Post Schedule

Due to a family emergency the next post will be Sunday May 3rd.

Positive But Not Solid Advance

Although the markets were higher today, the volume was average to below average and not convincing. I would have liked to see a more powerful follow-through. As it stands, the rally from Tuesday's low can still be counted as 3 waves up which could mean a flat or expanded flat correction with an expectation that the low of April 20/21 will be retested early next week. The Qs are now at resistance at the 200dema. The 200dema is not strong resistance for the Qs, as it frequently pushes right through that level in either direction, so we will just have to wait and see how the market behaves on Monday.

One thing seems to be clear to me with each passing day: the rally from March 9 is not over. JNPR staged a powerful breakout above its downtrend line today. That is not an indication of a market ready to roll over. HANS broke out strongly yesterday as well. AMGN rallied after a poor earnings report. I shorted AMGN(half-position) on Monday at 46.00 with a stop at 51.00. I thought that it would fall apart today after the action last night. If it continues higher Monday, I may reverse and go half long. This is bull market (rally) type behavior.

Bullish Action

Overall, the lack of downside follow-through today together with continuing positive reaction to tech earnings raises the likelihood of a contination of the rally with a possible breakout in the Qs tomorrow. It is possible that the Qs are working on a more complex flat correction that would lead to another downmove next week to retest the April 20 low, but I expect that the Qs will move on to 35.70 and 37.66 over the next few weeks.

To reiterate, the risk is to the upside until sentiment swings solidly to the bullish side, which it has yet to do. Rarely does CNBC offer insightful information for traders, but one report today was very insightful. The results of analysis by a firm, I missed the name, showed that retail traders have been sitting on the sidelines during the rally, hedgefunds have been selling this rally agressively, and institutions have been buying this rally. This fits exactly with the analysis by Alex Roslin at COTs Timer, which has showed the large speculators to be very bearish on this rally.

This rally has a long way to go, I believe, and will be fueled by the hedge funds reversing their positions and retail traders jumping on board. In fact, we may soon see a third of a third wave breakout in wave (A) of Primary wave 2 up. If this happens, we would expect wave (A) to top somtime in July. I will make an effort to provide a labelled chart soon.

Poor Close

The selloff at the end of the day probably means that wave c of this correction is underway. The Qs made a new rally high intraday. That, together with the positive response to technology earnings supports the view that only a brief test of the Jan/Feb highs is likely in the Qs. Should today's high be exceeded before today's low, it would be very bullish indeed. In any case, unless something unexpected happens, another day or two should complete this correction.

Follow-up on the MACD post from April 5th:

The MACD gave a sell signal in the Qs yesterday. Using Appel's rules for the MACD, this signal should be ignored since it is the first sell signal after the positive divergence buy signal on March 12. If the MACD pulls back to the neutral line (zero line), it would be a chance to add to positions. Otherwise, we will wait until the second sell signal for an exit whether the MACD is higher or lower than its recent high for this rally.

Traders could use this in combination with the 3 week trailing stop by exiting half with the MACD and half with the 3 week stop.

Nice Rebound

Today's action was very positive and afterhours reaction to SNDK and YHOO appears to be positive so the bounce may continue tomorrow, but I would expect at least one more down wave to complete a 3 wave correction from the recent high. The action in the financials was especially encouraging today with an outside reversal bar in JPM up 9.57% and WFC bouncing off of the recent downtrend line with a gain of 10.65%. My hunch is that this week will be flat overall and the rally should resume next week. It will be very bullish if the Dow can hold above 7750 and the Qs above 31.21, but we will see.

There are hardly any new lows and the summation index keeps moving higher which again supports the bullish view.

I finished reading Trading Chaos, 2nd Ed. by Bill Williams & Justine Gregory-Williams this weekend. It was interesting, but long on psychology. I am using the technical aspects of their work a great deal in my trading. I think it truly is the easiest and best way to trade, but I have adapted my own risk management techniques which work better for intermediate term trading.

Psychology is important, but a quite overworked area in trading. I remember several years ago paying a golfing coach to help figure out why I couldn't hit a golf ball. He spent the entire time talking about my emotional state. My emotional state was one of frustration at not being able to do something that otherwise appeared relatively simple. Well, needless to say, even when I was relaxed and calm, my slice was severe. Years later, I watched a golf video in which the instructor claimed that he could teach anyone to hit the golf ball straight. I had to watch it several times before I saw what he saying, but I went immediately to the driving range and was able to hit the golf ball straight. Now, if for some reason I hit an errant ball, I know exactly what I am doing wrong, and I can hit the ball straight whether I am angry, calm, excited, sad or happy. The point is that trading is simple, and once you understand how to do it effectively, your emotional state should not affect the outcome. Your emotional state only comes into play if you it prevents you from doing the simple things you need to do to be effective. Successful trading will then lead to even more successful trading in a virtuous cycle.

If you are not being profitable and successful in your trading, look to find a mentor who is successful and follow them until you are successful. Your emotions will take care of themselves.

Shakeout

As I said on Friday, the intermediate term trend is still up. Whether or not this current correction turns into a deep affair awaits to be seen. My suspicion is that the Qs will hold up above the recent breakout of the January and February highs at 31.63 to 31.68 with perhaps a move down to 31 intraday. The Dow could easily see the 7500 area, but again I expect it would be a brief foray. Only a sustained move below 7483 in the Dow and 29.79 in the Qs would alter the intermediate trend.

This is the type of action that is needed to rebuild some bearish sentiment, but to bail out now would be premature in my opinion. None of my stops were hit today, although a couple came close.

On the short side, SPW has set up nicely for a quick hit and run short trade with a target in the 28 to 30 area. However, exit on any solid reversal above the target zone.

Oil looks as though it is in wave c of a correction that could last 1 to 4 more days before the uptrend resumes.

A Bearish Wedge?

It is now common knowledge that the markets are nearing the completion of a bearish wedge, or ending diagonal triangle in elliott wave terms. I don't recall ever seeing a more highly publicized pattern, as if it is obvious to everyone that the markets are ready to correct. Occasionally the masses do get it right, but I have my doubts. I recall more than a few occasions when I was certain that I had identified an ending diagonal in a stock or index only to see it continue sharply in the direction of the trend. And that is the danger here. We could see the indexes explode higher instead of correct.

So far there is no evidence of a change in trend. In my opinion the risk is still to the upside as I have been saying for weeks. If you have doubts, buy some insurance - index puts or short ETFs. According to Bulkowski's thepatternsite.com, downward breakouts of rising wedge patterns hit the target only 46% of the time, and downward breakouts are ranked 20 out of 21 in performance of bearish patterns (1 being the best). To me, this is a pattern to be aware of but not one to take a pre-emptive position on. We may very well see a sharp thrust down for a day or two to shake some people out, but until I see evidence of a trend change, I will just keep trailing stops and looking for new setups.

I can't tell you how many times Elliott Wave International called the end of the rally in 2003. At least a couple of those were ending diagonal patterns. Well, all that happened was the rally would correct 5% to 8% and then surge higher. That may not happen this time, however, too many people are predicting the end of this rally. One pit trader has been on CNBC every morning this week talking about how he keeps trying to sell this market with no success, but he is sure the top is near. When I see people like him saying they are buying this market because they were wrong and now they believe the rally is for real, I will start to look for the exits.