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Friday, October 26, 2012

SPX, INDU, Oil: Bulls Need to Find Support Soon


I'm going to use an analogy I've used before, because I believe the current market fits:  The market is like a rubber band stretched to its breaking point -- either it will snap back and begin a strong rally over the next few sessions (quite possibly as soon as today's session) or it could break.

As we look at the options, it's important to remember that QE-Infinity hasn't actually started yet.  Some bears are calling QE-Infinity a "failure," and even the mainstream media (who should know better) has been guilty of this.  The effects of the QE MBS (Mortgage-Backed Securities) purchases won't be seen until the Fed cash actually makes its way into the Primary Dealer accounts -- there was no liquidity flood released when the media announcement happened.  And no liquidity added even once the first purchases were made, as MBS settlements are done on a forward basis.  The first MBS purchases aren't scheduled to settle until November 14, so that's roughly when we'll finally begin seeing the "real" effects of QE-Infinity, which is anticipated to be inflationary (i.e.- rising equities and commodities prices).  

The old adage of "don't fight the Fed" sticks in my mind going forward.

Yesterday's preferred short-term count played perfectly, as the market rallied up to my wave 4 label and reversed immediately to a new low.  So, the short-term count was correct -- but what about the intermediate-term counts? 


The predictive power behind Elliott Wave analysis is underpinned by two key strategies:

1.  Using the available price action to attempt to anticipate the pattern that will unfold going forward.
2.  Understanding the key levels where that anticipated pattern becomes invalidated and mutates into something else.

This is why I usually give both a preferred and alternate count.  The preferred count is "here's what looks most likely, given the price pattern that's currently visible"; the alternate count is the "okay, that fell apart, so this might be unfolding instead."

This task can be quite difficult in certain markets, because some patterns start off looking like a specific high-probability pattern, but then turn into something else entirely.  This happened near the recent peak.  The Dow Industrials (INDU) in particular looked like a nice clean pattern called an "expanded flat," but then went on to mutate into something much more extended.  The upshot of Elliott Wave, even during such predictive failures, is that it does provide clear levels where we can recognize that the first predicted pattern was wrong -- and sometimes the short-term work can still get you a winning trade even when the larger pattern fails.

To stick with the example of INDU, on October 19, I suggested it was due a correction to roughly the 13400 zone -- and also noted that "sustained trade beneath 13398 would open up more bearish intermediate prospects."  Even though the larger pattern failed, Elliott Wave allowed the patient trader to locate a low-risk entry-point, and further allowed the patient and nimble trader to bailout with minimum damage when the trade didn't work (as we know, patience isn't the only skill required of successful traders).  A really nimble trader could even have played the decline on the short-side and made a profit along the way. As an aside, this drives home a big part of what trading is all about: managing risk.

So, here we are in today's market -- trying to put the puzzles pieces together into a "most likely scenario," while at the same time looking for key levels that will suggest the preferred scenario is failing and "something else is going on."  I realize things can get a bit confusing to readers at times, because I'm working on several different time frames, and sometimes the five-minute (or one-minute) chart looks crystal-clear, while the daily or hourly is more of a toss-up, or vice-versa.  As best I can, I try to fit them together into something readers can understand.

And sometimes, it seems like detailing the alternate prospects is a ridiculously-complicated task which will only confuse everyone -- and to some degree this market fits that bill.  During these times, I try to note a few key levels where it's time to capitulate or reverse position.

A great example of how I use Elliott Wave Theory to find trades can be seen below, in the long-term oil chart.  Oil is approaching what appears to be a key inflection point, and the best-fit pattern presently is a B-wave continuation triangle, which can be expected to resolve higher (note this pattern also fits the "fundamental" expectations of QE-Infinity -- inflation).  The alternate count allows the possibility that the pattern is considerably more bearish (because it's simply never fully cut-and-dried).  The dividing line between the two counts is 77.28.



There's been zero change in the INDU preferred count -- in fact, this count performed perfectly yesterday, accurately predicting the pop and drop reversal to within a few points.  The $64,000 question is whether we should anticipate the blue "4?" rally and reversal.  Hopefully, we'll be able to determine whether that's probable as the action unfolds.

The alternate intermediate count that isn't shown is morbidly bearish -- so if the market markedly fails target support, then bulls who didn't heed my Monday warning might want to consider that failure as a second chance at taking a vacation.



For SPX wave counts, I'm only going to focus on the daily chart today, since the questions and potential outcomes are essentially the same as for INDU. (continued, next page)






Finally, the SPX hourly trendline chart below.  It will be interesting to see if the market reacts to the confluence of trend lines in the 1390-1400 zone.



In conclusion, bulls likely need to find support quickly, or risk... I was going to say "hibernation," but that's what bears do.  What do bulls do?  Get castrated?  Should I say, "or risk castration?"  Whatever; you get the point.  If this wave is going to find a bottom, it is now in a zone where that becomes more likely.  Trade safe.

6 comments:

  1. Hi Jason,

    Your long term oil chart is contradicting the one you posted on 8 Nov. 2011, that has  wave B ending At $114.83. Your current chart has A ending at $114.83. Can you please clarify.

    Many Thanks

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  2.  Hi dani,

    The count you are referring to is roughly represented by the "alt" labels on this chart.  I am slightly favoring the triangle count until proven otherwise.

    ReplyDelete
  3. Hi Jason,
    Regarding the very long term view, please tell me if the following interpretation could be true: 1900 - 1929 wave 1, the Great Depression 1929- 1933  wave 2 (the violent wave 2 that retraced almost entirely wave 1), then a very long wave 3 (1932 - 2000, 7 decades of growing and growing) , then a fourth wave 2000 - 2009 (A 2000-2002, B 2002-2007, C 2007-2009), sort of an expanded flat. Could be possible that march 2009 be the start of a fifth wave ? Could this 3.5 year rally be the first wave of this wave 5 ? If so, could now follow a brutal correction (the wave 2 of 5 to retrace at least 61.8% from this 808 soaring points (666-1474), bringing the SP500 way under 1000, maybe even in the zone 770), followed then by the wave 3 of 5 to finally push the indices to all time highs- SP 2000, Dow 20000 ? Thank you and congratulation for your very interesting and good analysis! Serban

    ReplyDelete
  4. Elliotticians are split/undecided as to whether to label the 2007 peak as wave-B of an expanded flat or whether to call that peak wave 5.  I have considered your scenario (or some variation thereof), and yes, your basic outline is possible.  :)

    ReplyDelete
  5. Christian GustafsonOctober 28, 2012 at 3:36 PM

    Greetz, Pretzel.

    Here's some healthy chart fun for a Sunday night.  Full moon tomorrow == spike bottom.

    http://deflationland.blogspot.com/2012/10/spx-thought-experiment.html

    ReplyDelete
  6.  Hi CG, the hurricane is potentially messing w/ the timing!

    ReplyDelete