Post Election Year Cycle

Up until August, this year's post election year cycle, see at www.seasonalcharts.com, was right on target. Since then the market has diverged from the typical pattern. This occurred in 2008 as well, which helped me anticipate the extent and duration of the selloff. I call this type of occurrence a cycle inversion. Now it appears that the cycle has inverted again. When it normally would be going down, it is going up. If the inversion holds, then the current pullback should end by the end of September and will be followed by a continuation of the rally into late October/early November with perhaps a couple more pullbacks along the way. We would then expect a more serious correction to ensue. The correction would likely bottom in January at the projected end of the 10 month cycle. There is no guarantee that the inversion will hold, but it is something to consider.

Pullback Probably Underway

Today the Qs came within 13 cents of our stated target zone of 43.30 to 43.60. With the expectation that this zone would not be penetrated on the first try, a pullback should be no surprise, although the timing has been difficult to pin down. One thing that is surprising is how quickly the McClellan Oscillator is moving to an oversold condition moving down ahead of the market just as it did in August. This would seem to indicate that the pullback will be of a short duration.

We would expect the August highs to hold as support if that level is even tested. The 38.2% RT of the September rally is 41.59, not very far away.

Consolidating Gains

It appears that instead on going down the market is content to consolidate recent gains by moving sideways. That doesn't mean that we won't see a more significant pullback in the near future, but it certainly doesn't look like the market wants to go down. The VIX and the QQV look poised to move lower, which should support a continuation of the rally.

Some stocks are setting up to breakout while others are nearing intermediate term tops. BWLD appears to be wedging up in a 5th wave. It would take a strong move above 50 to contradict that view. 50 is the point where the current 3rd wave would become the shortest wave, a violation of elliot's rules. Any spike above 46 that reverses on high volume would be a sign to exit long positions. Another reason to believe that BWLD may be topping is that CMG is in the middle on a long base building process and may be turning down in a wave C soon. If you already have a position in BWLD, one way to deal with this would be to exit on a reversal below 50. If BWLD subsequently breaks out above the reversal high, then re-enter the position. If it breaks down, then your out. If it continues higher without a reversal, then hold.

STAR may be attempting to break out, but this may be a b wave which means a retest of the 9/14 low would be expected. Nevertheless, I am long from 26 with a stop at 21.85. Yes, that is about a 4 ATR stop, just below the .618RT of the right side of the base. I have found the trend is easier to ride with wider initial stops of at least 3 ATRs. Just adjust the position size accordingly.

A Change In Trend For GENZ

For the moment GENZ is displaying an excellent 5 wave pattern that indicates that the trend has changed from down to up. There is a slight chance that the recent triangle could be a b wave, but the overall form is more consistent with an impulse wave. Wave 5 may have a little more to go and then a correction should ensue. Once the correction is complete another impulsive move should follow.

The big picture for GENZ is rather muddled and difficult to decipher, so it is hard to project whether the current trend change will lead to new highs. Sentiment on GENZ has been rather negative which should support a rally.

My general strategy for this type of setup is to decide up front whether or not I am going to take a full position or partial position based on my confidence in the analysis and the broader market conditions. If I take a partial position, I will wait to see how the stock behaves to decide whether or not to add to the position. If it moves in my direction, I will take half profits at the end of wave (3) or (C), and move my stop to just above break even near the top of wave (1) or (A). At that point, I wait to see how the next correction unfolds. If it is a triangle, then I take profits as close to the end of wave (5) as possible. If is another type of correction, I wait to see how the next impulse wave unfolds. If it is a 3rd of a 3rd wave, it will usually break out above the upper trend channel on increasing volume. In that case, I will hold on for bigger gains.

A recent example is SOHU. I went long around 51 as SOHU broke out above its wave (1) high and a rectangle formation in April. I took half profits in June around 67 for a gain of around 30% and raised my stop to 51. A triangle has since developed and SOHU broke out of the triangle on 9/11. The ideal target is 82 to 85, but the breakout volume was weak so I'll be looking for signs that wave (5) is completing before hitting the target. Having completed 5 intermediate waves up from its low, I now have a ready made trade to take sometime later this year after SOHU corrects to the 50 to 55 area.

Expecting A Shakeout

With the SP500 up 4.7% and the Qs up 6% MTD for September, the bulls may be getting a little complacent. The rally seemed to get a bit tired toward the end of the week. It would not be at all surprising to see a sharp one or two day decline to shake things up a bit and get the bears frothing at the mouth. The elliott wavers are anxious to short this rally as they are expecting wave 3 down to begin any day now.

The problem with that viewpoint is that leading stocks are acting great and new bases are being formed even as the market has moved higher. Look at STAR. It has formed a beautiful cup and handle over the last 8 weeks. There are many more like this. This is not the type of thing that you see at tops. A few other names that are setting up nicely are AMZN, CMG, GMCR and JCOM. These last ones still need some more work, but they don't look ready to break down.

Another factor that has developed over the course of the last few weeks is a large number of stocks that have completed 5 waves up from the March low. This is extraordinarily encouraging for the bullish case as it implies more upside after these stocks finish correcting, and many have been correcting even as the market has moved higher. As an example, F completed 5 waves up on 8/03 and is correcting now, AMZN completed 5 waves up on 7/23 and MIL and SOHU are currently in their 5th waves. There is a rotation going on here which will provide a floor for any correction in the broader markets.

We also have oil service stocks moving higher. Oil has coiled up, just like gold did in August, for a move higher in October and will support the move in these stocks as well.

The Qs and the Dow are near important resistance. We shouldn't expect 43.30 in the Qs and Dow 10000 to be overcome on the first try. There will be setbacks, but for now there is little evidence that a major breakout is imminent.

My Sentiments Exactly

I highly recommend this post by Martin Goldberg at Financial Sense:

(As I was afraid, this link rolled over to the next day. You can go back to Martin Goldberg's post history and see the article from 9/17/09).

http://www.financialsense.com/Market/wrapup.htm

This link should take you to his post for 9/17/09.

Followup On Top Potential

While I am content to ride the trend as far as it will take us, I thought it would be prudent to mention the other side. You can go to Elliott Wave International and check out free week (starts today 9/16) to see the short term updates for Europe and Asia. They are calling for some markets to be topping in potential ending diagonal patterns. I no longer subscribe to the US Short Term Update so I don't know what they are saying about US markets, but having been a long term subscriber, I feel confident they are calling for the ending diagonal pattern in the US as well. If I am wrong, someone please let me know. Anyway, at the same time they are showing some of the Asian markets ready to blast off in wave iii of 3 of C. I realize that all world markets are not synchronized, but somehow the thesis just doesn't sit well with me. It may very well be that we get one more down up sequence to finish an ending diagonal and fall hard, but I doubt Asia is going to be blasting higher with the US falling apart.

I still think it would be prudent to take some profits over the next few weeks in case we do get a sharp correction. There is no reason to over leveraged going into the middle of October, but I will still be committted to the long side until I see some definite price action that changes the picture.

I took partial profits in LVS today, long from 11.70 and out part today at 18.47 on reversal. I probably should have got out around 20, but I am still happy.