Not Every Triangle Works Out

Hardly Compelling

While we saw a positive close today, the action was not very compelling as it appears to be developing as a complex upward correction of some sort. That could change with a strong one day rally that closes well above today's high as the fledgling pattern could morph into an impulse. It really does depend on tomorrow's action. The longer it takes for this rally to get going, the lower the expected rally target will be. Even so, if we get a MACD buy signal I will be taking it on the positive divergence. At least we have a setup now for a follow-through day. A 1.7% rally tomorrow or later on higher volume than the day before will qualify.

BP continued its 4th wave rally today, while GOOG needed to retest its low again. GOOG should begin its rally soon.

Why I Think A 6 To 8 Week Rally Is Imminent

Two widely followed stocks, GOOG and BP, are near reversals that should last 6 to 8 weeks. Such action in widely followed stocks usually coincides with turning points in the broader markets. For those who own GOOG, the upcoming rally would be a good place to sell shares before the next selloff to the 300 to 350 zone. BP should followup its impending rally with another sharp selloff to new lows. The alternate view on GOOG is that the triangle is wave X of a double zigzag which is the more bullish view. Either way rallies are imminent.

The Decimation Continues

We can see that today's rally occured in 3 waves. If the Qs fall under 42.09, a lower low may be in the cards before any rally begins in earnest.

What's The Worst Case Scenario?

According to Elliott Wave International and Robert Prechter we have just finished minute wave [i] down from the June 21 high, and we are now in minute wave [ii] up. Minor wave 1 down ended on 5/25 and minor wave 2 up ended on June 21. If this interpretation is correct, then a powerful minute wave [iii] down should begin sometime in July. Wave [i] was 972.27 points for the Dow. The typical minimum length for a 3rd wave is 1.618 x wave 1, but oftentimes is 2.618 x 1, so we can estimate the length of wave [iii] down as 1573.13 to 2545.40 points. Assuming a 0.618 retracement of wave [i] down, we can calculate downside targets for the Dow at 8649.62 and 7,677.35 for wave [iii]. Based on this we can see that if Prechter is right intermediate wave (1) down should end around the March 2009 lows and should do so sometime this fall.

At this point the probability that Prechter and EWI are right is rising, but we cannot know for sure until we see a 3 wave rally that fails to clear the June 21 high and a subsequent break of the minute wave [i] low. Even then there are other possible outcomes. A 61.8% retracement of the rally from the March 09 lows is certainly one. This could terminate as a large 3 wave zigzag. If Prechter is right then this will be the most telegraphed selloff in the history of the stock market. Even Standard & Poors is lowering its estimate and calling for a correction this fall. Almost everyone is on the correction bandwagon. Does that make sense? During the decline from 2000 to 2002, there were very few who called for the market to selloff. Most were busy calling bottoms. Few were calling for a selloff in August and September of 2008. Not until the market crashed were there calls for lower lows. Now all we've had is a significant panic selloff and the consensus is that the market is going much lower. I don't know, but I am having a hard time jumping on that train. If the intermediate signals line up in late July or August I will go with it regardless of what I think or feel.

The question then is what to do at the moment. Barring a substantial change in market character we should expect more selling this fall, so the prudent thing to do is to raise cash on rallies. I think it may be premature to go short as we will likely see some sort of rally over the next few weeks. While intermediate systems have gone short, better entries may be possible later this summer. Another failed follow-through day would be a great short entry as well as a MACD sell signal from a lower high.

Picture Clears Up For SP500

While I believed it to be plausible that wave B up was underway, the market was in no mood to comply with my opinions. However, the picture has cleared up as we now have a very clear 7 wave decline that indicates the correction to date has unfolded as a double zigzag. The take-away from this is that it is a correction and will ultimately lead to higher prices. Either this is the first leg of a still ongoing correction or it is all of the correction and there is no way to know at this time. I suspect the former, which means that we have completed wave (W) of [B] or [X] of the still ongoing cyclical bull market.

The falling volume is not consistent with a developing 3rd wave. We also have a positive divergence developing in the MACD, which should not be ignored. Primary resistance for wave (X) up is the downsloping median line of the correction as well as the 200dema. 3 waves up to this resistance zone may be a selling opportunity. 5 waves up will suggest higher prices. The first leg down of this correction showed a fair degree of complexity. Typically corrections will run from simple to complex or complex to simple. Thus, we would expect the correction to become simpler in form as time progresses. This should make it easier from this point forward to follow the unfolding price pattern. Will it turn into a large flat or double zz? It's hard to say. One possibility that we must keep in the back of our minds is a large triangle. That would lead to contracting price movement over the next several months.

So far the pattern of highs and lows has followed the typical mid-term election year pattern extremely well. If it continues, we should see highs in late July and late August. The only question is whether or not late August is a lower high or a higher high, which means we have up to 8 weeks of waiting before the best shorting opportunity for intermediate term traders. In the mean time I will take a positive divergence MACD buy signal if it occurs.

Why Do These Things Always Happen When You're Not Around?

What a nasty start to the week and end to the 2nd quarter! I've been away with my wife and two of my sons at Virginia Beach for the National Junior Olympic Power Tumbling and Trampoline Championships since Saturday. My youngest son, Stewart, has been competing in the sport since he was six, and he is quite the competitor. He has advanced to the highest level of competition possible before moving up to Junior Elite. Senior Elite is the highest level of competition. The Junior and Senior Elites compete in world competitions. After competing in events in Quebec in 2007 and Belarus in 2008, Stewart could have moved up to Junior Elite last year, but decided to take another year to polish his skills to build a solid foundation before advancing. Those were good opportunities to meet the top competitors and see what it would take to get to the top.

This year Stewart fully expected to win gold in both the trampoline and double-mini events. While the competition was very good, he clearly had the skills and experience to win both events, but he didn't and was quite disappointed. After prelims, he was 2nd in tramp and 1st in double-mini and in position to win. However, he had some muscle pain in his left shoulder. He let that distract him from his mental preparation, which cost him. He finished 7th in tramp and 2nd in double-mini. He did have a solid finish on his final pass in double-mini which allowed him to take the silver. After a mental mistake that cost him several points on his first pass, he landed his second pass to finish second by 0.3 points on a positive note. Still, it was a great experience and he can now see how much work he has to do mentally and emotionally in order to be able to win at the next level. I would like to say that I am proud of him as is common, but that is a self serving statement. Truly, I am happy for him, as it is his accomplishment.

I came into this year on target with my 10 year plan and fully expecting to win big. I have the skills and experience to do so, but I haven't and I am disappointed for myself. I've made some mental mistakes which have cost me because I got distracted with my views on the potential future market direction. The problem is not so much whether I have been right or wrong with regard to those views, but the manner in which I have executed my plan. I deviated from my plan by being over allocated on the long side, which has led to a greater drawdown during the recent correction than I should have had. Now, I will have to nail "my final pass", the second half of the year to pull out a respectable finish. I know I can do it. This week my son taught me how.

The market has given up all but two possible avenues for a positive outcome for the rest of the summer. All but a couple of the trend following systems are on a sell, which says as much as anything. The charts are beginning to look like late December 2007 just before the plunge in January 2008, but we should be guarded in drawing such an obvious parallel. The action over the next week will tell whether we should commit fully to the downside. The first day of July closes higher 80% of the time after an early morning low. We then have a holiday weekend which also typically leads to a positive Tuesday. The market still has a chance to pull a rabbitt out of the hat.

The MACD signalled a buy for the Qs off of the rising 200dema on 6/2, and although price has violated the low of the swing, the MACD has not fallen below its low and the 200dema has only just turned negative. The Qs turned down from a flat 50dema. For the a true MACD sell signal, we will need to see the MACD violate it June low or the Qs rise to the falling 50dema with the MACD giving a new sell signal.

From an elliott wave perspective, I see that we are in some sort of complex correction, but it just doesn't look anything like what I have seen in the past that would indicate a 3rd wave breakdown. Even with all that has happened, the correction has not even hit the 20% level for the SP500. Yes, this correction could have been avoided, but I am not ready to commit to a full blown return to the bear market just yet. I am getting close though.