SPX hit the range of a high confidence top for wave 1 up of this bear rally on Friday. I had been looking for 850-860 since the week before. XLF hit it's high probability top today at $11. I had not posted a target for XLF since I had not applied the EW principles to it. I ran across someone this weekend that had and they had an $11 price target.
Since SPX topped Friday and XLF today early, both appear to be making moves down that are consistent with a new wave down. If this is true we should see some acceleration downward later this afternoon on both SPX and XLF.
The wildcard out there right now is the GS earnings scheduled to be released tomorrow before the market open. It is possible that we trade in a tight range for the rest of today and tomorrow the GS earnings (which are rumored to be atronomical) is the catalyst for the selloff. A "buy the rumor, sell the news" type selloff.
One thing is certain from last Friday's surge. Record profits are now ALREADY PRICED INTO ALL FINANCIALS. When WFC announced their fake record earnings all of the other financials rose along with them near the 30% range (with the expection of C which only rose 10%). So anything short of record profits will take the finnies DOWN. Record profits just keeps them where they are now. This also fits well with the EW forecast.
Now would be an ideal time to open up short positions against the financials, real estate and the SPX. It is a very high reward, low risk setup. I would suggest FAZ, SRS, SDS and SKF. My target for the SPX is in the 725-750 range and my target for XLF is 7.80-8.45 range. If XLF hit this target FAZ would more than triple from it's current price. This wave 2 down should take about 1-2 weeks to play out.
Monday, April 13, 2009
Thursday, April 9, 2009
Thursday Market Analysis
I finally had a chance to digest today's market action so far. The SPX hit the target I had been expecting for a few weeks (850-860). Market volume remains light as it has all week.
The structure now looks complete for an EW wave 1 off of the 666 bottom. I now expect a retrace of 50%-62.8% minimum. Running the numbers puts us in the 734-758 range. The momentum indicators are running on the overbought side on most time frames now. We are also going to put in our fifth straight up week in a row. to put this into perspective we only had ONE strecth of five or more down weeks in the entire bear market. June to July of '08 had six straight down weeks.
The price structure on XLF looks even better. A retrace from today's high of $10.10 takes us down to $7.41-7.96.
I studied the market action during the period off of the Nov. 23 low to the high on Jan 6. I looked at this period because the time frame matched the time frame from the March 6 bottom to today (a little over a month), both periods started with a bear market low and ended with a 3 day weekend. You can see this in the following chart:
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3095409&cmd=show[s155003437]&disp=P
Jan 5 and 6 were the first two days after the New Year holiday period. We put in back-to-back doji candles. We also put in a top and went down 280 points in the next two months.
If this scenario were to play out again, then next week Monday and Tuesday will be narrow range trading days and give us a top slightly higher than today. Which would still fit with my expected top in the 850-860 range.
Also note in the chart above that we are close to hitting a major resistence line. I believe we test the line and fail there. Then we pull back to the next resistence line that connects the tops on jan 6 and Feb 13. This line conveniently sits right in the range of the expected pullback (734-758).
Once my new brokerage account is funded I will go heavily short for the expected pullback. I will scale out of shorts as we approach the 750 area and then scale into longs when it is apparent we are near a bottom.
The most difficult time to be short is at the top. The most difficult time to be long is at the bottom. Yet these are the times to be a contrarian. Going short now will pay handsomely in the next few months.
The structure now looks complete for an EW wave 1 off of the 666 bottom. I now expect a retrace of 50%-62.8% minimum. Running the numbers puts us in the 734-758 range. The momentum indicators are running on the overbought side on most time frames now. We are also going to put in our fifth straight up week in a row. to put this into perspective we only had ONE strecth of five or more down weeks in the entire bear market. June to July of '08 had six straight down weeks.
The price structure on XLF looks even better. A retrace from today's high of $10.10 takes us down to $7.41-7.96.
I studied the market action during the period off of the Nov. 23 low to the high on Jan 6. I looked at this period because the time frame matched the time frame from the March 6 bottom to today (a little over a month), both periods started with a bear market low and ended with a 3 day weekend. You can see this in the following chart:
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3095409&cmd=show[s155003437]&disp=P
Jan 5 and 6 were the first two days after the New Year holiday period. We put in back-to-back doji candles. We also put in a top and went down 280 points in the next two months.
If this scenario were to play out again, then next week Monday and Tuesday will be narrow range trading days and give us a top slightly higher than today. Which would still fit with my expected top in the 850-860 range.
Also note in the chart above that we are close to hitting a major resistence line. I believe we test the line and fail there. Then we pull back to the next resistence line that connects the tops on jan 6 and Feb 13. This line conveniently sits right in the range of the expected pullback (734-758).
Once my new brokerage account is funded I will go heavily short for the expected pullback. I will scale out of shorts as we approach the 750 area and then scale into longs when it is apparent we are near a bottom.
The most difficult time to be short is at the top. The most difficult time to be long is at the bottom. Yet these are the times to be a contrarian. Going short now will pay handsomely in the next few months.
WFC announcement
Credit markets have generally been decent over the past few weeks and it sounds like the 19 banks under the "stress" test (not that much of a stress) will pass the test. Add to that the news from WFC today that they will blow away consensus expectations for Q109 and the short covering rally is on today. Liquidity will be low in the market given the holiday tomorrow so it will be more extreme than it should be. It will be tough to be short the financials group through earnings season given that this WFC trend should also benefit JPM, BAC and PNC. This should give a general lift to financials overall since this is one of the most hated and therefore underowned groups out there. This should be a broad positive for the markets overall as well. However once earnings season is done (mid May) I think we are in for a market pullback given that the Fed/FDIC will push the banks that need more capital to get it and we may have another GM like boot out of a bank CEO, Pandit at Citi? The push for more capital means the conversion of government preferred to common and that will dilute the heck out of the common shareholders. In addition there will be arbing to short the stock of the bank who will have preferred converted into common like we saw with Citi. I would ease up on WFC, BAC and C here and then come in after earnings season to put the shorts back on them. Good pair trade is to use JPM as the long.
Wednesday, April 8, 2009
Critical Error in my Long Term Outlook
I must admit I am a little embarrassed. I made a critical error in my long term outlook. As you may have known I have been reading a book on EW theory. Anyway I got to the section regarding corrective periods like we are currently in. The critcal idea is that market corrections of ALL magnitudes contain three wave structures. So the expected wave pattern for the current bear rally is a THREE wave NOT FIVE wave structure. This will significantly lower my IT target from over 1000SPX to most likely under 1000SPX.
In the short term nothing is changed. I am still expecting the second wave of this rally (which is now called B and not 2) to retrace to 750 or lower. The change is now the next wave up will be the end of the bear rally. Corrections are very difficult to play and to predict with much confidence where they will end. This C wave up could go higher than the top of the A wave, or it could not reach that high. It should take a five wave structure though which will help tremendously in setting a target for the top. The problem is we will not have much warning for this. We'll have to set the targets as the wave C moves up.
If I had to guess, which of course I will, I would say that the C wave traces to at least the top of A (currently is about 845). It will probably go beyond A to the 900-950 area.
Corrections in general can be messy complicated structures that tend to stay in a trading range. The reason for this is that these periods are when most investors take profits. Once the profits have all been taken then the larger trend (down in this case) can continue. They can take much more time to complete than impulsive waves. I have referenced the period between December and early February as an example.
I expect this correction to last throughout the earnings period. This is the rest of April. I also expect prices to remain mostly in the 800-850 area. I may take a more active trading approach during this period going long near 800 and short near 850. I will use trading stops as a safety net to avoid becoming trapped in a position. I probably won't make much money doing this, but I'll probably learn alot and use this period to become acquainted with my new broker.
In the short term nothing is changed. I am still expecting the second wave of this rally (which is now called B and not 2) to retrace to 750 or lower. The change is now the next wave up will be the end of the bear rally. Corrections are very difficult to play and to predict with much confidence where they will end. This C wave up could go higher than the top of the A wave, or it could not reach that high. It should take a five wave structure though which will help tremendously in setting a target for the top. The problem is we will not have much warning for this. We'll have to set the targets as the wave C moves up.
If I had to guess, which of course I will, I would say that the C wave traces to at least the top of A (currently is about 845). It will probably go beyond A to the 900-950 area.
Corrections in general can be messy complicated structures that tend to stay in a trading range. The reason for this is that these periods are when most investors take profits. Once the profits have all been taken then the larger trend (down in this case) can continue. They can take much more time to complete than impulsive waves. I have referenced the period between December and early February as an example.
I expect this correction to last throughout the earnings period. This is the rest of April. I also expect prices to remain mostly in the 800-850 area. I may take a more active trading approach during this period going long near 800 and short near 850. I will use trading stops as a safety net to avoid becoming trapped in a position. I probably won't make much money doing this, but I'll probably learn alot and use this period to become acquainted with my new broker.
Tuesday, April 7, 2009
Everything Falling Into Place
Yesterday was an important day in the worldwide markets. There were signs that many important worldwide markets have topped in unison. This is possibly a very powerful indicator that we are at an IT top.
The EUR stocks opened with a gap up, traded above the IT high from last Friday, then reversed and closed at the LOD on volume. Also yesterday the EUR, GBP and CHF all had similar topping patterns. At a minimum I expect these currencies to test the lows set earlier this year. Our own stock market failed to set higher highs than Friday.
As you guys have known I have been expecting a top in the 850-860 area. We have not gotten there, but we got close. Overnight trading on Sunday night reached 848. It is possible that the fifth wave of our fist bear rally leg up will end short. However keep in mind that this is a holiday shortened week. The markets are closed and volume on Wed and Thurs will be light. Because of this it is possible that the mostly retail crowd will push prices into the area I have been expecting.
There is a very good possibility that next Monday's open is down significantly similar to the last threeday weekend we had at MLK day.
Looking forward I still have my target at 750, which is roughly the 50% retrace of the move off the bottom. Just as likely is a 62.8% retrace (732). Less likely is a 38.2% retrace (777). I am reducing the odds for this due to the worldwide market activity yesterday. That was a powerful signal that this correction will be significant, as most wave 2 retraces are. I am also moving up a small notch the possibility that the retrace is 100% or even over 100%. At this point I am only keeping these possibilities in the back of my mind. As prices fall I will get a better indication of where prices are likely to fall to.
The way I am going to play this is similar to the plan I have had in the last few weeks, except that I will not begin scaling out of my shorts until closer to the 750 area, not the 775 area.
The EUR stocks opened with a gap up, traded above the IT high from last Friday, then reversed and closed at the LOD on volume. Also yesterday the EUR, GBP and CHF all had similar topping patterns. At a minimum I expect these currencies to test the lows set earlier this year. Our own stock market failed to set higher highs than Friday.
As you guys have known I have been expecting a top in the 850-860 area. We have not gotten there, but we got close. Overnight trading on Sunday night reached 848. It is possible that the fifth wave of our fist bear rally leg up will end short. However keep in mind that this is a holiday shortened week. The markets are closed and volume on Wed and Thurs will be light. Because of this it is possible that the mostly retail crowd will push prices into the area I have been expecting.
There is a very good possibility that next Monday's open is down significantly similar to the last threeday weekend we had at MLK day.
Looking forward I still have my target at 750, which is roughly the 50% retrace of the move off the bottom. Just as likely is a 62.8% retrace (732). Less likely is a 38.2% retrace (777). I am reducing the odds for this due to the worldwide market activity yesterday. That was a powerful signal that this correction will be significant, as most wave 2 retraces are. I am also moving up a small notch the possibility that the retrace is 100% or even over 100%. At this point I am only keeping these possibilities in the back of my mind. As prices fall I will get a better indication of where prices are likely to fall to.
The way I am going to play this is similar to the plan I have had in the last few weeks, except that I will not begin scaling out of my shorts until closer to the 750 area, not the 775 area.
Monday, April 6, 2009
Holding Frim
My post on Friday is still my primary view. I thought we'd get to 850-860 as a high, we actually hit 848 in overnight trading last night. It appears today that the bears are in control, for awhile anyway.
The prices today suggest we are now in wave 2 down. The targets I posted last week are still valid.
I am feeling much better today than last week so hopefully I am finally kicking this bug out of me. You can expect more frequent posting when I am fully recovered.
The prices today suggest we are now in wave 2 down. The targets I posted last week are still valid.
I am feeling much better today than last week so hopefully I am finally kicking this bug out of me. You can expect more frequent posting when I am fully recovered.
Friday, April 3, 2009
New Wave Targets
I think I was a bit rpemature in ending wave 1 when I did. It is looking to me like we may get one more push up to new highs before ending this wave 1. EW target would be 860. Could end sooner, could end later, but most probable is 860. Gauging the length of the beginning of a new trend is difficult. Once the first leg is clear then a true EW'er can set high probable targets for the rest of the waves.
As it stands now My targets are ending this wave 1 in the 850-860 range. Wave 2 down goes to near 750. Wave 3 then will go to a minimum target of 950 to 1050. Wave 4's are usually long and boring. (the wave 4 from the past bear market lasted from late Oct to mid Feb and spent most of that time in a 150 point range.) Wave 5 could take us 100 points higher than wave 3. Kind of early to project wave 5 since it is possible that wave 1 extended.
The way I am trading this is per my previous plan. Stay short until the end of wave 2. i will scale out as we approach the wave 2 down target.
If I am wrong about where we are in the wave count, it will become apparent that we are in wave 3 already if we push up past 860 towards 900 in a steep, fast line. I highly doubt this since there is so much resistence above from a trend analysis. I really think we need lower prices to "refuel" the momentum gauges as we are currently oversold.
As it stands now My targets are ending this wave 1 in the 850-860 range. Wave 2 down goes to near 750. Wave 3 then will go to a minimum target of 950 to 1050. Wave 4's are usually long and boring. (the wave 4 from the past bear market lasted from late Oct to mid Feb and spent most of that time in a 150 point range.) Wave 5 could take us 100 points higher than wave 3. Kind of early to project wave 5 since it is possible that wave 1 extended.
The way I am trading this is per my previous plan. Stay short until the end of wave 2. i will scale out as we approach the wave 2 down target.
If I am wrong about where we are in the wave count, it will become apparent that we are in wave 3 already if we push up past 860 towards 900 in a steep, fast line. I highly doubt this since there is so much resistence above from a trend analysis. I really think we need lower prices to "refuel" the momentum gauges as we are currently oversold.
Subscribe to:
Posts (Atom)