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Sunday, October 30, 2011

SPX and NDX Update: A Disturbing Look at Fundamentals, and the Rally Explained

John Mauldin, whom I have a great deal of respect for, put forth a very convincing and enlightening argument this weekend in his free Thoughts from the Frontline newsletter.  I'm going to try to summarize his argument as succinctly as possible for my readers, but do note that the credit for this information goes to him.

Basically, his argument helps explain what stretched out the historic melt-up rally in equities (the Dow Transportation Average is having its best month in 72 years -- that's pretty historic).  His argument revolves around the announcement which came out of Europe on Thursday, and why it impacted the equity markets.  As most realize, it had nothing to do with "good news" from Europe.  Pretty much anyone with half a brain looked at the European summit and said, "Greek bond holders taking a 50% haircut isn't good news... why is the market rallying like crazy?"

What it boils down to is this:  when the banks agreed to a voluntary 50% write off on Greek debt, that agreement caused credit default swap clauses not to be triggered.  If the write off is "voluntary," it is not considered a default, so no CDS.  Once it became apparent there would be no CDS event, the parties involved no longer needed to hedge their risk on CDS counterparties through short positions.

Imagine you were a big player who sold a CDS on Goldman.  You would then short Goldman stock to help hedge your risk exposure, and protect yourself in case you actually had to pay out on that CDS.  When the CDS event was voided due to the voluntary write-off agreement, that risk exposure evaporated.  And those shorts got covered.

In the interest of brevity, suffice it to say that this "voluntary" agreement out of Europe caused many short position hedges on the SPX and financials to be covered, which then squeezed the short hedge funds and caused them to cover, which then got picked up by the algorithm bots who added more fuel to the fire, followed by momentum traders, followed by John Q. Bear who had his stops hit or his margin squeezed, etc.. 

Before you know it, the SPX gaps right through the neckline of the old head and shoulders pattern like it isn't even there.  I am simplifying things a great deal here, but I think my readers are smart enough to get the basic picture.

The bottom line is: the government changed the rules in the middle of the game.  Imagine if you were a football player who returned a kickoff 100 yards all the way to the endzone, then spiked the ball and started celebrating... at which point the officials came running in and said, "Sorry, no touchdown.  In fact, it's a fumble.  We just moved the endzone out to the parking lot.  By the way, grab us some hot dogs on your way back."  That's basically what happened to the credit default swap players.  Changing those rules had a major impact on the "private" equity markets, and caused the melt-up.

This is another thing that always interests me about Elliott Wave: had the rules of the game not been changed, it seems more likely that the counts I posted on Wednesday might have panned out better.  The market sometimes forms patterns which "keep their options open."  The patterns can, in essense, morph into something different if influenced enough by an outside force.  This is another reason no analyst can be right 100% of the time -- you make a call based on your best analysis at the moment, but outside events can transform a pattern from something that appears to be a low probability potential, into a reality. 

I have sometimes compared trading to poker.  You might have a very strong hand (i.e.- a high probability pattern), but that strong hand can always get cracked by some long-shot hand that hits a miracle card on the river (i.e.- a low probability pattern). 

Nothing is guaranteed -- the best we can hope to work with are probabilities.  I get my money in when I've got the odds on my side, and I get it out when I don't.

The situation in Europe is still far from bullish.  There is simply too much debt in Greece, Italy, Ireland, Spain, France, and Portugal for the Eurozone to recover from unscathed.  Meanwhile, the United States is running into debt problems of its own. The U.S treasury market is deeply dependent on foreign central banks (FCBs) for support... and lately the bids on U.S. debt are drying up.  My associate Lee Adler at the Wall Street Examiner compiles one of the most comprehensive reports available on the Fed and US Treasuries.  The data and analysis he provides is incredibly comprehensive and useful.  Put simply, it's a champagne report for beer money.

The following is reprinted, with Lee's permission, from his Wall Street Examiner Professional Edition report:

FCBs are in a short term cyclical upturn in their buying pattern, but this turn comes from an unprecedented level of weakness and the numbers coming off the low are pathetic, and still deeply negative.  If this is the up phase, I can't wait to see the next down phase.  It will be ugly.  But we probably will not have to deal with that for at least another 6 or 8 weeks if typical timing holds for this buying cycle.  On the other hand, unless FCBs step up to the plate much more than they have in the past couple weeks, either the Treasury market will collapse, or the stock market rally will fizzle, or both.  We're not there yet, but if these trends continue, make no mistake, the balance will tip.

The chart below is also from the Professional Edition, and is again reprinted with his permission.  It shows the FCB holdings and activity going back to 2007.  You can see the 4-week moving average has broken down to unprecedented levels:



It appears that the governments are running out of money to lend to each other.  We all know that real wealth cannot be generated by a printing press.  The nature of money is the same as every other commodity: the more of it there is, the less it's worth.  So the governments can print until their hearts' content, but ultimately they're not actually creating anything, other than higher prices out in the real world.  They're really only shuffling pretend money around in a type of gigantic shell game... or Ponzi scheme, whichever image you prefer.  The real world knows that true wealth is only created through production.

And production is something the world currently lacks.  Right now, the entire world economy is riding on the backs of an estimated 87 workers who make Widgets at an industrial plant just outside Beijing.  (I realize I'm overstating the situation here -- but not by much.)

It seems to me that this grand experiment in economic design is getting very close to running its course.  I think it will be terrifying when it all starts collapsing in earnest, and the public realizes that not only does the emperor have no clothes, but even his pretend clothes were insolvent.  (Okay, maybe I'm trying to stretch that one too much...  you get the picture.)  I will end this thought with a quote from F.A. Hayek:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."      

Beyond that bit of insight, the market finally did me a favor on Friday and allowed me to relax a bit over the weekend (well, at least as far at the charts go... still had this article to write!).  There's been no material change in the counts since Friday's update, so I am still anticipating two likely resolutions to this historic rally:

1)  Thursday was a blow-off top and the rally is over.

2)  Thursday was wave 3 of C, and the rally will ultimately end in the zone of SPX 1305-1330.

Due to Friday's sideways action, there isn't much to update in the charts (for once).  Friday could have been the b-wave of an a-b-c correction, in which case the market should find support around SPX 1265-1270 before rallying higher... or it could have been the start of something more ominous. 

The key levels to watch are still: Thursday's high, above which would indicate that option 2 is unfolding; and 1256, below which would indicate that option 1 is unfolding.

(Also check out the U.S. Dollar Update to see how the dollar and stock charts may be lining up together.)


The NDX also did nothing noteworthy on Friday, and I am still considering the ending diagonal as a possible final resolution of the NDX rally, though it is certainly not the only possible conclusion.  Two alternate conclusions for the NDX revolve around the black "Alt: 4" label on the NDX chart.  If that alternate label indeed marks the end of the 4th wave, the two most likely outcomes are either:

1)  The NDX rally is over.

2)  Thursday was wave 1-up of 5-up. 

First warning that the NDX rally is over comes with a violation of the rising red trendline off the October lows; second warning is a violation of 2274.49; confirmation comes with a violation of the blue wave 1 high, around 2220.


As I talked about on Friday, I am still equally split between the idea that the rally ended on Thursday, and the idea that there's one more marginal new high coming.  The bulls are now openly gloating, and many of the bears I talk to have either capitulated, or are nearly there... so the sentiment is right where it usually is at the end of a bear market rally.  It sure looks to me like the top is a lot closer than the bottom now.   

The original article, and many more, can be found at http://pretzelcharts.blogspot.com/

157 comments:

  1. having some trouble with blogger and getting Lee's analysis to post... working on it.

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  2. there we go, just had to enter it all in manually. cut and paste having problems, i guess.

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  3. futures look ugly at this point. Down almost 1%. Not close enough to your 1256 yet for the s&p though

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  4. Yep, it'll be intesting to see where it opens. A lot of people are looking for more upside today. I'm not one of them... but a lot can change between now and the open.

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  5. "intesting" being "interesting" -- lol

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  6. lol i was going to say anything, but i guess you caught it in time. Also on your dollar chart, i found it amazing that you have a "300 year dollar chart" ;) :P

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  7. Yeah, not quite 300 years. Gonna make me get all exact and stuff, sheesh. :P

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  8. There, I changed it to "multi-century." The 300-year chart was a reflection of how hard I work putting these charts together. I was charting the dollar before the dollar was cool. Before it existed, even! Beat THAT, Bob Prechter!

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  9. TJN (used to be TJ but seems like TJ is a famous char here)October 30, 2011 at 8:16 PM

    Since I come in usually from a non-technical standpoint, I would like to quote this from an economist that I follow:

    Since 1963, when the ECRI Weekly Leading Index growth rate has been below -5 and the ISM Purchasing Managers Index has been below 54, the economy has already been in recession 81% of the time, and the probability of recession within the next 13 weeks was 86%.

    If in addition, the S&P 500 was below its level of 6 months earlier, the economy was already in recession 87% of the time, and the probability of recession within the next 13 weeks climbed to 93% (and then to 96% within 26 weeks). Under these conditions, once the PMI fell below 52, the probability of recession within 13 weeks climbed to 97%.

    That simple set of conditions (WLI < -5, PMI < 52, SPX < 6 months earlier) has been seen in every postwar recession for which the data is available. Though we've seen recessions without a drop in the WLI much below -5, when a WLI below -7 has been coupled with a PMI below 52 and an S&P 500 below its level of 6 months earlier, the economy has been in recession within 13 weeks, 100% of the time. This is the combination, incidentally, that we observe today.

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  10. I am no technical analysis expert, but I always thought that it would be awesome to overlay fundamental leading indicators like the ones above on technical analysis (hint hint to Pretzel, who will probably kill me for giving him more homework)

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  11. lol. preacher's got nothing on you pretzel i love the vibe of this blog. makes me want to go non anonymous. but glad you've been working so hard pretzel ;)

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  12. Nice, TJ - N. :)

    Great post!

    Only 100% chance, then? Seems like the bulls still have a pretty good shot... If my math is right, let's see, carry the zero... hmm... are we using base 10 here?

    I'm thinking maybe it's like my contractor... he gives 110%, so if the economy works like he does, that still leaves a 10% chance that we're not in a recession!

    Seriously, though... good stuff.

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  13. Thanks, anon. You should go non-anonymous. There are a lot of anonymous posters, and frankly, you all look the same to me (I hope that's not racist...) ;)

    And TJN, I will consider it. Someday. Maybe. :P

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  14. fine fine, im non-anonymous now.

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  15. Ah, one less anon... and the world breathes a little easier tonight. :)

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  16. My ES shorts from Friday as posted intra-day are looking pretty good right now. :) Moved my stops down, though.

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  17. won't a gap open need to be filled though?

    Still favoring your second rally ending count of a new high, especially since the vix spiked on the 1197 low which leads me to believe it was more likely the end of B than was the 1190 low.

    good stuff pretzel.

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  18. Excellent last two articles Pretzel! Should be an interesting week - can't wait to see what the Fed does on Wednesday - even more QE could prove to be a big fade in the intermediate term - eventually even the addict becomes immune to the drug and could set this market for an even bigger fall down the road. Still see alot of bear sentiment out there, so I would favor a small correction soon with a further run of the bull. Great stuff buddy, keep up the good work - I'm off to work to try to get out of the 99% class!

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  19. Wel, FWIW, the SA JSE is often a leading indicator and is currently down -1.35%...

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  20. Futures down solidly, dollar up solidly. Where is everyone? :o

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  21. how do you see today playing out?

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  22. Pissed that I let this market shake me out on friday with that fake triangle breakout even though I was calling for the 1265-1275 level the whole time.

    I've set myself up for a wave 5, gonna play it that way until we break 1256.

    Pretzel - all we need is a print below 1256, not a close right?

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  23. Gonna wait and see what the cash open looks like. It really depends on whether this is a fourth wave of C-up, or a third wave of 1 of 1 of (3) down. Market still hasn't given enough info to make a definitive call -- I really don't have anymore info than I had on Friday.

    The current move down in the futures I was largely expecting either way, which is why I went into the close short. Now we'll just have to watch and wait.

    I'm still leaning toward the scenario where the rally topped on Thursday, as I have been since Thursday -- but there's still no confirmation until we get a five-wave decline or break 1256.

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  24. For those who may have missed it, my cycle roadmap for stock market was posted last night on the US Dollar post comments section.

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  25. Rocky, correct. Doesn't need to close below 1256

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  26. P is there a particular reason you like to trade in the futures market? Or do you treat it as an extension of the day-time market. Another way to put it, do you prefer one over the other, treat them essentially the same..?

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  27. Pretzel what are the key levels to watch for SPX other than 1292 and 1256

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  28. What I found interesting about the "fake" triangle breakout is the market left the option open for that to have been something other than a triangle, as I hinted at Friday.

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  29. Pretzel- Finally got this screencast thing up - take a look -- white line is 2010, orange is last couple of months. 2 rallies like that in less than 18 months ... the strong arm of PPT seems at work ... definetely some differences - as you pointed out - 2010 had a higher low and then the bounce vs 2011 with the lower low and the bounce. Food for thought

    http://www.screencast.com/t/w7CNwqD8Ei

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  30. I like futures because of the liquidity and leverage... plus you can get in or out while the cash market is closed -- and not get stuck in a spot where the market gaps up or down, and leaves you stranded.

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  31. anon-

    well, if Friday was a 2nd wave correction, when we put in our first bounce here, it shouldn't exceed Friday's high. It's kinda tricky -- basically we need to see five waves down BEFORE we exceed Friday's high.

    On the downside, there's really not much to work with other than 1256 right now. We could retrace to 1257 and rally to new highs from there without violating any rules of structure.

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  32. POTUS-

    TY. Yeah, time-wise it's a dead ringer. That new low makes the pattern a little different, though.

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  33. If this IS part of a five wave decline, it looks like it will take out 1256 before it's over. If it's not, well, there's about 10 points left for it to bottom.

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  34. In other words, if this is wave 1 of 1 of (3) down, it looks like it will take out 1256 before we get a decent bounce... lemme put it that way.

    SPX back beneath the 2011 head and shoulders neckline btw.

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  35. Solely based on terms of logical sentiment, in relation to the soon forthcoming extreme super-cycle century-degree bear market, there should get an extremely violent bullish rally right before it starts, to totally wash away all bearish sentiment.

    And, washed it away enough, so that sentiment continues to remain bullish for a long time, even while stockmarket repeatedly, steeply, drops.

    Therefore, solely based on logical sentiment extremes, I'd say your screaming top to 1330 SPX scenario is much more likely, than your scenario in which the stockmarket has topped out already. Because, the extremely bullish sentiment necessary, is not here yet.

    So, I´ll further postulate, that in order to achieve this final manic top, that whatever comes out of the Fed meeting this Wednesday, it will be interpreted as wildly bullish by the stockmarket. And so it will shoot up screechingly, for it's final bear-trap rally leg upward.

    And it will be this final rally leg upward, that will wash away all bears, and will feed the continued necessary bullish faith of a powerful Fed QE3, that will maintain sentiment highly bullish for quite a while, even as the market falls further and further.

    And it will fall and fall to everyone's surprise, including both bulls and bears.

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  36. seems to be hitting a wall at 1266. Could that be an area for a bounce?

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  37. This is the first area of support, yes.

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  38. I'm sure this could break either way, but if feels like the wave 2 bottom last week, gap lower, found support, inch higher to midday then inch lower before late day buying begins to officially end the wave 4 down. I really like a push above 1300 to solidify the bear case here. Makes it that much more painful for the bulls.

    Given the wild action we say last week, I don't see how all bears press the gas right here, we've got the 'threat' of QE3 on wednesday and I believe that will drive enough bear fear to put a floor in here.

    Plus if we close the gap completely at 1256 then we don't have that magnet later on to help drive the drop.

    Ofcourse I'm bias, cause I need that move higher due to my lapse in judgement of covering and going long on Friday. Dumb.

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  39. Covered Friday's shorts from 1285 (cash market). I'll go short again if we take out 1256. I can live w/out 12 pts if this is c of 4 before the next leg up.

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  40. Hmm. Move off the LOD looks a bit like an a-b-c, though. Interesting.

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  41. Well, Rocky, I'm flat now, so I hope we get your wave up. :)

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  42. Apple now a few points over Friday's high.

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  43. Pretzel, if you think it's only a matter of time before we see a major down, and the top was either last Thursday or this coming Wed, wouldn't it be more prudent to be half short now, and leave the other half for Wed with a stop at say 1332, rather than potentially miss this when the market gaps down again tomorrow. i don't see why you shouldn't "average up" if you are bearish esp since you are shorting at decently elevated levels. then again, i am not really a trader, so forgive me if this is a stupid question

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  44. By the way, I noticed that after last week's whipsaw, the number of comments in your blog is steadily decreasing. Given the bearish inclination of your writings recently, I see this as a contrarian indicator that many bears are bailing out

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  45. Not much of a trader either but this ralley is just meant to fool the masses.

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  46. Now i'm up. Debating whether to hold on to FAZ now. hrmm

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  47. TJ- yeah, I've been a member of a certain "bear board" for a long time, and you can almost time the market tops to the lack of posts. :)

    Re: gaps down. I trade SPX futures (symbol: ES) and the futures market is open 24 hours (basically) -- so gaps in the cash market don't matter to me. I've been referencing the cash market prices when I posting my trades in real-time, because it seems most here are more familiar with the cash market.

    But the way I view the current situation is: I'm about 50/50 on a continued decline. We're only 12 points away from the level where I would consider getting decidedly short, so that's my potential "lost profit" -- 12 points. The upside potential of the market could run as high as 62 points -- so that would be my "risk" in staying short to try and ride it out. Risk/reward at 50/50 odds of 12 points lost vs. 62 points lost didn't make sense to me.

    The move down today I considered to be high probability for either pattern. So I played it and took 17 points of profits. Once the market again tips its hand for short term direction, I can reassess where to enter.

    Make sense?

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  48. bounced off of 1266 again

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  49. So far this whole move since the open looks corrective. I suspect we see new lows for the day.

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  50. freeport is strong off the am bottom as is apple...we're going higher.

    In my humble...often wrong...opinion

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  51. Thanks Pretzel for your explanation. Just out of curiosity, should the market dip below your support today, and you go in short, and SPX rebounds tomorrow to around 1267-75 level, what would you do prior to the Fed on Wed given there is still a chance of good news and a rally to your upside potential estimate. I am trying to understand the thinking of a seasoned short term trader .

    ok i am out, gotta catch some sleep!

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  52. Rock, not saying this isn't still wave 4... just saying it looks like it wants a new low for the day. Not necessarily a breakdown "OMG the sky is falling" low. :)

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  53. TJ- if it breaks below 1256, I wouldn't expect a rally to new highs after that. That level should take new highs off the table. From there, I would simply have to assess the wave structure for my entry point. I wouldn't necessarily enter right at 1256... I would wait for a bounce IF I felt one looked likely.

    But I've learned over the years that I lose the most money by pushing a move too far (greed), and/or from over-trading on bad setups.

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  54. Bears seem to be losing the initiative here, not exactly the kind of damage I wanted to see today to allow 11/4 +/- 1 cycle to be a lower high. With so many days left until the next cycle turn and with the market still it spitting distance from last weeks high we either need to get some cushion by seeing a much larger downdraft today or else higher highs into 11/4 +/- 1 would seem to be on tap. Basically if we don't really start cratering the rest of the day today then the next most bearish alternative I can think of would be that we are going to spend another 2 days into Wednesday's Fed meeting in a 4th wave triangle, then thrust out of it on Fed announcement with final 5th wave top coming Thursday morning. On the other hand if we see new highs sooner that that then it would signal a more powerful extension higher. This market is really doing a great job of hiding it's true intentions from me since Thursday. I have noticed that happens most often in 4th waves.

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  55. CTP-

    Agree. 4th waves and B waves are the worst.


    Alright, gotta run for a while. Feel free to talk amongst yourselves.

    Catch up w/ ya later. :)

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  56. Dollar seems to be taking next leg for the 5 leg move from recent high -takes us to new low in SPX?

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  57. could be another false triangle breakout lower. If so, it needs to snap back above very quickly, else a test of 1256 is in the cards today.

    Pretzel was right, new lows at 1263 already and counting potentially.

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  58. Two very tight trading range days in a row. Which I assume means the market is holding it's cards close. Will curious to see what everyone here thinks this portends for the next meaningful move.

    My suspicion (and it's just that) is that the market holding above 1,260 provides another healthy dose false hope and shot of heroin to the bull crowd. And so we head up past 1,300 after the Fed meeting and into the end of the week.

    Which would set the trap perfectly with no buyers left and everyone holding . . .

    All buyers would be in. And then down we can go . . .

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  59. 2 highly pertinent short videos.
    one ew technical, one banking fundamental:

    Talking Numbers: S&P Double Dip? (last Friday) Discussing his perspective on patterns occuring in the market, with Walter Zimmermann, United-ICAP chief technical analyst. http://custom.yahoo.com/talking-numbers/


    Jenkins Says Italian Bonds Guarantee Is 'Worthless' 7 hours ago - Bloomberg
    http://finance.yahoo.com/video/marketnews-19148628/27110503

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  60. Just a quick heads up... Need to see this market tank hard either in the last hour today or else gap down big tomorrow in order to keep my bearish cycle roadmap on track.

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  61. Now is a good time for bears to push if they really want it...

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  62. what happens if the market's flat?

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  63. looks like the market movers heard you.

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  64. POTUS,

    ;-)

    Yes bears did what they needed to do to stay in the game.

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  65. 1257.56 with 15 min to go. 1256 ah so close.

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  66. so close to breaking 1256...

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  67. Yup, waiting for that final push!

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  68. we'll close around 1258 with a bounce off of 1256 just to keep everyone guessing

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  69. Does not look like it will get there today!

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  70. My cycle stuff looking for a ST low here at the close today or early tomorrow, then going into 11/4 +/- 1 should see either sideways consolidation (most bearish), retest of high (next most bearish) or possible marginal higher high (most bullish). I lean toward the more bearish alternative but am open minded to the potential for another assault on the high.

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  71. My bad looks we took it out no problem!

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  72. so what do you think CTPtrader?

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  73. LOL, not it's even the best month since 1974! All that talk and here we are with the best month since 2002.

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  74. do you think the sell off will continue into the fed meeting?

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  75. Anon,

    Cycle stuff says due for an ST low and bounce into 11/4 +/- 1. Today's sell off was enough that I expect 11/4 +/- 1 to be a lower high than last Thursday's high. For the next 2 weeks or so I would be looking to sell rips.

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  76. "
    So, my preferred roadmap for the week is sell-off hard into Tuesday, bounce on Fed Wednesday and into Thursday morning, then tank hard into the end of the week. That would set up for a very nasty drop (wave 3 down?) into the next cycle turn date of 11/11 +/- 1 which my Hurst stuff indicates should be a low. "

    so nothing has changed from this picture you painted before

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  77. Anon,

    nope today's late sell-off fulfilled the roadmap perfectly.

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  78. Ah I see thanks. I was thinking of going short here since it broke the 1256 line. However, I just reread that roadmap and it says selloff hard into tuesday, not on tuesday as well?

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  79. There is a possibility of a further drop into Tuesday morning but today's sell-off covered enough ground that it further selling Tuesday is not required per my cycle stuff. I could be wrong of course, but that is my best guess based on everything I am looking at.

    At this point I am not interested in chasing weakness. I shorted the futures last night and covered 10 minutes before the close (unfortuntely I was 3 minutes too early as I missed that last 7 minutes of waterfall decline) :-( ...

    Given the bearish forces building and the cycles rolling over I am not willing to go long, not even for a scalp, even though my cycle stuff suggests we a due to bounce. So, right now I am flat and plan to stay that way going into Fed day, probably will just take the day off from trading tomorrow. Post Fed I will be looking for a place to get short again.

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  80. according to yahoo prices, sp500 closed at 1253.3, so pretzel's 1256 was beat by nearly 3.

    also, according to yahoo finance's main closing article, it's still the best october since 1987.

    1987.

    so tell me, if all of you went to rockbottom support, what would you define as hardest "structural support", before you totally caved in?

    1190 ?

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  81. Anon,

    Not sure exactly what your question is. When you say " if all of you went to rockbottom support, what would you define as hardest "structural support", before you totally caved in?"

    Are you asking if there is a level which if broken I would decided to chase the weakness rather than wait for a bounce to short?

    If so the answer is no, because I am already bearish, so violation of further support is not required to turn me bearish. However, I am more interested in shorting rallies than shorting breakdowns.

    On the other hand if you are asking at what level if broken I would be 100% convinced that the next leg down in the bear is underway then yes 1190 is that support level. If 1190 goes then the next stop is 1075 SPX in my opinion.

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  82. woot glad I held onto FAZ. I hope theres more selloff tomorrow with uncertainty over the fed meeting!

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  83. Pretzel get in here and comment on stuff! lol

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  84. Pretzel - fantastic site here. I'm new to EW, and your work is extremely informative; thanks for all your efforts. The board here is tremendous. I don't know of another site where I can get such well-reasoned, thoughtful dialogue and sharing of ideas. CTP, Rocky, POTUS, all you Anons, thanks for sharing your thoughts.

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  85. Well, use Rocky as your contrarian indicator...he was on the wrong side of the trade again, getting my arse kicked :(

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  86. :( sorry rocky. It always sucks to loose money mate

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  87. Sorry Rocky.

    Looks like the top may be in.

    What a day... haven't even looked at the charts yet, just looked at the closing price.

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  88. Glad to see you back Pretzel! It must be weird to sleep when the market opens and wake up when its closed. I imagine it like going all in in texas hold'em without looking at your cards

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  89. mavrich... lol. A bit like that sometimes. ("You put me in a room like that, and the cards don't even matter. I'll play it blind.") (from "Rounders")

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  90. The NDX still hasn't broken its rising trendline.

    What will be interesting here is to see if the market "allows" bears back on board. I would expect a bounce... but so does everyone else.

    If we follow 2008's playbook, we should get some form of bounce right before the biggest crash leg, at least. But I doubt there's many shorts right now, and without shorts to generate buying power... hmm.

    Just kinda thinking out loud here (i do this a lot, so don't take everything i say as a prediction).

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  91. "not to like a broken record" lol

    "not to SOUND like a broken record" is what I meant. :/

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  92. lol that was a great movie. keep thinking out loud. I want perspective to know if I should cover my shorts

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  93. mav... looking at charts right now and still thinking out loud. what the futures do tonight could be very helpful in interpreting the ST structure... first impression is that this may be a series of nested 1-2's, which means the market could let go in a big way. Need to look at more charts though.

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  94. BT- thanks! Yep, we've got a great group of people here.

    CTP - nice work. I'm particularly impressed with the time components of your cycle work; that's always been interesting to me, and you seem to have something figured out there.

    Rocky, you didn't hold those longs all the way down did you???

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  95. Wow P. - I think I just found a job with BP, these records are great - bad thing though, they are not too popular here in Louisiana! Lol

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  96. "Stocks extended losses in the final hour of trading after Greek Prime Minister George Papandreou said he will put the European Union’s new agreement on financing for Greece to a referendum." Now if Greece defaults, this will be a real reason for SPX to plunge.

    Pretzel, now that SPX has broken your support of 1256, you are saying a higher high is ruled out. But if a higher high is made post Feb, today could be seen as a whipsaw to trap bears? Just curious what level you will start to short again now that we are at 1253

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  97. Unfortunately I have, never really had a clear opening to take them off. Put them on at the end of the day friday...sat on them at the open cause I thought we would base at 1265. Wasn't ready to cover because a 1256 would still constitute a 4. So now I have a decision to make...Hope for a little snap back tomorrow and go short again, or just go to cash and look for the next good entry point.

    The fear of a gap down open is going to keep me up tonight. I took off about 1/3rd of my longs in after hours but just couldn't bring myself to remove them all. I'm just getting chopped up with terrible entries and exits. My head is spinning right now on the last 3 trading days.

    Are you going to chart some projections for this wave down tonight?

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  98. Got suckered in by the fake triangle breakout at the EOD friday...afraid of missing yet another leg higher with a gap up open. Shouldn't be a surprise that it gapped down open on me.

    I'm new to swing trading, developing trading discipline has been very expensive thus far.

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  99. Thanks guys! :)

    KB3, I think you should take the job. You'd sure to be a big local hit. :o

    TJN- Post Feb meaning post Fed? So far, with the false head and shoulders breakout, it looks more like a bull trap than a bear trap. As to what level... no rush. I'll play it by ear. As I said before, virtually all my losses in the past have come from over-trading. The market will always still be here tomorrow, so when the setup looks right, I'll jump back in. Not losing money can sometimes be more important than making money... obviously, if you lose your capital, there's nothing to make money WITH. I'm pretty happy with 15 points today from Friday's shorts, in ES that's nothing to sneeze at.

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  100. Rocky,

    Based on my cycle work you may get a window of opportunity to exit longs over the next 2 days. But I would not overstay my welcome if you know what I mean ;-)

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  101. Pretzel, you are right about not losing money :) Let me know when you are going short again.

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  102. Rocky, FWIW, I lost my entire trading account 3 times before getting half-decent at it. To this day, I still consider myself a better technician than trader. When I lose, I usually know ahead of time I'm making a mistake. The market will test your every weakness.

    There are two main opponents you face everyday in trading:

    1) The market

    2) Yourself

    For me, the second one has always been harder to defeat. Always decide on your stop-loss exit point BEFORE you enter a trade. Once you've entered the trade, your emotions can override your better judgment... and you end up hanging on to losers way too long.

    Let your winners ride and cut your losers... but due to the emotions involved, most rookie traders start off doing the opposite.

    Sorry it's going against you right now. Again, FWIW, that's how most traders learn.

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  103. "Not losing money can sometimes be more important than making money... obviously, if you lose your capital, there's nothing to make money WITH"

    lol, learning this one the hard way I am. Trying to play it from both sides all the time is a quick way to the poor house!

    Thanks Pretzel & CTP, advice well received.

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  104. Rocky,

    #1 advice I can give you is don't chase. Wait for oversold on support to buy and overbought into resistance to short. You may not catch every move but your % winning trades will go up dramatically. When you are unsure cash in a position and sometimes the best trade is no trade. It's just like poker, if you try to get involved in every pot (even with crappy cards like 2-7 offsuit) you will get broke very quickly. On the other hand if you only play top 10 hands there might be long stretches when you are doing nothing but when you do get involved your chances of winning are dramatically increased. As you get more experienced then you can start to get involved more often as you will develop a feel for the game (whether poker or trading). Hope that helps...

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  105. CTP- agree on not overstaying one's welcome. As I headlined last week: "When the rally finally reverses, things could get ugly fast."

    The potential we have now is that most of the shorts got blown out, so there may be limited support in the form of covering. Also, most people (except for maybe CTP and I) were pretty convinced there was still "one more leg up" coming -- so Rocky, you've probably got company in the "longs gone sour" department.

    I'm hoping we get a solid bounce, from some level anyway, into Wed/Thurs... but there's definitely no guarantees.

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  106. I've started to notice that nearly every night at 9:00 PM EST right on the button the futures start tanking hard. Trying to figure out what foreign market opens at 9:00 PM EST. Anybody know?

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  107. CTP - good advice.

    The one thought I would add, and I know you know this, so it's more of a clarification for Rocky:

    Be very careful about going long on "support" in a bear market. As my friend Lee Adler says, "there's no such thing as oversold in a bear market." And there's a ton of truth to that: most crashes come from deeply oversold levels... not the other way around.

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  108. As a follow-up to that thought:

    (please note that all my advice is only hypothetical; talk to your broker, etc.)

    I guess my over-arching advice for new traders would be not to even attempt much (if any) counter-trend trading. Stick with trading the primary trend.

    In a bear market, the market will usually bail out your bad entry shorts.

    In a bull market, the market will usually bail out your bad entry longs.

    Counter-trend is a whole 'nother matter. If you're long in a bear market off a bad entry, the market can leave you stranded in the blink of an eye and never look back.

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  109. Pretzel,

    Same goes for strong bull trend as well, strong trends eat through support and resistance. But markets only strongly trend around 25% of the time so mean reversion type strategies can work quite well the majority of the time. One just has to recognize when the market is in a strong trending mode either up or down. Good thing about using support and resistance is that your stops can be well defined and tight.

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  110. Pretzel,

    Good point about the primary trend I guess I should have clarified in my prior post. You want to short overbought at resistance either in a bear market or a trendless market. And vice versa buy oversold on support in a bull market or trendless market. NEVER buy oversold in a bear market trend and NEVER sell overbought in a bull market trend.

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  111. mavrich-

    you might not have cookies enabled or something. I only have to log in once?

    also, good advice regarding the matter which I can't really comment on: so guys, try not to overdo it individually, I guess. Limit it to 2-3 each day, at different times maybe.

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  112. Which is why even though I am looking for a bounce here I would not be caught dead with a long position on right now. (ie. Bear trend)

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  113. CTP-

    The markets that open at 9 EST are Singapore and Taiwan that I know of. Maybe others too.

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  114. Guys, thanks for all the advice. Nice that you want to educate and share. In the end, no lesson is learned as well as in person, but the advice can shorten the learning curve a lot. You have to have money on the table to really pay attention.

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  115. Pretzel,

    Maybe Taiwan is the one driving the selling? I woulda thought Shanghai but they open at 9:30. Anyway you can pretty much set you watch by it lately. I might start shorting futes at 8:45 every night and cover at 9:15. It would be like an ATM machine (just kidding :-P I know at some point it will stop working)

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  116. hrmm, i keep having to put in a "name"

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  117. oh I see tonight's spike down at 9:00 was China PMi number came out below expectations

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  118. CTP,

    Could be Taiwan. I wonder why, though? Taiwan's TSEC gapped down about .5% -- usually doesn't impact our market much though. Weird.

    Btw, anyone seen Frank lately? Haven't seen him since Friday... hopefully the bulls didn't eat him.

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  119. Maybe you need to create a Google account, mav? I just sign in once through my Google account, then it stays signed in.

    I really like having less anons -- it helps in answering questions (otherwise it gets confusing sometimes, when 5 anons are talking about 5 different things and it seems like it's the same person saying all of it) -- plus it's cool just for getting to "know" different people.

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  120. I wonder how the US manufacturing numbers will look tomorrow...maybe thats the catalyst that will start the slight bounce

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  121. from a macro viewpoint I guess. I can hear the "dont trade the news" coming lol

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  122. SSEC third day basing underneath it's 50 day SMA today. Even with worse than expected PMI number it is showing some tenacity thus far. Chalk that one up in the bulls column for now...

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  123. Whoops, correction from way back with TJ: just looking at my account, and 15 was actually 17 points.

    Funny thing to me is, this morning's open was yesterday to me, since I have to nap in-between. Makes for long trading days sometimes. Actually looking forward to you mainlanders doing DST next week, b/c then the market here opens at 2:30 a.m. instead of 3:30 (we don't do DST in Hawaii).

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  124. TJ brought up an interesting issue that I forgot about after we got to talking trading advice...

    From TJ's post:

    "Stocks extended losses in the final hour of trading after Greek Prime Minister George Papandreou said he will put the European Union’s new agreement on financing for Greece to a referendum." Now if Greece defaults, this will be a real reason for SPX to plunge."



    The other thing: if Greece is putting the EU solution to a referendum, that would likely have caused many of the CDS players to re-short their counterparties.

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  125. Wow, looks like the weekend article about the dollar being due to bottom couldn't have been more timely...

    dollar went parabolic today. looks like a clean five wave move, too -- so i'm officially calling a long-term bottom in the dollar. if my interpretation of the structure is right, the dollar should head upwards (not straight up, of course!) for a long time to come.

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  126. mavrich,

    If you are looking for a "fundamental" reason for a bounce next 2 days here it is ;-)

    http://historysquared.com/2011/09/17/stock-returns-rise-into-federal-reserve-meetings-suggests-fed-research/

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  127. Greece veto-ing the EU solution would be a black swan even IMO

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  128. event* gosh. my spelling is almost as bad as your pretzel ;) lol

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  129. from what I understand Greek vote does not occur until January.

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  130. Pretzel and CTP, you both play Texas? We are in different parts of the world, but it would be great to have a game with you one day. CTP sounds like the tight aggressive type that I usually want to avoid :)

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  131. CTP-

    EIGHTY percent? I've always maintained that the stock market bubble started in 1995, roughly around the time of Greenspan's "irrational exuberance." In a way, their findings prove it. The Greenspan/Bernanke Put is still a force to be reckon with. At some point, when enough faith is lost in the system, that may cease to be the case.

    Mav,

    wot due ewe meen, MY speling? My speling is exelent! Eye wil have ewe no, eye am verry gud at speling, at leest MOWST of teh tyme! Sumtymes eye mite tipe a tipo hear or their, butt tha'ts yousually ITT! So THEY'RE!

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  132. TJ-

    That's how I play, tight, but aggressive. Although, every now and then I'll throw in a weird hand to show at the showdown and keep everyone off balance. ;)

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  133. TJN,

    Yes my poker style is tight and VERY aggressive ;-) ...

    That would be fun. Love playing Hold 'Em. Used to play online quite a bit before they shut down all the big poker sites to US players. Played $50 Sit N' Go's primarily and had 46% ROI. Lost a few thousand of my bankroll though when Full Tilt got seized in April and now that money is gone with the wind >:-(

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  134. CTP
    you mean small blind $50? Then we are not on the same level as I only do $10 max (even then 3/6 is still comfort zone). any sites you are playing on now?

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  135. TJN,

    No not $50 blinds, I was referring to $50 Sit N' Go (single table) tournaments. $50 was the tourney entry fee. Not playing online anymore after I got burned by having my bankroll seized when DOJ shut down Full Tilt. Hoping some day they will make it legal and I can start playing online again.

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  136. Unfortunately, I do have to delete all posts suggesting the Subject Which Cannot Be Named, so POTUS and others, if you see a post you've written has gone missing, that's why.

    Gotta take the kids trick or treating... be back later.

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  137. POTUS said (edited): Pretz i was giving 5:1 on Friday for the next move lower while you were snoozing :$. This market has been tough..sorry Rocky. My best guess is that a straight shot lower from here is too easy for what this market has been serving. We had a huge overthrow last Thursday which got all of the bears to recount and start thinking hard about the last leg up. Now we get the move below the all important H&S battleground ..too easy for shorts to pile in and make money. We drop into the 10:30 am suckers hour then we start our climb higher to backtest. Feels like backtest should culminate with Fed speak and then a kiss goodbye on the sell the G20 meeting when the US does not allow China a seat at the big boy's IMF table so China walks from the Euro Spiv.

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  138. Just a couple quick Fed related stats and then it's bedtime for me.

    Bernanke started his press conferences this year and so far has done 2 of them. One the day before each of press conference (tomorrow) the SPX has been up +0.9% and +1.4% so far. Small sample size so take it with a grain of salt.

    One more thing I looked at 2-day Fed meetings in the Bernanke Era and performance of market in day 1 of the 2 day meeting. I was interested in time the market sold off ahead of the meeting so I filtered by 2-day RSI < 30. Of the 7 instances 5 closed higher on day 1 (71% win rate). Average winner was +2.6% but this was skewed by one huge gainer so if I throw that outlier out the average winner was still a respectable +0.6% while of the 2 losers the average loss was -0.4%.

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  139. so basically i said that the market should peak on 11/4 and then turn then lol?

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  140. mav, whoops, your comment was lost in the ether... okay off with the kids now.

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  141. no worries pretzel! enjoy Halloween with your kids!

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  142. Mav,

    I'll try to get something put together... might be posted late (or early, depending on how you look at it) though.

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  143. No worries if you can't bud, not going to lose my support. This is the best blog out there.

    -mav

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  144. Pretzel and CTP
    If cash market opens at where futures' trading at now (around 1230) I will be v interested to see where you will go short, and if you still think we will get a strong wave up sometime today or tomorrow.

    as for poker, i thought sites like PS still accept US?

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  145. Ont market advice, I'm in the same boat. Have lost my playing capital twice already. (Only way to learn it seems, hope I have ;-)

    The most important lesson I suppose had been that the market could remain "wrong" a lot longer than I could remain solvent!

    I'm currently very much short and have been throughout the huge rally. Luckily yesterday and today had been lind to me so I'm back in the green on 2 of my 6 stocks already and the rest are getting close.

    I also tried shorting at resistence levels of a downtrend and still almost got shaken out. Now it is not over yet, but is this is really a bear market than that had been my saving grace.

    In Feb 09 I went long in a falling bear market and eventually wiped out 70% of my playing capital as I got bumped out at the lows. (And in those days my playing had been 5 times as large as what I'm prepared to risk now!)

    Btw, according to the talking heads we are not in a bear market yet as the decline had not yet been 20% from the highs. What is your definition for entering a "bear" market?

    From Sunny South Africa where the market is currently down -1.74% In fact everything is down, stocks, gold, oil, etc and not surprisingly - our currency too against the dollar!

    Jaco

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  146. mav-

    Thanks! But I posted the update just the same. :)

    TJ-

    Man, you're relentless! I actually put my shorts back on last night after looking at the wave structure and the futures action, and realizing this could be a minuette 3rd wave unfolding. After analysis, it looked like a good risk/reward. I'm short from 1243.75, basis ES futures.

    Jaco-

    I don't use 20% or anthing similar to define a bear market. I use wave counts and confirming indicators like daily RSI and MACD. I've been saying we're in a bear market since August. :)

    Let's move all future discussion/replies to the new thread.

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  147. Global Economic Intersection would like to cross-post this article with full attribution and links to your site. Please respond to jlounsbury59athotmaildotcom.

    http://www.econintersect.com/index.htm

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