A Triangle In Ford

On 7/8/09 F completed wave e of a textbook 4th wave triangle at 5.24 3 ticks above the wave c low of 5.21. The standard measure rule for running triangles allows for the upper trendline to extend above the wave 3 high as shown. The measured target was then 7.31. F hit that target on 7/29, but the 5th wave did not look complete so I decided to give it another couple of days. The range expansion today probably marks the end of the run and provided a good place to take profits for a gain of 26% in 10 days. Frankly, I was surprised at today's move in F and counted it as an unexpected gift, not to be refused. Other approaches project F to as high as 9.30, but I am not willing to take that chance on a 5th wave at the current juncture in the market.

The wild swings continue in the Dollar, gold, and oil. I will stick to my current position respective to these moves as there is ample evidence that the Dollar is approaching an important low despite today's action. Looking only at price in gold, the directional odds are 50/50 as far as I can tell at this point, and when that is the case there is no benefit in switching sides until the odds change. Overall, the pattern for the bearish case would not be negated even if gold advances to the 975 area which is now a possibility. The seasonal pattern for gold is calling for a sharp spike into Monday followed by a decline for the rest of August. Also, the JJC is now close to resistance at the trendline drawn above the April/June highs. On balance, it seems more likely that the Dollar will turn up as the market turns down and that gold and oil will follow suit.

The Qs have closed at the low for two days in a row. I think the odds definitely favor the expected correction. All in all, I plan to just manage positions for the next couple of weeks.

Have a good weekend.

5th Wave Complete

The case is fairly strong that the indexes completed 5 waves up from the July 8 low today. Note the clear divergence in volume between the wave 3 high and today's high. Also, note the poor close. It is no coincidence that the Nasdaq markets hit psychological round numbers at the highs today: Nasdaq Comp - 2000, Nasdaq 100 QQQQ - 40. Both Gann and Livermore talked about the importance of these round numbers as resistance and support in their writings.

So, where do we go from here? If this is the beginning of a correction of the rally from the July 8 low, I am looking for a bottom around August 14+/-. The correction would most likely test the June highs. The 50% retracement for the Qs is only 1 tick above the June high and an obvious target. The measured move target for the Qs from that level would be around the July 08 low of 43.30, which would be a phenomenal recovery. In fact, if my thesis regarding the rest of this rally is correct, it makes it easy to see how the Qs could better the 2007 highs by June of 2010, but we have a lot of work to do before then.

Today I exited positions in the UWM and USD and will look to re-enter on the pullback. I held my position in the UYG as the action in GE helped support it.

I am holding my long stock positions through this correction as it may prove to be more shallow than expected. Pullbacks are part of the trend and the big gains are had by riding them out.

Even so, I was disappointed by the poor close on MA today. I had gone long from 187.50 on the cup and handle breakout. It looks like it will be in the red before moving higher. I think it will move higher as V has moved up in 5 waves from July 8, and they should move together.

Oil gained back most of its losses from the prior day, so the bullish scenario is back on the table. Meanwhile, gold did not follow. If oil blasts higher from here I may let it go, but if there is a proper pivot off of today's high, I will look to go long.

In my opinion, this is no time to be thinking short. In fact, this is probably the worst time one could try to go short, except for intraday traders. There is little downside to support and a lot of potential upside. That is not to say that there aren't some stocks that are beginning to show intermediate term short setups, but it would be better to wait until the next wave of the rally is underway to see how they will behave.

Dollar Up, Gold Down, Oil Down

The Dollar continued to move up today and triggered a positive divergence MACD buy signal. Gold and oil both fell sharply. The move down in oil is close to negating any near term bullish potential, so it is beginning to look like the downtrends in gold and oil are accelerating.

I would like to see gold close under $900 to feel better about the intermediate term bearish prospects. Based on my reading of trading sites, most are still looking for a continued decline in the Dollar and a breakout in gold above $1,000. Dollar bulls as measured by DSI fell to 5% on Monday which is the lowest level of bullishness in 2 years.

I think we will have some strong evidence pretty soon how these 3 markets are going to play out.

The stock indexes look set to thrust higher into August 1, but I would be cautious about adding to long positions from this point forward until we see a pullback. The RSI14 and most Stochastics are maxed out except Stoch 5,5,1 and RSI5,1 which are falling (a negative divergence), which is both intermediate term bullish and near term bearish.

Dollar Up, Gold Down

The US Dollar index went below its wave 3 of C low by one tick today, possibly marking the low of the decline. Gold, meanwhile, fell $17.70. It will be interesting to see if oil diverges from gold for a time as I speculated or if it follows gold lower. If gold undercuts the July low by mid August and the Dollar continues to rally, I will remain short gold. I will withhold judgement on oil for awhile.

Clear Pattern In The Utility Average

The Dow Utility Average gets little press, but the elliott wave pattern is pretty clear, at least down to the March low. The decline from the Jan 08 high occurred in a very clear 5 waves and the swing highs and lows were coincident with the broader market turning points. In general, we would expect that the countertrend rally would retrace 50% to 62% of the prior decline. This turns out to be very close to the zone of the 4th wave of lesser degree, the 4th wave in intermediate wave 3 down, which is often the area that retracements terminate. The DJ15 Utility Average may be a good coincident indicator for the broader averages.

Oil Headed Higher

I recently attempted to short oil by going long the DTO. This now appears to be a losing trade for several reasons: 1) oil is moving almost in lock step with the stock market which is moving higher, 2) oil has moved up in 5 waves from its July low, 3) oil service stocks have moved up in a very clear pattern of 5 waves from the July low, 4) the elliott wave pattern in oil is now more clearly showing a potential 5th wave after having completed a zig zag which alternated in form from the 2nd wave flat in March and April, and 5) an analysis of gold in accordance with methods described by Tom McClellan in his book on liquidity waves now projects a high in oil in late September.

So, that being the case, I will be looking to exit the DTO trade on a pullback if I am not stopped out first. I will then look to go long the DXO with a view of exiting half the position at the median line and trailing a stop on the second half. I will also be looking to take a stock trade on an oil service stock if there is a clear setup. The initial stop on the DXO trade will be just below the July low.

Broadening Top?

Just after the head and shoulders top that recently failed, the latest pattern in vogue is the broadening top formation. To be clear, it should not be called a broadening top. It should just be called a broadening formation. It is just as often a continuation pattern as it is a reversal pattern. From a purist point of view, this is not even a valid broadening formation as the lower line has only two touch points. To become bearish, we would need to see a move all the way down to the lower line, followed by a partial rise and then a breakdown.

The current phenomenon is a manifestation of the persistent bearish sentiment in the market. Notice how few people have mentioned the breakout from the inverted head and shoulders bottom pattern in the SP500 (Carl Swenlin is an exception). I calculate an average target of 1164 for the breakout from this pattern.

This rally so far is developing almost exactly as I had envisioned toward the end of 2008. And the degree of persistent bearishness is such that I think it is entirely possible that by mid 2010 the Nasdaq 100 will exceed its 2007 highs, and the SP500 may come close to retesting its 2007 highs. This does not reduce or negate my long term view that the bear market low will be seen in the time zone of 2012 to 2014 with the Dow approaching the 3000 level or lower.

So how is it possible that we are in a bear market with markets heading toward their previous highs? I believe the explanation is that we are in the largest X wave in the history of the stock market. This X wave is the connection between the first phase of the bear market which evolved as a flat in the SP500 and the second phase of the bear market which will most likely be a 3 wave decline. Once the first leg of that 3 wave decline is complete, we will be able to more accurately project the price and time of the final bottom.

As far as I know, I am the only person to put forth this hypothesis publicly. It occurred to me back in 2007 as wave C of the flat correction got underway. It has grown on me because it is about the only pattern that unifies the various cycles that I have previously described while maintaining the possibility of a potentially devastating outcome. The positive side is that we could also see only a retest of the 2009 low, which while perhaps disappointing to some bears would be a blessing to our nation and the world. I plan to post a paper on this analysis in the coming weeks.

The one thing that could prove this hypothesis wrong is a 5 wave decline from the top of the current rally that carries below the 2009 low.