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.

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