for a 3rd of a 3rd wave in (C).

Either way, it appears that there is no reason to chase after QCOM at the moment.

A Look At The IBD 100

Investor's Business Daily has changed its weekly format from the 100 best stocks to the 50 best stocks using a revised stock screening method.  We will see if it improves the results next year.  Using IBD's market calls, I performed a few tests to see how the IBD 100 performed during 2010.  These are as follows:

1. I - Buy the top 10 stocks from the IBD 100 on a "Confirmed Uptrend" and sell them on a "Market In Correction".
2. II - Same as I except use an 8% stop loss.
3. III - Buy breakouts of the top ten stocks from the IBD 100 "boxed" with formed bases as of the first posting after a "Confirmed Uptrend".  If there are less than 10 listed, then only buy those and no others.
4. IV - Same as III except use an 8% stop loss.
5. V - Buy the top 10 relative strength stocks from the Russell 3000 on a "Confirmed Uptrend" and sell them on a "Market In Correction".
6. VI - Same as V except use a 16% stop loss.

The results were:

1. I - 7.08%
2. II - 17.16%
3. III - 9.83%
4. IV - 11.69%
5. V - 31.30%
6. VI - 42.78%

The relative strength approach beat the IBD 100 hands down.  However, it must be said that the volatility was much greater with a 30.02% and 18.64% drawdown for 5 and 6, respectively.  Nevertheless, using a relative strength screen may be a better approach based on total return.  If safety is the primary concern, then using strategy 4 would be the best approach as the drawdown was only 2.82% and the strategy averaged more than 50% cash during the year.  Slippage and commissions were not considered.

 As impressive as some of the results were, the hassle of buying multiple stocks on each buy signal does not seem worth the trouble, but to be fair I have not done the same test for 2009.  Nevertheless, I believe I will concentrate on trading market ETFs with leverage.

It seems to me that the big money in buying individual stocks is made with longer holding periods.  For example BIDU is up more than 500% since the 2009 low for a period of almost 22 months.  Therefore, my current approach is to build positions in stocks that I believe have the potential for outsized gains over the next one to three years while also trading market ETFs and options for shorter term gains.  My goal is to achieve a 60% to 100% average annual return without huge drawdowns.  Presently I am running just under 40% since I began this blog.