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Whew! One Crazy week! However I Think Next Week Will Make Last Week Look Like a Walk in the Park :)

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October 18, 2009 – Comments (10)

Lots of crazy moves up and down this week. Lots of volatility. And fun was had by all ... sort of ... well, not really :)

The most obvious question is: Did we reach the top (end of P2) last week, or if we have one small wave up next week, will that be the end of P2?

The best answer anyone can give you is: maybe.

That's all. I have opinions and thoughts on this matter, just like any analyst does. But they are irrelevant.

The top will happen when the top will happen. And we will never *know* it is the top when it occurs, we will only know after a confirmation move. What would be a confirmation move? I would like to see a clear impulsive *MINUTE DEGREE* wave down (5 full Minuette degree waves), followed by a 3 wave Minute degree correction with a lower high on all the major indices (SPX, INDU, RUT, COMPQ, and NDX), and then followed by another Minute degree wave down.

I think a move of that size will a) obviously break the 7 month wedge lines and b) be too large to ignore as a bull market correction because c) a 5-3-5 is either a 1-2-3 in an impulse or a zigzag, and I don't see another realistic Minor degree zigzag X-wave to extend this out to be a triple zigzag (I think we are in the 3rd zigzag now by my preferred count).

So thinking about P2 some more, there are a few things that we would expect to see at the end of P2. The final wave of P2 should have:

- Low volume
- Low volatility
- Low breadth and decreasing breadth as it moves up
- Daily divergences of technical indicators (MACD, RSI, and TRIN more importantly)
- Lots of extension with little pullback and possibly a 5th wave extension for a blow-off, not because of a bullish move but because of little bearish resistance.

And so while I am not calling the top here, I am remarking how much this current wave from Oct 2 fits nearly all of the criteria above.

But again, this post is *NOT* a declaration that P2 is over.

The above was what we need to see regarding a confirmation move, and some thoughts as what the end of P2 should look like. I have already talked about several count options for P2, both bullish (rally extends out as far a December and goes up to 1150-1200) and bearish (P2 is done with this wave) in this post: EOD Count Oct 12 with a Bunch of Charts and Count Options. For my thoughts on this matter, check out that post.

This post will be some observations about P2 and will be some observations about the current wave. But mostly it will set up some of the action that we will be likely to see in the next week.

... Continued in the comments section ...

10 Comments – Post Your Own

#1) On October 18, 2009 at 6:11 PM, binve (< 20) wrote:

So lets start with where we are, the current wave since Oct 2:



This is my preferred count. Building off the one in this post: My Count of This Crazy Rally.

So there are two main options with this count

1) The wave is done with the Thursday high.
2) The wave will be done Monday or Tuesday next week. (Only SPX and INDU made higher highs on Thurday, RUT, COMPQ and NDX did not. And due to the weak nature of the move, it could be a Wave B overshoot.) Also the main channel has not been broken yet.

Also, if we go past 1101, then Wave 3 will be the shortest wave in my count (which is unallowable). In that case, Daneric's count is the most likely count IMO, which means a very extended 5th wave. This has some *very bearish* connotations (see the checklist above).

As I have observed before, the breadth of this wave is really bad: Man SPX, Your Brea(d)th Stinks! and SPX says "Pass Me the Binaca!". Friday proved no different. Bearish breadth is rising as the move is making new highs.



This says to me the wave is over, or is over after one more small move up. There is also another aspect to be aware of, which is on my 60 min pattern chart:



There are two channel trendlines currently being fought over (one resistance and one support). When the support breaks, there is the gap at 1075, but another support line right below that. When the move fills the gap, there is a high likelihood we will see an immediate bounce right off that trendline. Just something to be aware of.

There are two ways to play this for a short swing trade (not advice or recommendations, just a swing trade setup that is possible).

1) Assuming you subscribe to the more bullish large count, then this would be the end of Minute 1 and the next move down is a Minute 2 pullback. The correction should last 4-6 trading days and should take us down to 1067 (38% retrace of the Thursday high) to 1057 (50% retrace). There are unfilled gaps at both 1075 and 1057. My guess is both will be filled on the next Minute degree pullback.

2) Assuming you subscribe to the more bearish large count (P2 was done Thursday or will end early next week), I would get short (if you have not done already) and play it this way.

 2a) Watch the move down and see if a Minuette degree impulse forms. Hold through the correction with a stop set at the high (either the Thursday high or the high Mon/Tues if this wave has one more move up).
 2b) Sell part after the second impulse down (the count at this point will have been a 5-3-5 each Minuette degree). So this could be a 1-2-3 of an impulse of an A-B-C of a zigzag correction (zigzags are typically in the Wave 2 position and this would fit with a Minute 2 pullback in Option 1 above). Either way, this would be a good place to take partial profits. Set a stop where you feel comfortable for the rest of the position, and allow for a possible 4-5 to follow
2c) Exit the position after a full Minute degree impulse is formed (1-2-3-4-5 Minuette degree waves). Wait for a 3 wave move up that looks corrective (could be a 5-3-5 zigzag which would look impulsive) and then wait for the next Minuette impulse down (in the case of a zigzag correction, you might want to wait until the impulse develops more). Then reshort for the next impulse down.

Again, this is *NOT ADVICE*. I am just sharing a potential swing trade setup.

Moreover, this is a trade for a position to be held for only a few days. Many swing traders will hold for longer time periods and will only use this setup to scale into a short position and not exit the way I indicated above. Also there are many traders / investors who have a much longer timeframe in mind.

So next lets look at the Daily and Weekly Charts:



RSI: The up-channel since March has been violated and a new down channel is forming. The second negative divergence on Daily RSI has formed. Showing weakness
Trendline: The trendline from March 9 is broken and is now acting like resistance. I appeared to have broken back through on Thursday but was quickly shoved back under on Friday.
Moving Averages: The 20 EMA and 50 MA are still uptrending as supportive. Watch for bounces at these levels as we correct
Volume: Decreasing as we make new highs (bearish)
MACD: Broke down from wedge and is turning down beneath the support line (bearish)
CMF: Continues into distribution as new highs are made (bearish)
Breadth: Bearish trends on both ADV:DEC and UPV:DNV



Many of the same observations can be made on the Weekly chart. It is not as bearish (some of the weekly trends are still bullish).

But besides the downtrending Weekly CMF (which I pointed out last week) we now have weekly RSI divergence showing up. A weekly red candle this week would cement that and be a very difficult blow for the bulls with regards to this rally.

THE VIX IN FOUR TIME FRAMES

The last several posts I have been focusing on the VIX, for obvious reasons. Please read this post to see where I am coming from (VIX Thoughts to Accompany a Few Count Options) If we see the top of P2, would would expect to see a corresponding bottom in the VIX.

The middle of last week sported a possible 5-wave finishing move, which turned out to be a C of B of a very complex 4.

The VIX sported a new low on Friday.

This new low was arrived at very implusively however. So it *could* be a bottom in the VIX or it could be Wave 1 of 5 of the final move. Next week will answer that question.




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#2) On October 18, 2009 at 6:18 PM, tonylogan2 (< 20) wrote:

alright, well I figured market is heading down, but not far enought to make tonylogan1 look good, so hence, here we have the unleashing of tonylogan2.

I figured 1100 is as good a spot as any to get a new short account in.

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#3) On October 18, 2009 at 6:36 PM, binve (< 20) wrote:

Tony, Hey man! LOL! Yep, I think so :) Will this account be the Ultrashort / antithesis of UltraLong?

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#4) On October 18, 2009 at 6:39 PM, prose976 (< 20) wrote:

One thing greatly overlooked by most:

Perhaps the "crash" was bull scat, and the consolidation of business and the cutting of fat from payrolls and government is actually very good for the economy.  Hence, the "recovery" is being justified, but is actually just a return to reality.

The market is about where it should be, perhaps.

Maybe we're exactly where we should really be...even with the unemployment levels as high as they are.  While many may wish this wasn't true, and that we should really be at Dow 6000 or less, with the dollar going down in value, interest rates in the toilet and gold bubbling, a much better place to put your "money" is into something - a real asset that actually does something for you personally or for other people in your state, country or across the globe.

The market does not reflect the economy, but instead it reflect economics of the market ecosystem.  Efficient companies are worth more than inefficient companies inherently.

Here's an example of how people have looked at the market in the past.

The market was lean an mean for many years.  Then it became bloated, as did spending by the companies that composed the market.  But that bloating was recognized as valuable, because those companies were displaying "prosperous" window dressing in the form of buying more than was needed, hiring more than were needed, stocking more than was needed, paying more dividends than made sense, etc.

Smart companies have taken the opportunity to "get fit" over the last year or two.  This has made them more valuable, especially because they are still able to meet demand, innovate and also because the world is not shrinking, which gives them even more opportunity.  Conversely, current business competition IS shrinking, thus giving greater market share to the standing, more efficient companies who made it out alive.

The market companies are leveraging the long tail (read about it in Wikipedia).  There is a lower common denominator.  If you can't sell a $100 item to 100 people then sell a $10 item to 1,000 people.  With technology, it can be done, and is being done.  That's why Tech has led this thing.

I think we're fairly valued and may spend a long while between Dow 9000 and 12000, but it is very likely we could even push past our beginning 14000 because of the new value companies are bringing, not in jobs but in solid, upward trending revenues that has been enabled by the global technology revolution.

Fool on! 

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#5) On October 18, 2009 at 7:13 PM, tonylogan2 (< 20) wrote:

no, I have not looked at Ultralong, though I assume we have a lot of similar inverse picks.

It will basically just be re-calibrating the timing of the sad picks of tonylogan1. I red-thumbed too many things with the S&P at 940 or so. 

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#6) On October 18, 2009 at 7:45 PM, binve (< 20) wrote:

prose976, I appreciate your optimism (I am not being sarcastic, that is a true sentiment). And I would like to share it. I would much rather be bullish than bearish. It just when I look at the long term fundamentals and technicals, and look at them honestly. I just do not see a bullish case. If you are interesting, please check out my reasoning behind this stance http://marketthoughtsandanalysis.blogspot.com/2009/09/info.html#Long_Term_View. At some point I will become very bullish on equities in general and the economies of many countries, including the US's. But unfortunately not until we go through a needed correction / contraction.

Not being confrontational, just stating my disagreement civilly :) Fool on!

tonylogan2, Gotcha. I wasn't meaning the opposite of UltraLong's portofolio, per se. I meant that he went Long on everything on March 6 (practically at the bottom).

It would be an interesting comparison if this turns out to be the top and you go short everything here.

It will basically just be re-calibrating the timing of the sad picks of tonylogan1. I red-thumbed too many things with the S&P at 940 or so

LOL! Yep, same here. Most of my short picks were made around then (and a few that were made before that) :) Doh!..

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#7) On October 18, 2009 at 8:13 PM, amassafortune (29.67) wrote:

Binve, I like your trading strategy in the middle of this piece. It respects 1. Capital preservation and 2. Seeing both sides (knowing one can be wrong), and 3. Having a plan. After not losing money, making money is the desired investment outcome, and your blogs always maintain that focus.

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#8) On October 18, 2009 at 8:43 PM, binve (< 20) wrote:

amassafortune, Thanks man! I really appreciate that! Especially from you, I really value your opinion and insights! Yeah, my long term view is bearish fundamentally and technically, but in the intermediate term, I can defininitely see avenues for this rally to extend.

Good luck in all your trades :).

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#9) On October 18, 2009 at 10:21 PM, ChrisGraley (30.25) wrote:

Next week?

I'm thinking Monday will make last week look like child's play.

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#10) On October 18, 2009 at 11:36 PM, binve (< 20) wrote:

ChrisGraley, LOL! Yep, I have a feeling you will be right about that :)..

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