Monday, June 12, 2017

SPX, NDX, BKX: And They Said He Was Crazy

On Thursday, I noted that SPX was in an inflection zone where (5) could complete, and while it pulled a nice (and brief) head-fake over 2441ish, it then reversed immediately into a fast decline.  NDX, for which I provided two inflection points on June 1 (the second price point I had noted turned out to be dead-on), was even more dramatic. 

So... normally at this is the point in the game I'd do a little horn-tooting... and I guess I can be proud of the contrarian NDX call, directly into the teeth of a strong rally (some folks even commented that I was "far off base" on June 1 when I posted this chart -- probably new readers) -- yet it's hard for me to get too excited here, because the picture remains quite fractured and complicated.  To illustrate some reasons why this is so, let's start with the NDX chart, and I'll have some additional discussion afterwards:

So, all-in-all, a pretty decent call on June 1, but so what?  Where do we go from here?  Well, the bull count heads to 6300-6400 next.  The bear count could head to 5350ish or beyond.  The problem is, there's no clear victor for this pattern.  I was expecting a correction when 5 completed, and indeed we got one -- but that correction was so sharp, deep, and fast that it's entirely possible it's already over.

Thus the problem is:  How actionable is the current market?  And I'd have to say:  Not very.  To analogize this point, I posted a bit in the forum over the weekend, which I'll reprint here (I have often compared trading to poker, which I used to play quite a lot back in the day -- and while I'm no Doyle Brunson, I virtually always finished in the top 3% in the tourneys I entered):

You know, it has occurred to me that there is another parallel between poker and trading:

In poker, certain hands CAN win, but are very difficult to play. For example, 7-8 suited can win with flush possibilities, but it's hard to play because you could easily be against a higher flush (ace-high, or even 10-high, would beat you). These hands aren't too big a deal in limit games, because if you bet your flush and get raised, then you just check and call down the river and you only lose one (or at worst a couple) more bets if you're beaten.

But in pot-limit or no-limit games, then you have to be awfully sure of your opponents' hands (and/or your opponents) to stay in that hand until the showdown. And that's where your modest hand CAN win, but becomes very difficult to play. Sometimes it's best to muck a potential winning hand, simply because it's not worth losing your whole stack just to learn you had the 2nd best hand.

And that's how trading is too. You can win by trading certain things, but without clear stop levels and/or clear patterns, sometimes it's best to just sit it out and wait for a better hand. I mention this, because in a way, this NDX call (from June 1) was like that. Sure, the 2nd "5?" label was spot-on -- but this was an awful hard pattern to trade with anything but a few bucks in spec money.

Said another way: In both poker and trading, just because you COULD win, that doesn't always mean you should try to -- at least, not with high stakes. Small bets (limit games/small spec positions) are sometimes appropriate.

And that's where we are now.  Due to the b-wave potential at the high, there's no clear bearish call from here.  The bear call was to take a stab back at the second "5?" when we hit that, but even then, there was no warm-up decline (to provide a clear stop level) with a retrace to then short; NDX just dropped like a rock and never looked back.  Because of b-wave potential, it's possible the low is already in.  Yet because of the flash-crash nature, it's difficult to say that for sure, either -- so let's look at some other charts, and see if we can find something that gives us clearer markers.

Indeed, we can find one such marker in SPX, and it appears to be the 2398 (ish) level:

Then there's BKX, which has sometimes been a wonderful leader -- but lately it's been trading with almost zero correlation to anything else (SPX, reality, etc.).  Nevertheless, BKX has followed the path I outlined on May 24 pretty darn well, even though it's taken a little longer than originally shown (I've often warned that I don't do "time" projections, only price projections):

In conclusion, although it's tempting for bears to get super-excited now, the market's true intentions aren't actually clear yet.  The fact that SPX/NDX both turned from their inflection zones certainly gives bears some hope, but that's the extent of it.  Sometimes markets will simply react to inflection zones, and all it shows you is that you accurately identified the inflection zone in advance.  It doesn't necessarily mean that the market will continue its reversal from that zone, though. 

An inflection zone is a decision point for the market -- in this case, it "knew" it would have to keep rallying above that zone, and maybe it wasn't quite ready for that level of commitment just yet.  The market can sometimes act like a fiancée who gets cold feet a week before the wedding, then starts calling airlines for ticket prices to skip town... but then ultimately decides to go through with the whole thing anyway. 

In a nutshell:  SPX and NDX both reversed and dropped, but the time for bear entries was near the inflection zone, and has thus passed for now.  Neither market has overlapped any critical bear levels so far.  And, given where we sit in relation to the peak and trough, that means the current price levels aren't easily actionable.  Veteran Elliotians could watch for small directional impulses and act against the starting points of those impulses, but other than that, this is a spot to "check and call small bets," not a spot to go all-in.  Of course, there will be far more promising actionable zones again in the future -- there always are -- so there's never any need to push a marginal hand.  If you didn't already jump into the pot and sell near the high, then you might want to save your stack for better trades.  Trade safe.

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