leaderboard

Friday, October 31, 2014

SPX Update: Obligatory Halloween-related Title Goes Here


Today, of course, is Halloween, which means I'm required by law to make some stupid obligatory Halloween-related market comments about bears getting tricks and bulls getting treats, or about how bulls put the "jack" in "jack-o'-lantern" or something similar -- but I'll do no such thing in this column.  Come and get me, Stupid Obligatory Seasonal Comment Police! 

With futures up approximately 20,000 points as of the time of this writing, if nothing else, we can't say that this market didn't foreshadow this possibility.  I ended Wednesday's update with the following:

My conclusion, trade-wise at this moment, is that with a typical rally, I might think it was nearing completion -- but this rally has already clearly shown it's not a "typical" rally; therefore, we would be foolish to ignore that and attempt to treat it as we would a typical wave.  We've only had one clear impulsive decline in this whole rally (last Thursday), and that did indeed point the way to an ABC decline on Friday, though it fell short of its targets.  The next impulsive decline will thus be the first confirmative signal that helps point the way toward an end to the rally; until then, this rally has already shown us that most anything's possible.

Also on Wednesday, I had noted 1995-1999 as a potential target for the current wave sub-wave, with the warning that if a fourth and fifth wave were in the cards, that would not be the final high for this move.  SPX did hit the 1995-99 target, and that generated a massive 12-point reversal (I initially wrote "massive" with the intent of being sarcastic, but, come to think of it: during this rally, 12 points of decline actually is a massive reversal) prior to this morning's futures ramp (yes, this is still the same sentence).

We're going to look at just two charts today, because, frankly, given the unusual nature of this rally, pretty much every wave count out there should probably be treated as speculative at best.  This goes back to what I've spoken about many times before:  know and respect the limitations of every system, and know your limitations as a trader. 

First up is the long-term chart.  Wave IV seems to have completed in the expected price zone, but was a bit short in terms of time.  This does allow for the technical possibility that it was a smaller degree fourth wave than most of us were expecting, which means the rally has the option to make new highs, then terminate abruptly and unexpectedly, thus catching bulls and bears alike completely off-guard.  I've explained this potential in more detail on the chart.



The 30-minute chart shows horizontal support/resistance zones.



In conclusion, there are many times I can look at a chart and say, "Oh yeah, the market's headed here, then here."  And sure, it's possible that the rally is now in its final fifth wave at micro degree -- but as I noted previously, this move has not behaved in the usual fashion, which means this is not the type of wave where you can make reversal calls with high probability

Technical analysis is based on the idea that the market will perform in a similar fashion to the way it's performed in the past -- but when you encounter extraordinary moves, they perform almost according to their own rules, and thus do not lend themselves terribly well to anticipation.  Recognizing and acknowledging that, as I covered in Wednesday's update, has value in its own right.

Happy Halloween!  Trade (and keep your kids) safe.

Wednesday, October 29, 2014

SPX, INDU, COMPQ, NYMO: FOMC Day; Oh the Joy



Last update noted that SPX had likely completed an ending diagonal, thus hinting that a correction to 1946 would unfold.  But this rally again threw a bit of a curveball, and the expected ABC decline instead developed into a shallow sideways triangle, thus giving bears very little relief (we'll look at this on the chart in a moment).

This has been an unusual rally, with virtually nothing in the way of pull-backs.  This is the type of move that simply feeds on itself:  Those who stayed strongly bearish near the 1820 low are eventually forced to cover into strength, which gives more fuel to the rally, which then causes more shorts to cover into strength, which gives more fuel to the rally, etc.  There's probably even a handful of people who are buying the market.

I've heard a few bears talking about thin volume in this rally, but generally speaking, volume is a red herring for bullish moves.  Bull markets don't need volume -- and I've watched many a bear burned with volume analysis during bull moves.  Bull markets only need more buyers than sellers; they don't need massive volume "confirming" the rallies.  Volume is always interesting to observe, but, in my experience, it's pretty useless as a predictive tool during these types of moves, and paying too much attention to it can actually do damage to a trader.

Let's take a look at the charts, starting with SPX 5-minute.  On the chart below, we can see how the last correction was a bear-burner, especially to any bears who were late to the party.

I should add that the chart notes 1995-2000 as a potential completion point for the current wave -- do note that this would not necessarily for the entire rally if gray iv and v are in play.




NYMO is getting into overbought territory, which usually means a rally wave is nearing completion.  This jives with the SPX count discussed on the 5-minute chart above.  Do note that "overbought" can always become "more overbought," so this indicator doesn't necessarily promise an immediate reversal, but it does help confirm my suspicion that the rally is now wrapping up its 4th and 5th waves.




COMPQ's chart clearly shows that this rally has been the most vicious rally in the entire 4 year history of this chart.

I still have nothing new to add since 10/22, when I noted that the anticipated ABC decline had effectively been confirmed as an ABC (ABC's are corrective waves, and corrective waves are always fully retraced to their point of origin).  Beyond that, I still have no new high-probability intermediate targets.




INDU also shows the viciousness of this rally, via the monthly candle -- which also shows just how rare these types of rallies are over decades of market history.


Today is, of course, the second day of a two-day FOMC meeting.  The Fed is expected to waffle-on about all the usual stuff that the Fed waffles on about, and the market is expected to react in its usual wild and whippy fashion.  My conclusion is that this market stinks for both bulls and bears.  If you're a bear, you've been beaten repeatedly by this rally.  If you're a bull, you were beaten repeatedly by the decline.

Personally, while I somewhat regret missing most of the rally, I'm thankful that I shifted into an essentially neutral stance immediately after SPX 1820, and warned readers that the decline could be complete and to stay nimble -- because that beats the heck out of the alternative of being stubbornly bearish the whole way up.

My conclusion, trade-wise at this moment, is that with a typical rally, I might think it was nearing completion -- but this rally has already clearly shown it's not a "typical" rally; therefore, we would be foolish to ignore that and attempt to treat it as we would a typical wave.  We've only had one clear impulsive decline in this whole rally (last Thursday), and that did indeed point the way to an ABC decline on Friday, though it fell short of its targets.  The next impulsive decline will thus be the first confirmative signal that helps point the way toward an end to the rally; until then, this rally has already shown us that most anything's possible.  Trade safe.

Monday, October 27, 2014

SPX Update, and a Few Notes about Elliott Wave


Before we look at the charts, I'd like to talk a little bit about using Elliott Wave in trading.  There are some key points that new traders sometimes miss -- but I've been employing Elliott Wave for so long that, at times, I forget that fact.

As I see it, there are three main values to Elliott Wave:

1.  It allows us to identify inflection points in advance.
2.  It often allows us to identify trend changes -- sometimes even before the trend actually breaks.
3.  It allows us to find high-probability targets, including unconventional ones.


Let me draw a recent example, using the "three main values" outlined above: 

Months ago, Elliott Wave allowed me to identify the (then pending) inflection point near 1920 SPX (value #1).  We reached that inflection point, and the market reversed.  The impulsive decline from the high then allowed me to confirm that the trend was changing before the trend lines broke, and that the inflection point had likely generated a meaningful reversal (value #2).  I then used various formulas to arrive at a downside target of 1824-1833 SPX (value #3), which was subsequently captured.  I further used Elliott Wave to identify that the downside target represented another inflection point, one which could mark the bottom of a C-wave, thus ending the decline (value #1 again).

The trouble I see traders getting into, over and over again, is by not acknowledging that there are limitations to any and every system, including Elliott Wave.  Limitations must be respected.  One does not make money by pursuing fantasies, but by negotiating reality.

The fantasy is that we can somehow know every single move the market will make in advance.  The reality is that we cannot.

If we pursue the fantasy, then we'll take too many high-risk entries, we'll watch winning trades turn into losers, we'll hold on to losing trades for too long, and we'll just generally manage our risk poorly.  Once we accept reality, then we can trade accordingly -- which equates to trading more effectively and more profitably. 

So, let's also discuss a recent example of the limitations, and how those limitations must be acknowledged and respected:  When SPX bottomed at 1820, I immediately began mentioning that a potential ABC corrective decline could have completed in its entirety (an ABC would mean that new highs were on deck).  In the very first update I published after 1820 was hit, I wrote:

"At this point, wave (4) and (5) are suggested by the momentum, but not guaranteed by the pattern, as the very first five-wave decline after a bull market simply cannot be anticipated.  The preferred count got us to the 1824-33 target, after hitting the turn off the ATH perfectly.  Now it's time for at least some degree of humility."

I published no new official downside targets, but I did discuss how a fourth and fifth wave might develop.  Obviously, what I do as a trader is not the same as what I do as an analyst.  The primary difference between the two is that, while every move can be analyzed to some degree, not every move can or should be traded aggressively.  In other words, as an analyst, my job is to tell you what I'm seeing (or not seeing).  As a trader, my job is to make money (i.e.- protect and grow my capital).  And that means recognizing when a move is probable vs. when a move is speculative, and trading and protecting myself accordingly.

An example of a probable move is a wave that's expected to be wave C or 3 -- that's a "confirmed" impulsive trend wave, which is expected to follow the impulsive wave A or 1.  That type of move might be traded aggressively.

However, after that's complete, then we encounter limitations: Trading waves 4 and 5 of a move that is labeled C/3 should be considered speculative, since the very existence of the "C" label means that waves 4 and 5 are unknown variables. 


I'll come back to all this in another update in the near future, because I haven't shared nearly all my thoughts here yet.  But for now, I'll just leave you with one final thought to consider (which I'll also get back to in more detail in the future):  Not every good trade is profitable, and not every profitable trade is good.

Last update, I discussed that the market appeared to suggest that at least a minor top was near.  I published a downside target, and while we did get another small wave down as I anticipated, it failed the expectations of a standard c-wave, and fell a couple points shy of my first target.

As outlined Friday, the bigger picture signals still suggest a downward turn is near, though the degree of said turn is presently unknown.  In that regard, there's little to add to Friday's update, so please refer back to it if you missed it.

Shortly after Friday's close, I published the following 1-minute chart in my forum, and based on the futures action this morning, it appears this near-term count from Friday was/is correct.  The minimum downside expectation for this pattern would (normally) be 1946 +/-. 


A deeper retrace than 1946 seems more probable, but -- talk about front running! -- we basically ended Friday at the highs, so there's literally nothing in the way of a turn or downward wave structure to draw from yet.



In conclusion, the market is still within a turn zone, however, the degree of said turn is currently unknown.  I should be able to draw more conclusive targets as the wave structure develops.  Trade safe.

Friday, October 24, 2014

SPX, INDU, COMPQ and SPX:TLT: The First Signs of at least a Minor Top


In the last update, I discussed at length why I haven't been trading much since SPX 1820, and we examined the bull and bear cases via BKX and COMPQ.  Nothing has changed in the intermediate picture, but near-term, we have the potential makings of at least a minor top.  We'll start with the SPX 1-minute chart to show why I say that:



Regarding the chart above, I should also note that in the event of the black expanded flat, Target 2 would no longer be considered "more probable," and would be given equal odds.

COMPQ reached, almost perfectly, the measured move target shown on Wednesday (represented by the height of the green measuring boxes), which also lined up with the second noted resistance level (blue dashed lines).



 
From an intermediate perspective, INDU's chart is interesting, and shows this market has tagged an intermediate confluence.  These adds another "reason" why a top (minor or otherwise) could form here:



Interestingly, SPX has (thus far, anyway) not quite reached its broken trend line.  So far, it's fallen about 10-12 points shy of that line:  (continued, next page)

Wednesday, October 22, 2014

SPX, COMPQ, BKX: Bull Case, Bear Case -- Head Case


This has not been the easiest market lately from either side of the trade.  I felt direction was pretty clear heading into SPX 1820, but at that point, I felt things got a bit iffy, which I hope I conveyed, though honestly I've been berating myself for not conveying it better.  Personally, I have been incredibly cautious during this rally, and have kept my risk profile very low since SPX 1820 -- and that approach has saved me a lot of capital.  But one of my goals with these updates is to help other people protect their capital, so I went back and checked to see how well I conveyed my feelings about the market's recent position.  On Friday, I wrote:

Wednesday was a good session for bears, as SPX captured its preferred target zone of 1824-33 (low of 1820.66), which was good for about 100 points of profit in four sessions.  We hit the intermediate turn well, and we've captured the lion's share of this decline off the all-time high, but now it's time for a little humility.  I'll discuss why below.

Let's start with the simplest wave count.  The first question we have to ask ourselves is if we believe this decline will be an ABC or a five-wave impulsive decline at higher degree -- and the honest answer is that no one knows for certain.  By all rights, momentum and most other indicators suggest that the final bottom isn't in yet, so odds favor new lows to come.  Therefore, we can make the assumption that we're in wave (4)-up with (5)-down to come, but we do have to remain aware that this is only an assumption.  


On Monday, I wrote:

In conclusion, amidst all the anticipation of new lows, I would again like to remind bears to pay attention to the basics in the form of trend lines and key downside levels.  If the market wanted to form an intermediate ABC decline, there are enough waves in place for said decline.  So, although it appears that the decline is not yet over on an intermediate basis, the first impulsive decline in a bull market is never a given -- and we must always honor both sides of the trade.

My conclusion is that I'm not sure how I feel about all that, and frankly, I think I could have done a better job conveying how cautious I was feeling about the bear odds at recent price levels.  But it is what it is at this point, and all I can do is try to convey those thoughts better in the future.

Water under the bridge, though, so let's see where we are now.  The market is in a bit of a no-man's land at current levels, so I'm going to cover the bull case and the bear case with as much detail as I can, given the very short time I have remaining as a result of Time Warner Oceanic's "system maintenance" that left me without blog access for a while.

We'll start with the bull case, via COMPQ:


And a closer look:


Now we'll look at the bear case, via two charts of BKX.


The 30-minute chart shows the detail, and why it's difficult to count the decline as complete:



Finally, SPX overlapped the 1926 zone handily, which pretty much rules out of fourth wave.  It's no-man's land for wave counts here, so I've highlighted a couple potential resistance zones.


In conclusion -- on Friday, I wrote the following to my forum members, and I think this conveyed my thoughts better than just about anything I've written in the updates.  It continues to convey my thoughts at this stage, so I'll end this update with Friday's comment:

I'm inclined to short the good R/R inflection points more than I'm inclined to buy the dips right now -- but that isn't a matter of conviction (despite what seems to be popular opinion), it's simply a matter of intermediate trend and comparative R/R. I'm somewhat agnostic to direction for the time being... so I'll short the inflection points when it seems appropriate, and be quick to bail if things don't pan out.
 

Direction has been clear since last month -- but right now, every trade on both sides is speculative, in my opinion. My strategy at times like this is to await the near-perfect entries (like 1898 SPX), but otherwise sit things out (unless, of course, something just screams at me in real-time).

The bottom line is I'm not in a hurry to give back my profits of the past few weeks. This market will make sense again soon enough.


Trade safe.

Monday, October 20, 2014

SPX Update: Detailing the 1-Minute Chart


After spending a ridiculous amount of time on one chart for this update, there's actually surprisingly little to add to Friday's update.  So far, the rally stalled at the noted key level of 1898, and has enough waves in place to be a complete ABC.

I'm going to start with the chart that I spent the most time on, which is a one-minute chart with some "thinking out loud" annotations.  If you don't like complex charts, then (to make it as simple as possible) C/3 could very well be complete at 1898.



Next is an updated version of the 10-minute SPX chart I published on Friday.  Note the rally stalled twice at the red trend line (I deleted the annotation that mentioned that line as important, but suffice to say it's somewhat informative that bulls failed to break out over it).


Finally, the simple bigger-picture chart.  This is still my preferred path heading forward; until the picture changes, I am leaning toward new lows, ideally in the form of a complex fourth wave (gray (4)).  In the event the market does make new lows, if it subsequently fails to hold support in the 1800-1814 zone, then we'd anticipate that gray (4) was already complete as opposed to complex as shown.



In conclusion, amidst all the anticipation of new lows, I would again like to remind bears to pay attention to the basics in the form of trend lines and key downside levels.  If the market wanted to form an intermediate ABC decline, there are enough waves in place for said decline.  So, although it appears that the decline is not yet over on an intermediate basis, the first impulsive decline in a bull market is never a given -- and we must always honor both sides of the trade.  Trade safe. 

Friday, October 17, 2014

SPX Update: A Simple Update in a Complex Market


Rest assured that I've looked at a lot of charts "behind the scenes" over the past 48-hours, but to keep things as simple-to-follow as possible, I'm only going to publish three charts.

Wednesday was a good session for bears, as SPX captured its preferred target zone of 1824-33 (low of 1820.66), which was good for about 100 points of profit in four sessions.  We hit the intermediate turn well, and we've captured the lion's share of this decline off the all-time high, but now it's time for a little humility.  I'll discuss why below.

Let's start with the simplest wave count.  The first question we have to ask ourselves is if we believe this decline will be an ABC or a five-wave impulsive decline at higher degree -- and the honest answer is that no one knows for certain.  By all rights, momentum and most other indicators suggest that the final bottom isn't in yet, so odds favor new lows to come.  Therefore, we can make the assumption that we're in wave (4)-up with (5)-down to come, but we do have to remain aware that this is only an assumption.

For the record, the gray path to "or (4)" shown below would be my "perfect world" outcome here, as follows:  A quick pop today, followed by a decline that breaks the prior low (probably finding support near 1814) then a sudden rally up toward 1898 +/-, and then another decline to new lows.



The question bears will ask is why I have wave (5) labeled near 1814, because that's far too short for typical Elliott Wave expectations.  I'll answer that with the daily chart below.  Note that the gray path I outlined above would work as one solution to resolve these conflicting market pressures.



The near-term chart is a little more complex.

On Wednesday, I published the following chart in our forums, and I'd like to update it and make it public now.  This chart has the potential to be a bit confusing, but suffice it to say that during Wednesday's session, I began viewing the last decline as (yes, another) extended fifth wave.  Be aware that red 5 of (3)/C does not end at blue 1 -- in this count, blue 1 is actually the first wave of red 5 (thus wave 3 is not the shortest wave).
 


In conclusion, to keep things as simple as possible with the market in a very complex position:  My perfect world outcome would be the gray path shown on the first chart.  That could always be blown up as early as today's session, though, so I've outlined some additional signals and levels on the 10-minute chart.  Trade safe.