The bulls will be defending key support levels. Breach of these levels may lead to an acceleration of the correction. The MACD sell signal from 9/24-25 is still in force.
For the Qs, we have:
3 week low (also last week's low): 40.72
3 week net line sell signal: 40.46
August high: 40.18
50.0% retracement from 07 high: 40.06
September low: 39.02
For the SP500, we have:
August high: 1039.47
3 week low (also last week's low): 1019.95
3 week net line sell signal: 1018.67
38.2% retracement from 07 high: 1014.14
September low: 991.97
Wednesday, October 7, 2009
Tuesday, October 6, 2009
Gold Breaks Out Again
Gold and stocks moved up together today and gold moved to new all time highs. The trend in gold is clearly up, but I do expect the move will be volatile in similar fashion to the move from October 08 to February 09, which means sharp pullbacks will keep the bulls on their toes.
The question before us now is what next with stocks? The one thing that is clear at the moment is that the move up from the October 2nd low in the Qs is not impulsive, and it does not appear to be impulsive for the Dow and SP500 either. If this is correct then lower prices are to be expected, whether soon or a few days from now.
Based on the comments, it appears that we have alot of work to do to reconcile the wave counts. Looking over the stock indexes, I realized that much of the confusion on my part is that I tend to concentrate my efforts on the Qs. Unfortunately, the rally in the other indexes does not match up with the Qs in that the Qs made a higher low in July, while the SP500 and Dow did not, which makes the analysis difficult. They don't have to be completely aligned, however.
I think the point to always keep in mind is that we have many tools that we can use other than elliott wave to help keep us on the right side of the trend. In particular, our main tool is price itself. So far, other than a negative divergence MACD sell signal, there is little that would compel us to short this market at the moment. Therefore, the real question is how long do we want to be right now?
As I have been recommending since late August, I have been lightening up on long positions going into October. (I don't want to be the last one standing when the music stops.) And if everything goes to plan, I will be out of all longs save my core positions by mid to late October.
We may see another new high for the rally this month. Depending on how it behaves then, it may be an opportunity for shorting this market, but the difficulty will be that the impending correction will most likely not be impulsive, and therefore will be difficult to trade. Smaller size and wider stops will help.
I would like to take moment to emphasize a point that perhaps has gotten lost since March. Over and over again back in March, April and May I stated that the risk in this market is to the upside. Since March we have had a historic rally, and now the bears are out in force again. Most of the ones I read are saying that this is it for the rally, and we are going to new lows in Q1 of 2010. I cannot disagree more. Nothing in my work supports this view. In fact I am still looking for higher highs in 2010 regardless of the wave count. The technicals and cycles, quite apart from elliott wave, support a continuation of the rally into the summer, and perhaps fall of 2010. The upcoming correction will be just that - a correction, which is not ideal for shorting. Again I repeat, the risk is to the upside, but I am expecting an opportunity to re-enter at better prices.
Of course, I could be all wet, but that is where price comes in. It will tell us what to do, just like it did with gold. I was wrong on the short side of gold, but now I am long - not wrong. If the market wants to break down to new lows, we'll know soon enough, but we are nowhere near that point yet.
The question before us now is what next with stocks? The one thing that is clear at the moment is that the move up from the October 2nd low in the Qs is not impulsive, and it does not appear to be impulsive for the Dow and SP500 either. If this is correct then lower prices are to be expected, whether soon or a few days from now.
Based on the comments, it appears that we have alot of work to do to reconcile the wave counts. Looking over the stock indexes, I realized that much of the confusion on my part is that I tend to concentrate my efforts on the Qs. Unfortunately, the rally in the other indexes does not match up with the Qs in that the Qs made a higher low in July, while the SP500 and Dow did not, which makes the analysis difficult. They don't have to be completely aligned, however.
I think the point to always keep in mind is that we have many tools that we can use other than elliott wave to help keep us on the right side of the trend. In particular, our main tool is price itself. So far, other than a negative divergence MACD sell signal, there is little that would compel us to short this market at the moment. Therefore, the real question is how long do we want to be right now?
As I have been recommending since late August, I have been lightening up on long positions going into October. (I don't want to be the last one standing when the music stops.) And if everything goes to plan, I will be out of all longs save my core positions by mid to late October.
We may see another new high for the rally this month. Depending on how it behaves then, it may be an opportunity for shorting this market, but the difficulty will be that the impending correction will most likely not be impulsive, and therefore will be difficult to trade. Smaller size and wider stops will help.
I would like to take moment to emphasize a point that perhaps has gotten lost since March. Over and over again back in March, April and May I stated that the risk in this market is to the upside. Since March we have had a historic rally, and now the bears are out in force again. Most of the ones I read are saying that this is it for the rally, and we are going to new lows in Q1 of 2010. I cannot disagree more. Nothing in my work supports this view. In fact I am still looking for higher highs in 2010 regardless of the wave count. The technicals and cycles, quite apart from elliott wave, support a continuation of the rally into the summer, and perhaps fall of 2010. The upcoming correction will be just that - a correction, which is not ideal for shorting. Again I repeat, the risk is to the upside, but I am expecting an opportunity to re-enter at better prices.
Of course, I could be all wet, but that is where price comes in. It will tell us what to do, just like it did with gold. I was wrong on the short side of gold, but now I am long - not wrong. If the market wants to break down to new lows, we'll know soon enough, but we are nowhere near that point yet.
Saturday, October 3, 2009
Breadth Sell Signal and McClellan Oscillator
My proprietary weekly breadth indicator gave a negative divergence sell signal as of Thursday 10/1/09. This is only the second time since I started calculating this indicator in July 2006 that it has given a negative divergence sell signal. The last time was just before the July 2007 top. The signal then was about 4 weeks early, but it definitely provided a warning. I think it is warning us again. We may see a new high for the rally, but it will probably be an opportunity to sell.
The traditional McClellan Oscillator in the above chart also gave an interesting signal on Friday. From the September 23 high to the October 2 low, the oscillator has swung from a new high for the rally to a new low for the rally (discounting the initial surge off of the March low). This type of swing can be an indication of the initiation of a new downtrend, as it means the selling pressure is the greatest that it has been since the rally began.
At the moment the rally could be labelled as a 3 wave abc pullback, but that could change next week. Near term, the turn dates are 10/7, 10/9, 10/14, 10/23. I am looking for a bottom on the 10/7 or 10/9 dates and a top either on 10/14 or 10/23. Allow a window of 2 days either way for these dates. Do not trade these dates. Wait for confirmation of a turn.
Thursday, October 1, 2009
August Highs Penetrated
What an ugly day. The August highs were penetrated by the major indexes putting the markets on a weaker footing with respect to the expected October rally to complete the first leg of the move from the March lows. We will have to watch it carefully over the next few days to see if the trend is reversing in earnest. The September lows are key as they represent the low of the high month for most indexes. We will also be looking for an impulse wave down that would initiate a trend change.
The semiconductor index has already breached the September low and was down almost 5% today - not a good sign for technology. I am long the SSG from 24.00. If your not yet short the semi's, it's a little late near term, but there will most likely be a rally for a second chance. I will wait to short the Qs and the IWM after we see how this current decline plays out. The indexes are approaching an oversold condition with the McClellan Oscillator at (-189), and the 5 day stochastic under 5 for most indexes. In my opinion, an opening gap down tomorrow, should it occur, would not be a good time to initiate short positions, as a near term bounce is likely. There is support for the SP500 between 1009 and 1018 as well.
Yesterday I sold a number of positions near the open including JPM (+170%), UAUA (+110%) and UWM (+22.2%), UYG (+50%). I will try to go over these trades in the next couple of weeks. I am still long a few positions, and it's not all good, but I will be looking for opportunities to exit most of my remaining longs over the next two weeks.
The semiconductor index has already breached the September low and was down almost 5% today - not a good sign for technology. I am long the SSG from 24.00. If your not yet short the semi's, it's a little late near term, but there will most likely be a rally for a second chance. I will wait to short the Qs and the IWM after we see how this current decline plays out. The indexes are approaching an oversold condition with the McClellan Oscillator at (-189), and the 5 day stochastic under 5 for most indexes. In my opinion, an opening gap down tomorrow, should it occur, would not be a good time to initiate short positions, as a near term bounce is likely. There is support for the SP500 between 1009 and 1018 as well.
Yesterday I sold a number of positions near the open including JPM (+170%), UAUA (+110%) and UWM (+22.2%), UYG (+50%). I will try to go over these trades in the next couple of weeks. I am still long a few positions, and it's not all good, but I will be looking for opportunities to exit most of my remaining longs over the next two weeks.
Wednesday, September 30, 2009
Qs Headed To 41.05
The last time I had a post with that title was August 4th when the Qs were trading at 40.21. Certainly it was not a big stretch to project a move to 41.05 from that level, but then on August 9th, I demonstrated that the next move of significance would be to the 43.07 to 43.63 zone, which was reached intraday on September 23rd. Now, we find the markets in a pullback, the outcome of which will determine what happens in October. The next step is for the Qs to revisit the 41.05 level.
There are a couple of scenarios that could play out in October. If the current pullback holds above 41.08, then the next move up in the Qs could be a 5th wave. It would last no more than 2 weeks with a target of 44.50+/-. The second case would be if the Qs fall below 41.08 (closing basis) on this pullback. The move up would then be wave c of C with a target of 43.17 to 44.43. The last case is that we see 5 clear waves down from the September high followed by a lower high in October. Clearly this is the most bearish view. I don't think the latter case is likely since the current intraday pattern is not consistent with an impulse wave down in the Qs. However, we need to keep an open mind.
I think the risk to the long side will be increasing in October, so it's not the time to be adding long exposure. The market appears to be under institutional distribution at the moment. You don't want to be the last one standing when the music stops. If you doubt this, take a minute to think about the fact that the 3rd quarter was the best performing quarter since 1938 for the SP500 according to CNBC. With many funds closing their fiscal year, and after the collapse of 2008, doesn't it seem reasonable that a lot of players will be taking some money off the table? The fact is that I expected the Qs to hit 41.05 in September and 43.30 in October. Those targets have been hit. Without a strong impetus to move the markets higher to the 46+ level, there is no reason to expect now that we will see a sustained move above the 43.30 level until after a significant correction.
My long term view remains the same. After a correction to complete the 10 month cycle, we will see new rally highs in 2010. However, between now and then a correction of unknown severity will occur, and may be developing a little sooner than I originally expected. A large number of stocks are completing 5th waves, which is both long term bullish and near term bearish. So caution is advised. Shorting the coming correction is likely to be a difficult endeavor and not to be pursued lightly.
Oil appears to be forming a triangle that will lead to higher prices in October and November. Gold still appears to be heading higher. We need dollar weakness to support these and a solid close of the dollar index above 78.00 will derail the bullish prospects in those markets.
There are a couple of scenarios that could play out in October. If the current pullback holds above 41.08, then the next move up in the Qs could be a 5th wave. It would last no more than 2 weeks with a target of 44.50+/-. The second case would be if the Qs fall below 41.08 (closing basis) on this pullback. The move up would then be wave c of C with a target of 43.17 to 44.43. The last case is that we see 5 clear waves down from the September high followed by a lower high in October. Clearly this is the most bearish view. I don't think the latter case is likely since the current intraday pattern is not consistent with an impulse wave down in the Qs. However, we need to keep an open mind.
I think the risk to the long side will be increasing in October, so it's not the time to be adding long exposure. The market appears to be under institutional distribution at the moment. You don't want to be the last one standing when the music stops. If you doubt this, take a minute to think about the fact that the 3rd quarter was the best performing quarter since 1938 for the SP500 according to CNBC. With many funds closing their fiscal year, and after the collapse of 2008, doesn't it seem reasonable that a lot of players will be taking some money off the table? The fact is that I expected the Qs to hit 41.05 in September and 43.30 in October. Those targets have been hit. Without a strong impetus to move the markets higher to the 46+ level, there is no reason to expect now that we will see a sustained move above the 43.30 level until after a significant correction.
My long term view remains the same. After a correction to complete the 10 month cycle, we will see new rally highs in 2010. However, between now and then a correction of unknown severity will occur, and may be developing a little sooner than I originally expected. A large number of stocks are completing 5th waves, which is both long term bullish and near term bearish. So caution is advised. Shorting the coming correction is likely to be a difficult endeavor and not to be pursued lightly.
Oil appears to be forming a triangle that will lead to higher prices in October and November. Gold still appears to be heading higher. We need dollar weakness to support these and a solid close of the dollar index above 78.00 will derail the bullish prospects in those markets.
Tuesday, September 29, 2009
SMH Acting Poorly
The SMH is wedging up on falling volume and looks ready to roll over. This does not bode well for the continuation of the rally in October. Assuming that the Qs make a new high, if the SMH does not, this would create a negative divergence between the two indexes. Looking at the individual components in the SMH, most are either extended or beginning to move lower.
While I think the case for a continuation of the current rally into the end of October is still strong, the likelihood is that we are in for at least one more bout of selling before attempting to make new highs. The Qs will most likely retest the 41.05 level first unless they form a triangle. I will be using the next two to three weeks to lighten up as I do not like what I am seeing. Particularly the financials and credit card stocks do not look healthy. Many of the stocks in the Dow do not look healthy. We may be building a double top with a sharp selloff followed by a retest of the September highs in October. This is no time to be buying breakouts.
Remember the first rule of trading and investing is to preserve capital. The corollary to this is to protect profits.
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