Monday, August 11, 2014

SPX, INDU, RUT: Market Rallies after Maui Survives Hurricane

On Thursday, while the big island (of Hawaii) and parts of Maui were busy being flooded by The Tropical Storm Formerly Known as Hurricane Iselle, SPX and INDU were busy capturing my target zones.  On Friday, the storm broke up and moved on.  And the market rallied, as Wall Street breathed a sigh of relief that Maui had survived. 

What, you think it was something else?  Makes as much sense as any of the "let's try to explain why the market did what it did today" news headlines you see on CNBC.  (Long-time readers know I believe that, outside of huge events, news is noise.)

So here we are.  We got the additional fifth waves lower I was looking for; SPX captured my 1899-1907 target (low 1904.78); INDU captured the green target zone and then rallied from the confluence of support that I'd noted.  Easy, right?  Time to mortgage the house and buy calls! 

Well... not so fast.

Frankly, I hate when the market does exactly what I expect it to do.  Well, I don't hate it (it makes me, and hopefully you, money) -- but it always makes me rethink everything.  I don't believe anyone's supposed to be "allowed" to anticipate the market perfectly, so when everything goes perfectly, then I start challenging whatever my next expectation is/was.

Part of this comes about from my prior experiences.  Back in the 2000-2002 bear market, I had (finally) really started making Elliott Wave work for my trading -- and I managed to hit a bunch of turns in a row.  I grew my account by about 700% in only a few months, and began to feel invincible.  Every turn kept going according to plan.  I felt like Russ in Vegas Vacation ("I put a dollar in, won a car!  I put a dollar in, won a car!"), so I decided I had everything right.  I had "cracked the code," and it was time to swing for the fences on my next trade.  So I not only took a huge position, but I leveraged myself to Kingdom Come. 

It would be the trade to end all trades -- the trade that would allow me to quit trading forever!  After that trade, I would move to Maui and live out my days getting sunburns, dodging hurricanes, and sipping Starbucks Frappucinos on the beach. 

That was the plan, anyway.  But, of course, that was the trade that went sour.  In a big way. 

My arrogance, and my resultant complete lack of risk management, devastated my account (it was 7 more years before I'd be able to recover... and move to Maui -- though with less sunburns, and more Frappacinos, than I had originally planned).

And ever since then, I rigorously consider the other side of the trade.

So even though everything went according to plan, we're also going to spend some time talking about the other side of the trade (the bear side).  Let's start off with the big picture INDU chart.  INDU found support where I suspected it would.  The chart notes a couple resistance zones and signals, which may help gauge strength heading forward.

A closer view of INDU helps reveal that bulls aren't entirely out of the woods yet.  Considering how deep this decline was, a one-day rally in itself isn't exactly an all-clear signal that means we're headed straight to new all-time-highs.

RUT is one of the markets that really casts the intermediate bull case into shadow.  RUT looks like a pretty clear 3-wave structure into the lows, and that implies there could an expanded flat upwards correction underway -- though, if so, it would be expected to break the red line, which is still fairly bullish for the near-term.

The 30-minute SPX chart reveals the capture of Target 3, and notes the expanded flat potential:

Finally, the 15-minute chart below is not normally something I'd publish.  This is one of my "behind the scenes" charts, wherein I'm simply trying to figure out if a wave can be reconciled as complete, so I know what to consider and what I can rule out.  In this case, I can't rule out either option:  the downward correction may be entirely complete, or there may still be another wave down yet to come.

But nothing bearish happens while the market is still inside the red melt-up channel, and the very first correction from that channel is likely to be bought to at least a minor new high.

At this point, the best longs were the ones taken in the target zone -- and (for any shorts that held through the target) at the minimum, shorts should have been covered after the breakout and successful back-test of the blue trend line (that was the trend-following exit zone).  INDU and SPX both reached their target zones, so despite RUT (and a few other things), that has to be respected.

We're going to need a bit more info from the market to determine if wave C is indeed entirely complete at 1904.  I maintained a bearish stance since the day SPX reached 1990, but as of this exact moment, I am no longer bearish and would not be inclined to short this market arbitrarily.  While I am not entirely sold on the bull case just yet, that's a whole different animal than "being bearish," and the picture looks bullish for at least the near-term.  The next few sessions will help sort the bulls from the bears.  Trade safe.

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  1. Thanks for the personal anecdote - very insightful !

  2. I noticed you have this 4th as 5 waves down. But aren't corrective waves supposed to be ABCs?