Is It Over Yet?

Today's selloff in the afternoon session, presumably on a negative reaction to the Fed decision, has brought out the bears again. However, a review of seasonal tendencies shows that there is a sharp selloff in the afternoon on April 30 more than 60% of the time. This selloff is usually reversed strongly on one of the strongest up days of the year - May 1. May 1 has been positive every year this decade except 2006. The weak May 1 that year portended a sharp selloff.

From a technical perspective, all systems are still long and only a move on volume below 45.93 in the Qs and 12,656 for the Dow would derail this rally. It is more likely that a short term top will be seen sometime next week. If it happens that today was the high with a sharp selloff tomorrow, then that would be particularly bearish. Otherwise, the longs have it.

Tomorrow, I will introduce a new system and review the charts of the Dow and Garmin.

Stay disciplined and you will succeed.

Rally Still Underway

(Click To Enlarge Chart)

The rally from the low of March 17, 2008 is still underway. I am amazed at the wide range of opinions regarding the potential for this rally. They range from its nearly over with the the bear resuming almost immediately to the markets are going to soar to new highs before the summer is over. Most of these views seem to be backed up by rational arguments, but can such speculations really help us to make money in the markets? Possibly, but they should be used to help see the range of probable outcomes rather than for taking actual positions. Trading positions should be based on what the market is doing and has done instead of what we think it will do.

Presently, the rally is intact. It may end tomorrow, but for now it is still going up. A look at the chart above shows two very important facts that underscore the current weakness in this rally. One, volume is below average and average volume is falling. Two, on balance volume is not confirming. In other words, this rally does not have the institutional support to go too far. That doesn't mean that it cannot pullback and blast off, but that would not appear too likely at the moment.

From a cycles perspective, we are currently in the first half of the 9 month cycle which bottomed on January 24. The March low was not the cycle low. We should expect at least a mild correction of this rally to ensue sometime by late May to early June with a bottom most likely in late June. If that bottom is a lower low, it would be particularly bearish. If it is not a lower low, then we should expect a higher high in July or August to end the rally. If that high is a new all time high, that may or may not be all that bullish, but it most likely will not be a new all time high. I would expect the bear market to resume in full force after that late summer high.

From an Elliott wave perspective, the rally appears to be corrective, and while some are already saying it is nearly over, there are several possible paths to a late summer high.

May 1 tends to be a strong up day. So, with the above in mind, even though the trend following indicators are long, it would be prudent to begin taking profits after May 1 to May 5. While at the same time, it may not be prudent to load up on shorts at that time.

I will be posting my current view on the 9 month cycle in the near future. Later on, I will be discussing how to take profits.

Are You Still Short?

(Click to enlarge chart)

The Dow Jones Industrial Index broke out of a large head and shoulders bottom formation on Friday. The measured height of the pattern from the bottom to the neckline is 1018.86 points. The first target is .50*1018.86+12720.56=13230.00. The second target is 1.0*1018.86+12720.56=13739.42. 12720.56 is the breakout point on the neckline as of Friday.

The 50% retracement to the October 2007 high is 12916.46, and the 62% retracement is 13218.93. Friday's high fell just short of the 50% retracement, and failed to breakout above the downtrend line from the October and December highs. The Dow also closed above resistance at the November 2007 low. 13230 is a highly probable target. 13739.42 may not be reached, but 13500 is certainly within reach. A pullback to test the neckline is a good bet.

All systems on the System Tracker are long. This rally may move in fits and starts but with so many long signals firing off, I would be surprised to see it end next week. Nevertheless, price rules over opinions. Trade the price.

May you be successful in your trading efforts this week.

VLE Long Signal & Elliott Wave

The VLE flipped back to Long today. It will go long on the open on Monday 4/21/08. The Tides remains in Neutral, and all other systems remain long.

I am a subscriber to a couple of elliott wave sites and also read some other free posts with elliott analysis. I must admit that I have spent a significant amount of time training myself to count waves, and I have become fairly adept at it. Oftentimes, I have seen the wave count that eventually revealed itself even when the professional sites did not present it. However, I can't say that it has helped me in trading to any great degree.

When you read a lot of advisory services including elliott wave sites, the analysts seem to be bi-polar - flipping from one view to another every other day, or staying with one view against the crowd for an extended period and then when there is finally no doubt that they are wrong they switch to the opposite view.

Please tell me how that is any different than the VLE System? At least with a price-based system there is no underlying bias that might keep the trader from taking the trade.

Elliott wave has its place and it is definitely valuable at certain times, but it should not be used in isolation. I think that the best use for Elliott wave analysis is to provide the trader with a framework for seeing market potentials beyond the standard pattern trading, but should be not used alone for trading. That is just an opinion.

Rally Back On Track

The VLE and Tides Systems flipped back to Neutral today. The Weekly Signal and Modified Donchian Trend Systems kept us in on the long side.

Most importantly, the Qs are back above the critical support level of 44.39 from the August 16, 2007 low. A measured move from yesterday's low gives a target of 48.98.

While there may be some additional consolidation, it would not be surprising to see this rally continue to the latter part of May, which may be the high of the rally.

Good entries are important to trading success, but good exits are what book the profits. Trend following systems by design tend to give back a lot of profits except on a few very strong trends, which can be a source of great frustration. One of the areas that I am investigating at the moment is how to incorporate rational targets for profit taking in a trend following system.

It is true that trends tend to last longer than anyone expects, but it is also true that trends come to an end. The question is - Does trying to stay in to catch the big move add to the rate of return over taking profits at high probability target zones?

Pullback Complete?

The pullback from the April 7 high of 46.41 in the Qs likely completed yesterday, 4/15/08, in a ABC correction at .05 below the 50% retracement of the rally from the March 17 low at 43.73. If so, a measured move from the correction low would give a target of 49.04 in as little as 3 weeks. However, I suspect that the correction from 4/7/08 may extend into a large sideways consolidation lasting 1 to 2 more weeks, afterwhich it will probably move to the above target zone.

Leading stocks are holding up quite well, but if you scan through the Nasdaq 100 and other large cap indexes you will see a large number of stocks are still in strong downtrends. In other words, this rally is probably a fake, being supported by only a few stocks.

Regardless of all of the above ruminations, the trading systems are our guide, and the current status is mixed.

Note: GRMN is down 14.3% from its breakdown point from the "Ending Diagonal Triangle" discussed previously. If short, caution is advised here as a strong countertrend rally may be on the horizon. A positive macd divergence is developing.

New Signals

The VLE & Tides went to short as of yesterday's close, while the Weekly Trend and Modified Donchian remain long. Although the Qs closed below last week's low, which was the low of the high week, the volume was well below average and less than Friday's volume. While price gave a sell in the intraweek system, volume did not confirm.

The Qs are approaching a 10 day closing low in the Modified Donchian system, which often provides support. Fibonacci support is at 43.74 and 43.10.