Fear Not Yet At An Extreme

The equity only put/call ratio (CPCE) is an excellent way to gauge greed and fear in the market. In general when the CPCE reaches into the 1.0 to 1.1 zone and the 10MA of the CPCE reaches the 0.85 to 0.90, the level of fear is commensurate with at least a short term bottom. Friday, the CPCE broke out above an important downtrend line confirming the correction that began on January 20. The PPO of the CPCE has yet to break out, but it appears it may break out soon. Prior important bottoms occured when the PPO reached the 20 to 30 zone, but at least above 15, which it has yet failed to do.

We can conclude from the above that although the level of fear has risen recently, it has not yet reached a level that would support an end to the correction. We should be able to pinpoint the end of the correction when the CPCE approaches prior extreme levels.

A rally of 1 to 5 days should occur next week. Traders should be cautious about entering new long positions as the rally could end without warning. The best stance would be to wait for new short setups toward the end of the rally with the view that the next leg of the correction will follow soon. The expected completion of the correction is the end of February to the first of March.

Wave (B) Up Underway

A positive divergence buy signal occurred in the final 1/2 hour for the Qs suggesting that wave (B) up is underway. This rally could be as short as 1 day or as long as all of next week. I show an alternate count above that has wave 5 down completing last Friday and today's low as wave B of a flat correction. If the alternate holds then a sharp wave C rally Monday and possibly into Tuesday would complete wave (B) up. If today was wave 5, then we should expect a 3 wave rally that lasts most of next week.

The fact that the Qs have bottomed in wave (A) at 42.12 above the 40.15 level is a bullish development that likely means that the Qs will bottom in wave (C) around the 40.15 level and not the lower levels of 36.14 to 38.62. If the Qs hit 40 at the end of February I will be a buyer.

The pattern in the Dow and SP500 appears to have completed wave (A) as a 3 wave zigzag decline. If correct, this is a also bullish development since it means that once the correction is over new rally highs will be seen.

5 Waves Down In The Qs?

The market action today was awful (for the bulls) particularly in the Dow and the SP500. The Qs were not far behind but the selling was not quite as severe as it could have been given the beating that the SP500 took. One thing that stands out to me is that the Qs could be completing a 5th wave down now. Notice how wave 4 above stopped exactly on the parallel channel line to waves 1 and 3. Also, notice how waves 2 and 4 have a different character. Wave 2, a zizzag looks almost like a flat, while wave 4 was sharp and deep. These differences seem to fit the guideline of alternation between waves 2 and 4. And finally, notice how the positive divergence in the MACD continues to develop.

I think wave (A) down should finish tomorrow approaching, if not hitting, the 200dema around 41.20. I may have been premature in calling the bottom of wave (A) on 1/29. We don't have a limit on how long wave 5 of (A) can be since wave 1 is the shortest wave, but we would not expect it to be longer than wave 3. Going below 39.96 would make wave 5 longer than 3 and raise the odds that wave (C) is underway, or that we are in wave [3] of 3 down of (A).

Another reason to suspect that the latter is not the case is that the McClellan Oscillator did not make new lows today, which is another positive divergence. It is also a rare occurrence when markets do not respect support at the 200dema, so at least some sort of bounce should materialize in the next couple of days. For that reason, I still think it is inadvisable to add new short positions at the present time.

If the above analysis is correct, we would expect a 3 wave bounce in wave (B) up toward the 50dema, but at least to the 20 to 26 demas, followed by wave (C) down. Wave (C) down should provide the best short term shorting opportunities.

Presently, I am short using the SDD and the SEF, as well as short AMZN, AAPL, PCLN, RIMM and GME. This weeks rally merely served to create bear flags in these stocks and many others. I am close to being stopped out of my OIL position. I remain long several positions that have done well and which I continue to expect will do well in wave c up of the bear market rally. Thus, overall my account is suffering a drawdown at present, though not too severe due to the short positions.

In retrospect, I should have avoided some short term longs in January and bailed on the long Qs position sooner, but if we could make money looking in the rear view mirror, anyone could do it.

That Was Fast

Well it didn't take several days for the GLD to breakout as gold has fallen over $40 this morning. The question now is whether the downtrend will accelerate or will gold find support at the previous highs.

Support at the 200dema for gold is at 1033, the previous all time high is 1029 and a measured move target from the January high is 1011. With gold currently at 1068, it doesn't make much sense to be heavily bearish against this support. On the other hand if support fails on the second try, we would certainly want to go with it.

Oil is also getting hammered today, but it remains above critical support at the December low. One frustrating thing about trying to trade the commodity via the ETFs is the tracking error and hidden expenses. From the 9/25 closing low to yesterday's close, the commodity was up 16.72%, but the OIL ETF is up only 11.05%, the USO ETF is up only 10.83%. This makes it difficult to maintain a proper stance with respect to the commodity since you are losing ground even when the commodity is above technical support. I usually try to trade the ETF based on the commodity, but I will have to work on position sizing to offset the tracking error.

GLD In A Trading Range

Gold and the GLD is clearly in a trading range supported by a positive divergence in the MACD. The question is: which way will it break out of this range? Bulls will see a completed ABC correction. Bears will see a 1, 2, [i], [ii] count. One thing is for sure: you can't have 5 waves up and 5 waves down in sequence as the move from the low of December to the January high and then the January low appears. So, if the current move completes as 5 waves up toward the January high, the bulls are right, and if the current move completes as a 3 wave move below the January high, then the bears are right. We will have to wait several days to weeks to know for sure. Patience will lead to a solid trading setup. Jumping the gun is a coin toss.

Wave (B) Up May Be Underway

Today's action likely completed wave A of (B) up. We should see a brief pullback in wave B down and then wave C up. The entire process may last the rest of the week. Thereafter, wave (C) down should follow. The alternate view is that the current move is a 4th wave and wave 5 of (A) down will follow. Either way, more downside is expected by late this week or early next week.

The ideal time to add short positions will be near the conclusion of wave C up. For the Qs this may be as high as the 50dema currently at 44.57. If so, then wave (C) would project to 40.56 to 38.08. Both of these levels are near the levels projected by the January range. We will have to see how far this countertrend rally carries before revising the projections.

Oil keeps bouncing off of its 200dema. This is generally quite bullish. As long as the December low is not violated significantly, the trend in oil will remain up, even if it is a slow one. I suspect that once the stock market correction is over, oil will make a big move.

The XHB is showing relative strength. This is another reason to believe that the current downmove in stocks is just a correction and not the beginning of a new leg down in the bear market. At the same time the XHB appears to be forming a large B wave triangle which tells us that after wave C up is complete, the bear market will resume, in the XHB at least.

Semiconductor stocks look ripe for another wave down once the current countertrend rally is over.

AMZN Breaking Down