SPX Update: 81 Points of Profit Captured as the Market Reaches Critical Support

I'm very interested to see what happens today, as most are expecting a "Facebook bounce."  There is some indication that at least part of the decline was caused by investors selling other stocks in order to raise cash for the Facebook IPO.  These days, there is little new money coming into the market -- so the only way to raise cash for Facebook was to sell other holdings, which in turn contributed to the recent decline.  Theoretically, this cash should come back into the market with the Facebook IPO, and this would argue that Facebook’s IPO may, indeed, help drive some type of rally here.
 

Interesting how the Facebook IPO coincides with the fact that SPX has reached a potential bottoming zone according to the wave counts, and the market is oversold according to the indicators.   I’m intrigued to see how it plays out today.

Yesterday was another victory for bears, and the market is now in a price zone that crosses numerous long-term support levels.  It's also sufficiently oversold that it's advisable to watch for a potential bounce.  However, so far the decline has blown through support as if it wasn't there -- so this offers probability, but no guarantee. 

Moving onto the wave counts, there are two higher-probability interpretations.  I'm inclined to view this wave as the third wave of a larger third wave, but the charts do leave open the potential that the recent decline was an extended fifth.   Both scenarios are currently expecting some type of bounce, possibly as soon as today, though the idealized target for either is still a few bucks beneath the current market.  It's not always advisable to try and chase the last few bucks of a move, though.  As we'll see in a moment, we've already captured 81 SPX points, so there's certainly no need to get greedy here. 

Conversely, I would pay close attention to the trendchannels in the chart below before getting too excited about any bounces.  An "expected" bounce is not a "confirmed" bounce until the trendlines are broken, as noted on the chart.

This is where a trader has to decide whether they want to risk giving back some profit to chase a potential extended drop (by placing stops above the market), or whether they want to trade actively and take profits directly.  I myself am very tempted to use the first option, but my real-time read during the trading day might change that view.

I do want to call attention to the 60 point trade trigger discussed on May 2, as that trade has now captured the full profit of 60 SPX points (1305 target reached) since the trade elected at 1365.  Keep in mind that this trade came directly on the back of a successful 21-point trade trigger which elected at 1394. 

Thus those two trade triggers have captured a combined 81-points of the decline from 1394.  Not a bad two weeks!

To wrap things up, one of my favorite indicators, the McClellan Oscillator (NYMO) has finally reached the oversold zone where larger rallies often begin.  If you'll recall, this was the same indicator I called attention to on the exact day the market bottomed back in April.

As I've also pointed out on a number of occasions, this is also an area that should have longer-term price support. 

What happens next is absolutely critical to the bull case.  A bounce looks possible, and even likely here -- but the market makes no guarantees.  As I discussed yesterday, bulls absolutely must hold this zone.  An oversold market can be extremely dangerous if an expected major support zone fails. 

If support holds here, then a quick trip to the 1320's, or even the 1340's, appears likely.  So -- be on guard for a bounce here, but stay nimble.  If by any chance the 1290-1300 zone fails, I would give absolutely zero thought to holding long positions at this time.  Beneath that zone and the market could easily go into free fall.

To put it simply: the next session or two represent a critical test for the bulls.  I'm favoring the view that they'll manage some type of bounce here, but also favoring the view that this bounce will be short-lived.  Trade safe.

Reprinted by permission, copyright 2012 Minyanville Media, Inc.

Something for the Trolls to Choke On -- Back-testing Pretzel's Calls

Every now and then, when they run out of gravel to chew on, trolls stop by and harass me about random things.  As a result, I’ve decided to put together an unbiased back-test of my calls going back to when I first launched this site, in early September of 2011. 

Now, this summary makes one assumption: it assumes that the person reading the projections is making good trade decisions.  For example: taking profit in a target zone when the potential exists for a big move against one's position, as opposed to just holding and (greedily?) hoping for more profit.  It also assumes that stop losses are being used, as suggested by KO levels, or in the body of the articles.

It also assumes that the reader is not abusing leverage and trading instruments like OTM (out of the money) options, which, for many traders, are the equivalent of playing the lottery.  Triple inverse funds would be a close second, and both these vehicles should only be utilized by expert traders.  The majority of traders using instruments like these will lose money, it's just a question of how much and when.

To summarize results, I assumed an active trading style and a $10,000 “hypothetical account,” using one ES (E-mini S&P 500) futures contract at $50 per point.

In each case, I chose the least aggressive target for profit taking.  For example, on a short trade, if the short was suggested at SPX 1200 and the target zone was 1140-1160, I used 1160 as the point of profit taking, regardless of whether the market went lower into the zone (for more theoretical profit) or not.  I used KO levels (knockout levels for the preferred count) as the stop loss levels.

In several instances, I did not use all the “in-between” trading which, for an active trader, could have yielded a higher return.  For example, during the December decline, an active trader could have picked up additional profit by jumping in and out as target zones were reached. I have also not bothered to include things like the DAX and BKX profits in the results summary, though some are mentioned.  These would add additional profits, but the results don’t need the additions.

I'm also skipping a lot of the daily commentary between the big swings, largely in the interest of time.  I'm quite certain without even checking that I didn't get every single daily call correct in the interim between bottoms and tops, and vice-versa.  I'm assuming neutrality of hits and misses for purposes of these numbers, and mainly tracking the bigger swings -- except for September, because September traded within a pretty narrow range.  

For documentation, I have provided links to each article, and a brief summary of the projections and their outcomes.  Below is the cumulative summary of all listed "hypothetical" trades combined:

620 points of profit
97 points of loss 

Over the course of less than 5 months, that’s a net of 523 points of profit. 

This equates to a return of $62,760 per year for $10,000 invested -- or 628% per year. 

So, all I have to say is… Troll THAT, buddy.  ;)  The results stand on their own. 

Especially when one considers that this hasn't been a trending market, but an up and down whipsaw market which has broken a lot of backs.

And now, of course, the obligatory disclaimer:

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including, but not limited to: forum comments by the author or other posters, articles and charts, advertisements, and everything else on this site, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions. Past performance does not guarantee future results.

The Calls:

September, 2011 

(Starting with September 4, 2011)
Predicted short term decline from 1177 to 1150.
HIT for 27 points profit
http://pretzelcharts.blogspot.com/2011/09/possible-count-on-es-futures.html

predicted DAX would head to 5100 from current level of 5319 HIT  219 points profit
http://pretzelcharts.blogspot.com/2011/09/can-dax-shed-light-on-spx.html

Predicted bounce from 1150 to 1185-1210 target zone target 1195 HIT 45 points profit
http://pretzelcharts.blogspot.com/2011/09/looks-like-possible-short-term-count.html

Two articles, which have to be taken together --predicted move from 1195 to 1101:
http://pretzelcharts.blogspot.com/2011/09/update-as-of-9-7-close.html
then at 1154, suggested market would bounce to 1174-1187: 
http://pretzelcharts.blogspot.com/2011/09/weekend-update-to-short-term-elliott.html
1195 to 1154 HIT = 41 points profit
1154 to 1174 HIT = 20 points profit

Suggested current wave may have more room to run on upside.  Position = flat
http://pretzelcharts.blogspot.com/2011/09/update-as-of-9-13-close.html

Suggested move from 1166 to 1145.  HIT = 21 point profit
http://pretzelcharts.blogspot.com/2011/09/cmon-bennie-lets-do-twist.html

1129-1140 HIT = 11 points profit.
http://pretzelcharts.blogspot.com/2011/09/elliott-wave-update-9-22-11.html

1142-1155 HIT = 13 points profit.
http://pretzelcharts.blogspot.com/2011/09/weekend-update-without-dennis-miller.html

1162-1101 HIT = 61 points profit.
http://pretzelcharts.blogspot.com/2011/09/spx-update-9-26-11.html


Calling the October Bottom:

Nailed the October low, before and after it happened.  Instructed readers on what to watch for before hand.
http://pretzelcharts.blogspot.com/2011/10/spx-update-10-3-11.html
http://pretzelcharts.blogspot.com/2011/10/spx-update-multi-month-counter-trend.html

I’m going to use the same qualifier of "what to watch for" described in the article above as the entry point – a move below and subsequent whipsaw back into the diagonal (that’s how I traded it, as well).  Thus, long positions taken at 1100 for ride to 1265 target HIT for 165 points.

Calling the October top:

Suggested rally would end shy of 1280 - MISS.  Suggested short entry at 1270 per chart… 1280 stop.  LOSS = 10 points.
http://pretzelcharts.blogspot.com/2011/10/spx-and-ndx-updates-last-call-for-bears.html

Favored view that top was in, suggested using 1256 as key pivot for shorts.
Assuming 1256 short entry going forward.
http://pretzelcharts.blogspot.com/2011/10/spx-and-ndx-update-new-key-levels-which.html

First target zone of 1196-1225 HIT.  Profit = 31 points.
http://pretzelcharts.blogspot.com/2011/11/spx-and-ndx-update-bulls-running-out-of.html

Unsure on whether current wave was 2^nd or 4^th wave.  SPX at 1218.  Suggested target for 4^th wave 1235-1254.  HIT = 17 point profit.  Suggested target for 2^nd wave 1253-1277
http://pretzelcharts.blogspot.com/2011/11/spx-and-ndx-update-so-far-so-good-what.html

Preferred view became that the rally was a second wave, with a target of 1253-1277.  SPX trading at 1238, stop at 1226.97.  HIT for 15 points profit.
http://pretzelcharts.blogspot.com/2011/11/spx-update-bulls-in-control-for-short.html

Suggested market was in topping/reversal zone, short SPX at 1261, stop loss at 1292.  Preliminary target for first leg of decline was 1140, later revised to 1140-1160.
http://pretzelcharts.blogspot.com/2011/11/spx-and-ndx-update-retracement-rally.html


From that point there was a lot of up and down and hemming and hawing on the part of the market.  Nimble traders could have picked up additional points during all this, as new waves became apparent and target zones were posted.  For the sake of time, I’m going to skip ahead, though there was certainly more profit to be gained in the interim period that I’m skipping.

I'm going to post one article from that interim period, because I was particularly proud of this call.  This was back during the November “triangle” that every analyst on the planet was convinced was forming and thought that the market was soon to head higher.  To my knowledge, I was the only one calling for a reversal of the prior trend and a move lower out of the triangle (I’m sure I wasn’t the only one – the key phrase is “to my knowledge”).

How many other technicians convinced their readers to take long positions during that triangle?  Where do you think they sold those longs -- no doubt at the point of max pain.  How much loss did they take?  One never knows, but think about it next time I blow a call.  ;)

http://pretzelcharts.blogspot.com/2011/11/spx-and-bkx-update-next-move-out-of.html

Article above also had a BKX chart, with a suggested target of 34.5-36.25 HIT.  BKX was at 38.01.  Additional profit not included in figures = 5%.

The November bottom:

Suggested first target for wave of November decline was 1140-1160 HIT for 101 points.  Article below also warned readers not to become complacent:

Now, that said, here's where things start to get interesting. Despite the fact that price has performed exactly as I've been predicting, my indicators are now giving some conflicting signals. I'll come back to that in a moment, but first: it's human nature to get complacent when things go perfectly according to plan, as they have for my readers. However, the stock market is no place for complacency. Please don't be tempted to get lazy here; I'd hate to see anyone give up their 100+ points of SPX profit at this point.

http://pretzelcharts.blogspot.com/2011/11/spx-update-crash-1-seasonality-0.html

Then a second time, on November 27^th, the Sunday prior to the rally, I warned of several things, including the fact that the bullish count had reached the bottoming window.  (This bullish chart was originally published in the comments section.)  Some quotes from that article:

One tendency I've observed in many traders over the years is to continue "looking" for things after they've already occurred. Here's an example. Back on Nov. 18, I wrote:

"Assuming my preferred count is correct, market surprises going forward should be to the downside. In third waves, momentum indicators reach oversold and stay there. Bounces that should materialize, often don't."

That has already happened, as indicators have been quite oversold for some time now, and expected bounces have been non-existent to this point. But as I wrote this past Friday, now is the time when I'm finally starting to look for a bounce, because the charts are finally justifying it.

Besides the chart potential, another argument in favor of a bullish move occurring is the fact that everything's gotten so bearish. Something has to give. The market is now like a rubber band that has been stretched to its limit: either it snaps back soon... or it breaks.

But after Thursday's action, I tried to convey on Friday that a bounce definitely became something to be cautious of if you're holding short positions. If we do see a bounce here, I expect it will simply be a snap-back rally, though it could retrace as high as 1220.

I blew the snap-back call.  But I gave readers ample warning of the potential of a 60 point move against their positions with the 1220 target.  I had also given this same warning in Friday's article.  If that's not enough to cause one to cover in the target zone (as I did), I don't know what is.
http://pretzelcharts.blogspot.com/2011/11/spx-update-bounce-or-die.html

I blew the next call (the same as above, the snap-back call).  I told everyone to “sell the bounce.”  Stops should have been placed at 1225, as per the article:

Sustained trade above 1225 would call this count into question, and would lend credence to the bullish alternate count shown yesterday.

SPX was at 1192.  LOSS of 33 points.  Keep in mind that even if one was trading very passively and didn’t capture points in the target zone of 1140-1160, then one should have stopped out at 1225 from the shorts taken in October at 1261.  This is still 36 points of profit for the most passive swing trader.
http://pretzelcharts.blogspot.com/2011/11/spx-update-sell-bounce.html

Once 1225 was violated, I began giving serious weight to the bullish alternate count:

The bullish alternate count has of course, roared into the spotlight, and could in the end prove to be the correct count.
http://pretzelcharts.blogspot.com/2011/12/spx-update-uncle-ben-saves-world.html

The December Top:

On December 2, I began suggesting that the market was in the process of topping again, regardless of whether the bull or bear count was in play.  Suggested target zone for the top was 1260-1280.  We’ll use the low end of 1260 as the short entry.
http://pretzelcharts.blogspot.com/2011/12/spx-update-topping-again.html

There was also a series of articles that followed the article above, and in each one I presented more evidence that a top was forming.


The December Bottom:

On December 18, I suggested active traders may want to take profits in the “safe” 1190-1208 zone.  Profit from 1260 entry = 52 points. From the article:

The blue "Alt: B" target zone is the safer and more conservative target.

Below is only a small excerpt, but in this article I also warned at length about the potential for the more bullish counts to play out.

There are several ways to label the current decline, and if it is indeed the impulse wave the preferred count thinks it is, then it needs to show some acceleration lower soon. There are only so many first and second waves that seem "reasonable" -- after a time, one has to start considering that the whole structure may just be a corrective wave instead.

I do feel that the market is in an area where shorts need to remain aware of a potential rally; bearish sentiment is also reaching levels that have generated rallies in the recent past.
http://pretzelcharts.blogspot.com/2011/12/spx-and-dow-update-critical-week-for.html

On the next day, I warned even further about the bullish rally potential, and suggested a stop loss level of 1231.47.  Once again, even passive swing traders should have profitted over 28 points on the December top.

trade above 1231.47 SPX would indicate that my favored interpretation is incorrect

http://pretzelcharts.blogspot.com/2011/12/spx-and-ndx-update-rally-or-just-blip.html

Then two misses. 

Here I suggested the rally would top at 1254, with a stop at 1267.  LOSS of 13 points.
http://pretzelcharts.blogspot.com/2011/12/spx-and-vix-update-indications-rally.html

Here I suggested the rally would top in the 1269-1310 zone.  Wherever one’s short entry, it should be readily apparent from the articles that followed that above 1310 would be dangerous for bears and thus used as a stop level.  Even though this article suggested that the rally was due to move higher than 1269, we’ll use that as the entry and 1310 as the stop, for a total loss of 41 points.
http://pretzelcharts.blogspot.com/2011/12/spx-euro-and-dollar-update-are-bulls.html

In conclusion, emotions of hope and greed and fear are all trade killers.   Trade safe.

Further Disclaimer:  These results are based on hypothetical or simulated performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical or simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.