I was surprised somewhat by the lack of downside follow-through today given the news on Citi and GE, but that may be pointing to some exhaustion of the downtrend. As I had mentioned in my last post I would be considering taking profits on some short positions today with more downside. When I did not see an acceleration this afternoon, I took profits in (3) short stock positions and (2) index short positions. I still see some potential for more downside so I am not completely out yet, but risk for shorts is definitely increasing.
What concerns me the most here is that this may not be wave (5). So far, the major indexes have only completed 3 waves down from the January high. If we should start a strong rally from these levels or even slightly lower, we could be looking at a B wave. If that is the case, the current pattern would be an expanded flat in most indexes. This could point to the possibility of the most bearish of elliott wave counts, a P1,P2,P3-(1),(2)...(3). In other words, in this scenario, after completing wave C of (2) of P3 up toward the 200demas, the indexes would collapse in intermediate wave (3) of primary wave 3. This is why I really want to see more capitulation next week with one more up down sequence to complete the primary wave 1 count. I have been keeping this count in my back pocket and hoping that it could be excluded.
Regardless of the wave count, sentiment is extremely bearish by some measures and neutral by others. For example, the 10 day ma of the Daily Sentiment Index for the SP500 has reached an all-time low today, while the 10 day ma of the put/call ratio and the VIX remain neutral. New NYSE lows have been modest, while the McClellan Summation Index has moved down sharply. Divergences are typical in 5th waves, but mixed sentiment and breadth data are more typical of B waves.
The reason I am raising this red flag is that many, including myself, have been looking for the mother of all retracement rallies to begin soon. If the above scenario were to be correct, there will be many who buy this rally who will get creamed because it simply will not last as long as would be typical. A truncated 5th wave is one thing, but we must at least see 5 waves down.
An alternate view is that we are in wave (4) of P1. I do not think that this is the case since wave (4) would end up being twice as long in time as wave (2). This is certainly possible. I just don't think it is the most probable.
Understanding these possible outcomes can help us not be overcommitted to one preconceived view of the market action. Traders, however, should be trading the price action and not a hypothetical viewpoint.
Given the lack of intensity in the decline this week, I decided to exit shorts in A, ADSK and PLD as well as positions in DXD and TWM. Gains were around 20% on all but PLD. The gain on PLD was a nice 42%. I am still long the QID, SSG, SKF. I may end up with a scratch in those positions depending on market action next week.
Friday, February 27, 2009
Wednesday, February 25, 2009
Still In The Downtrend
There's little to add tonight as it appears that the markets have been moving sideways in preparation for the next move down. The wave count for the Qs is most probably wave 2 of (5) as it is lagging the other indexes in completing wave (5) down. While the Dow and S&P completed an upward abc correction today and could be in wave ii or iv of 3 of (5). While I have tried to analyze and address the wave count during this sideways movement in preparation for the completion of primary wave 1 down, I am not trading the elliot wave count per se. Rather I am using it as a guide to aid when to begin taking profits. My entries have been based almost entirely on price rules that have been discussed in prior posts. However, it is not prudent to wait for price rule exits when short near a potentially major bottom. I will be looking to begin taking profits as early as Friday on some positions depending on whether we get another move down this week.
I have seen some speculation that we are only completing wave (3) and one can certainly make a case for it if looking solely at Elliott wave. However, in considering the wave counts I take into consideration the point in the 10 month and 4 year cycle that we are in. Carl Swenlin at Decisionpoint called the November bottom the bottom of the 9 month cycle (what I call the 10 month, because that is what it averages out to) and I agree with him. This explains why the current 5th wave has been muted to some degree and the lower potential targets are not likely to be seen for now. We are in the strongest first half of the 10 month cycle. When the 22 week cycle bottoms in March, we should see a strong surge for the first half of the next 22 week cycle like we saw off of the November low. Which should put us at the front end of another 10 month cycle. In other words, we could see a substantial period of market advance prior to the next leg down in primary wave 3. This doesn't mesh, as I see it now, with this next move being wave (4). I could be wrong, but I envision primary wave 3 occuring when the second half of the next 10 month cycle is in alignment with the final descent of the 4 year cycle to bottom in 2010.
We shall see.
I have seen some speculation that we are only completing wave (3) and one can certainly make a case for it if looking solely at Elliott wave. However, in considering the wave counts I take into consideration the point in the 10 month and 4 year cycle that we are in. Carl Swenlin at Decisionpoint called the November bottom the bottom of the 9 month cycle (what I call the 10 month, because that is what it averages out to) and I agree with him. This explains why the current 5th wave has been muted to some degree and the lower potential targets are not likely to be seen for now. We are in the strongest first half of the 10 month cycle. When the 22 week cycle bottoms in March, we should see a strong surge for the first half of the next 22 week cycle like we saw off of the November low. Which should put us at the front end of another 10 month cycle. In other words, we could see a substantial period of market advance prior to the next leg down in primary wave 3. This doesn't mesh, as I see it now, with this next move being wave (4). I could be wrong, but I envision primary wave 3 occuring when the second half of the next 10 month cycle is in alignment with the final descent of the 4 year cycle to bottom in 2010.
We shall see.
Tuesday, February 24, 2009
Where's The Capitulation
While capitulation is not always seen at market bottoms, it is usually seen at important ones. Yesterday's action just wasn't enough to call it capitulation. Today's rally was probably wave 2 of (5) in the Qs and wave ii of 3 of (5) in the Dow. This means we could see substantially more upside before the downtrend resumes. A move back up to 30 in the Qs is within the bounds of the dowtrend as well as 7860 in the Dow. If they move much above those levels then we would need to re-examine the situation.
It appeared yesterday that we were beginning the capitulation process, and even though there was no downside follow-through today, one day doesn't make a trend. As I said previously, we must be willing to withstand the sharp rallies while we ride out the downtrend. If there is evidence of a change in trend, then we can act accordingly, i.e. there is no reason to bail on short positions just yet based on trend following methodologies.
Today's action in gold was also still within the limits of the uptrend. That may change, but I will want to see more action to warrant exiting a profitable position in gold given a legitimate upside target higher that 1029.
Patience and discipline!
It appeared yesterday that we were beginning the capitulation process, and even though there was no downside follow-through today, one day doesn't make a trend. As I said previously, we must be willing to withstand the sharp rallies while we ride out the downtrend. If there is evidence of a change in trend, then we can act accordingly, i.e. there is no reason to bail on short positions just yet based on trend following methodologies.
Today's action in gold was also still within the limits of the uptrend. That may change, but I will want to see more action to warrant exiting a profitable position in gold given a legitimate upside target higher that 1029.
Patience and discipline!
Monday, February 23, 2009
No Rally = Climax In The Making
The lack of a rally today and the subsequent break of the 2002 lows in the Dow probably means that a climax selloff to complete wave(5) down is underway. While I had originally considered that the markets would work their way down in a steady fashion to fit the expected time targets, today's action pushes the expected completion date forward. In addition to today's action, another reason that I am suggesting an earlier end date is that sentiment has swung quite rapidly from very bullish to very bearish. Some sentiment indicators such as the put/call ratio still have room for more bearishness, but we must be careful here.
As I said previously, the best place to exit is probably at the end wave 3 of (5) and we may be there by the end of the week. Action in individual stocks will become divergent with some continuing to go down while the market builds a bottom and others will begin to advance.
I continue to see the Qs retesting 25.05 and DOW 6400+- as a signal of the end. I will discuss my reasoning on a future post as I am pressed for time tonight.
As I said previously, the best place to exit is probably at the end wave 3 of (5) and we may be there by the end of the week. Action in individual stocks will become divergent with some continuing to go down while the market builds a bottom and others will begin to advance.
I continue to see the Qs retesting 25.05 and DOW 6400+- as a signal of the end. I will discuss my reasoning on a future post as I am pressed for time tonight.
Friday, February 20, 2009
Short Term Rally Possible
The Qs have completed 5 waves down from the 2/10 high and a rally back to the 50dema is possible if not likely. The other major indexes have completed wave i of 3 of (5) of P1, which also supports a wave ii rally. This rally, however sharp, should be brief and should not move above the 2/9 - 2/10 highs in any index. We will probably see some premature market bottom calls next week and should not be side-tracked by this.
The most extreme move of this decline should be the next one after any rally. I expect that the Dow will push close to the final target on this move. It would be prudent to be taking profits at that time rather than risk losing them as waves 4 up and 5 down may not produce much further downward progress. This applies even more significantly to short positions in individual stocks as many will be bottoming ahead of the broader markets.
This last decline lasted 8 days. If wave ii lasts 2 days and wave iii lasts 10 days, then that would align with the March 10 first target date. I am not saying this is how it will play out, but it is a possible sequence to look for. In particular, it gives us a time zone for profit taking between the end of next week and March 10.
I also expect that we will see extreme calls for the gold market both for upside targets and for a top. We may be close to a top in gold, but I suspect gold will continue to move inversely with the stock market, which means a pullback in gold over the next few days before a final push to a top.
As a reminder, this is the time to be scanning for leading stocks and stocks with clear bottoming patterns to buy when the market bottoms. The cream is rising to the top now.
I wish you all the best during the exciting days ahead.
The most extreme move of this decline should be the next one after any rally. I expect that the Dow will push close to the final target on this move. It would be prudent to be taking profits at that time rather than risk losing them as waves 4 up and 5 down may not produce much further downward progress. This applies even more significantly to short positions in individual stocks as many will be bottoming ahead of the broader markets.
This last decline lasted 8 days. If wave ii lasts 2 days and wave iii lasts 10 days, then that would align with the March 10 first target date. I am not saying this is how it will play out, but it is a possible sequence to look for. In particular, it gives us a time zone for profit taking between the end of next week and March 10.
I also expect that we will see extreme calls for the gold market both for upside targets and for a top. We may be close to a top in gold, but I suspect gold will continue to move inversely with the stock market, which means a pullback in gold over the next few days before a final push to a top.
As a reminder, this is the time to be scanning for leading stocks and stocks with clear bottoming patterns to buy when the market bottoms. The cream is rising to the top now.
I wish you all the best during the exciting days ahead.
Thursday, February 19, 2009
Sell Signals In QQQQ and SMH
Today we got the final confirmations of the downtrend with 3 week sell signals in the Qs and the SMH. Also, the low in the Dow violated the November 21 low finally eliminating the triangle possibility. The only obstacle to look out for now is an ending diagonal triangle in the Dow which could still allow for a sharp rally. We should expect at least one or two sharp rallies before the bottom, i.e. 2% to 4%, but just like the 11/13 rally last year that occured before the bottom, these should be false rallies.
A couple of weeks ago I said that if the Qs moved below 29.69, it would confirm the downtrend. That did occur on 2/12 but the Qs closed up for the day so that was not a reliable signal. However, I did use that signal to become more aggressive in opening new stock short positions while maintaining my index short positions at 50%. On 2/17 the Qs broke below the 2/12 low confirming that sell signal and I increased my index short positions to 75% while adding stock short positions. Today we got the final 3 week low signals for the Qs and the SMH and it would not surprise me to see another bounce tomorrow.
For the Qs 29.69 was the low of the opening day and opening 5 days of January, 28.74 recently was the 3 week low and the low of the opening 5 days of February. I do not trade the opening 5 day range of the month as a rule, but it can provide an early entry. Oftentimes, a break of the opening 5 day range of the month will determine the trend for the rest of the month. Also, watch the relationship of each month's 5 DOR. If each 5 DOR is higher than the last, the trend is up, regardless of what happens in between, and vice versa. Also, watch for false breaks. If a market breaks below the low of the 5 DOR and then reverses and breaks above the high of the 5 DOR, then that is usually a great buy signal. I hope that clarifies any confusion I may have caused.
Looking ahead to targets, I expect that the Qs will more than likely only test the November 21 low and not go much below, while the fibonacci extensions of the current elliott wave count in the Dow is pointing to 6356 as a target. However, the key market to watch will be the financials as they are likely to lead the recovery. The XLF is in wave v of 3 of (5), so we are looking at maybe one bounce followed by another new low. My target for the XLF is 6.00 to 6.90. Today it closed at 7.55, so it is getting close.
If you are long the SKF, I would not overstay as violent reversals are common with it. I have not been happy with the performance of many of the Proshares ETFs this year. The SKF overshoots in both directions and the DUG was a disaster. Compare to the DTO. There is debate about ETNs vs ETFs, but the DTO delivered and DUG did not. Also, I was ambushed with the early dividend announcement from Proshares without warning that stopped me out of 3 positions. I wonder if we will find out that there have been shenanigans in the ETF management later on.
To summarize, we are now in the heart of the downtrend in wave (5) down to complete primary wave 1 down. The risk of new short positions is rising so caution is advised. A market bottom is expected in March probably sometime between March 10 and March 17. Gold will likely top at the same time or a little early. There is no indication yet that the uptrend in gold is over and my target is now at 1029 to 1118. Today's pop in oil is probably not the bottom, but a bottom is in sight. The trade for March, April and May will be long stocks, short gold and long oil, barring a 3rd of a 3rd wave crash.
A couple of weeks ago I said that if the Qs moved below 29.69, it would confirm the downtrend. That did occur on 2/12 but the Qs closed up for the day so that was not a reliable signal. However, I did use that signal to become more aggressive in opening new stock short positions while maintaining my index short positions at 50%. On 2/17 the Qs broke below the 2/12 low confirming that sell signal and I increased my index short positions to 75% while adding stock short positions. Today we got the final 3 week low signals for the Qs and the SMH and it would not surprise me to see another bounce tomorrow.
For the Qs 29.69 was the low of the opening day and opening 5 days of January, 28.74 recently was the 3 week low and the low of the opening 5 days of February. I do not trade the opening 5 day range of the month as a rule, but it can provide an early entry. Oftentimes, a break of the opening 5 day range of the month will determine the trend for the rest of the month. Also, watch the relationship of each month's 5 DOR. If each 5 DOR is higher than the last, the trend is up, regardless of what happens in between, and vice versa. Also, watch for false breaks. If a market breaks below the low of the 5 DOR and then reverses and breaks above the high of the 5 DOR, then that is usually a great buy signal. I hope that clarifies any confusion I may have caused.
Looking ahead to targets, I expect that the Qs will more than likely only test the November 21 low and not go much below, while the fibonacci extensions of the current elliott wave count in the Dow is pointing to 6356 as a target. However, the key market to watch will be the financials as they are likely to lead the recovery. The XLF is in wave v of 3 of (5), so we are looking at maybe one bounce followed by another new low. My target for the XLF is 6.00 to 6.90. Today it closed at 7.55, so it is getting close.
If you are long the SKF, I would not overstay as violent reversals are common with it. I have not been happy with the performance of many of the Proshares ETFs this year. The SKF overshoots in both directions and the DUG was a disaster. Compare to the DTO. There is debate about ETNs vs ETFs, but the DTO delivered and DUG did not. Also, I was ambushed with the early dividend announcement from Proshares without warning that stopped me out of 3 positions. I wonder if we will find out that there have been shenanigans in the ETF management later on.
To summarize, we are now in the heart of the downtrend in wave (5) down to complete primary wave 1 down. The risk of new short positions is rising so caution is advised. A market bottom is expected in March probably sometime between March 10 and March 17. Gold will likely top at the same time or a little early. There is no indication yet that the uptrend in gold is over and my target is now at 1029 to 1118. Today's pop in oil is probably not the bottom, but a bottom is in sight. The trade for March, April and May will be long stocks, short gold and long oil, barring a 3rd of a 3rd wave crash.
Wednesday, February 18, 2009
Pause Day
It seems to occur with great regularity that the day after a macd sell signal is an up day or a pause day. Today was a pause day that closed poorly. Whether or not we get another bounce tomorrow is an open question, but nothing that happened today affected the status of the trend. In fact, IBD finally called the "market in correction". It is rare that there is not some downside follow-through after such a market call by IBD. So we have another nail in the coffin.
The Qs came close to a 3 week sell signal today. Maybe tomorrow will be the day and then all the ducks will be in a row. As I said yesterday, patience is the key here.
Just one note of caution. I don't think it will happen because of the cycle timing, but there is still a remote chance that today completed wave D down of the triangle that just won't go away. If the Dow moves under the November 21 intraday low even one tick in the next few days, then we can eliminate the triangle. However, it we were to get a sharp rally out of the blue before undercutting the previous low, it would not be a sign to bail on shorts since once wave E finishes, wave (5) down would begin. In other words don't get caught in a bull trap here.
The Qs came close to a 3 week sell signal today. Maybe tomorrow will be the day and then all the ducks will be in a row. As I said yesterday, patience is the key here.
Just one note of caution. I don't think it will happen because of the cycle timing, but there is still a remote chance that today completed wave D down of the triangle that just won't go away. If the Dow moves under the November 21 intraday low even one tick in the next few days, then we can eliminate the triangle. However, it we were to get a sharp rally out of the blue before undercutting the previous low, it would not be a sign to bail on shorts since once wave E finishes, wave (5) down would begin. In other words don't get caught in a bull trap here.
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