Friday, December 9, 2016

SPX, RUT, BKX: Understanding What It All Means

It has recently come to my attention that I have not done enough 'splaining ("explaining") regarding the implications behind some of the labels that have been on my charts for the past few months, so today we're going to expand on what the "Bull 2 or Something" label meant (and means) to the market heading forward.

I first began verbally referencing the bull count on July 11, when I noted it would have a target of 2490 SPX.  I'm pretty sure the first time I actually placed the "Bull 2" label on the chart graphically was on September 26.  I placed it at 2080 SPX.  The bottom ended up being 2083 SPX.  So, even though I wasn't favoring that count, I still feel that providing a "2nd choice" count that ended up being accurate to within 3 points was in itself no small feat.
But I digress.  The point is that a "Bull 2" bottom would mean a "Bull 3" rally.  And third waves are almost always the longest and strongest waves, which is why I wrote numerous times that bears simply had to stand aside if SPX broke above 2194.  Let's look at those implications of "Bull 3" in more depth, starting with a chart of RUT:

Next we'll look at BKX.  On November 18, I commented about the BKX chart as follows: 

There may be a correction pending, since BKX is challenging intermediate resistance, but by all normal rights, it's hard to imagine this BXK pattern not ultimately continuing higher toward black V.  So, even if there is a correction soon, odds are reasonable that it will be a buy op.

While I was obviously anticipating that the rally would continue, when I wrote that, by no means did I envision that BKX would be within spitting distance of black V in only a few short weeks (!).  Yet here we are.  "Or V?" has been added on the chart below to reflect that reality:

And again, I highlight this move in BKX to drive home a point:  WHY front-run bets on a reversal against potentials like this?  Sure, maybe you end up getting lucky and nailing the top, and you can look back and feel like you did the right thing because you ended up in profit.  But did you actually do the right thing?  Or would you simply be justifying a bad trade using results-oriented reasoning? 

In trading, just as in other aspects of life, not all winning plays are GOOD plays.  The end does not justify the means.  More often than not, front-running reversals during patterns such as this leads to losing.  And consider it this way:  IF the pattern is indeed a third wave, then front-running reversals (for more than a brief short-term scalp, anyway) will end up losing exactly 100% of the time, without exception. 

For further consideration:  Betting on reversals also precludes the opportunity to profit on the long side of the trade, which can be significant during strongly-trending markets.

Of course, the caveat is "if" this is a third wave.  We never really know anything for certain.  Heck, even the most sure-fire bets have risks: I can bet that the sun will rise tomorrow and the day after, but there's always the possibility a dark star will come ripping through our solar system tonight and tear the earth from its orbit or something.

So:  Can the market reverse on a dime today, or any day, and punish all long traders viciously?  Absolutely.  Anything is possible, essentially at all times.  But why (and "how," for that matter) would we trade "any random possibility"?  Should we not instead always attempt to trade the highest-probability potential (presuming we can obtain that trade with manageable risk), at least as much as humanly possible?  And if we can't trade with the market on that potential, should we not at least avoid betting AGAINST the odds-on favorites? 

I am again reminded of something my father once said:  "Once you understand the odds, you never have to 'try to beat' them."

Now, to shift gears and give one example of "how to at least limit random trades," let's look at SPX's 1-minute chart for an example of the type of thing you'd look for if you just HAD to bet against a strongly-trending rally:

In conclusion, ever since SPX claimed 2194, I have been viewing this rally as "most likely" a third wave.  Recently I realized that perhaps I needed to expand on what that meant, particularly to benefit readers who are not as well-versed in Elliott Wave -- so hopefully today's article gets everyone up to speed. 

Now, can I promise the third wave bull count is the dead-on "right count" with 100% guarantee?  No way.  But it's the leader right now, so it has to be respected as such.  If it's not "the" count, then the market will show us that, and will almost certainly provide us the chance to adjust our expectations and to take appropriate action.  Trade safe.


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