Yesterday
We continue to remain on very low volume in a narrow range pattern. I was a bit surprised at the trade action in the late afternoon to be honest, something I did not expect and needs to be addressed. I said that my feel for a top out should be around the 837-838 mark and we stopped right there just before 3:00. Here is where I thought we would keep it for the day but we ended up jumping one last step towards the 842 and closed at 838. While we reversed this last jump quickly we still managed to close in the upper ranges.
We can clearly see that we are spot on with our narrow ranges and low volume but the bearish tone is definitly not in the market. We were able to create a slow up channel off the monday lows, something I felt would occur on the downside if any.
Today
Well the market got a bit ahead of itself yesterday so watch for the top out to occur around the 10:45-11:00 mark. This would be inline with a 1:1 ratio of our drops from wednesday last week. Volume here is the key and I can see us giving the 842 one last test - time is important here so do not chase it. If volume picks up while we are approaching 842 - something that should not occur watch for a break to setup for a suckers rally with a potential of 846-847. It is very unlikly to breakout on the upside from here on out so do not be fooled by this rally if it is to occur.
How to trade this?
Well, if you have to dabble in the markets today use this as a short entry window but keep in mind that its a medium probability and medium risk trade. Its not as safe as I would like so try to perfect the entry and lower your capital on the trade so its easier to get rid of it. This is one of those trades that you either hit perfectly or walk away from.
Wednesday, February 4, 2009
Tuesday, February 3, 2009
Follow the quote of the week ...
Short post today. Busy on planning my trip back home (been away for 3 months).
Yesterday
Nothing much changed. We gapped lower and were able to fill the gap closing perfectly sideways. We did not get any commitments on the upside and remained on very low volume just as I described would occur.
Today
We should remain on lower volume and should not exceed 837-838 on the upside. While this may look like a good short we need to wait it out. We should continue seeing indecision with narrow ranges and open/close prices that remain fairly even.
Wait it out and use this time to read up on strategies and other technicals.
"If you don't know where you're going, don't speed up."
Yesterday
Nothing much changed. We gapped lower and were able to fill the gap closing perfectly sideways. We did not get any commitments on the upside and remained on very low volume just as I described would occur.
Today
We should remain on lower volume and should not exceed 837-838 on the upside. While this may look like a good short we need to wait it out. We should continue seeing indecision with narrow ranges and open/close prices that remain fairly even.
Wait it out and use this time to read up on strategies and other technicals.
"If you don't know where you're going, don't speed up."
Monday, February 2, 2009
Getting ready
I spent quite a bit of time this weekend on a more detailed analysis of the possible outcome we may see out of this turn. So review both of the posts and use them as a guide for this week. The markets are waiting anxiously on the "next" big plan which in my opinion will be one of the key drivers leading this quarter.
This week I see the market remaining in a sideways low volume pattern until this "big plan" is resolved or turn lower giving up hope until there is a reason to believe otherwise. I do not see us trading much towards the upside unless we see outside interventions.
What are some of the signs to look for? V-Bottoms where you can see strong turns towards the downside with fast reversals - watch the daily candlestick patterns carefully this week. Whatever will happen, do not chase, better to sit out on a few points and wait for the retracements then getting caught in one of those whiplash trades where probability and risk are non manageable.
If this is the turn to the downside wait it out until we have made a decision in the 718 to 767-770 range. Sit and wait, let the market decide this week what we will do and then get ready for some good trading for the rest of the quarter.
Good luck everyone. I may be posting less this week due to personal travels so review my weekend posts whenever you are in doubt if I am not here for more detailed guidance.
This week I see the market remaining in a sideways low volume pattern until this "big plan" is resolved or turn lower giving up hope until there is a reason to believe otherwise. I do not see us trading much towards the upside unless we see outside interventions.
What are some of the signs to look for? V-Bottoms where you can see strong turns towards the downside with fast reversals - watch the daily candlestick patterns carefully this week. Whatever will happen, do not chase, better to sit out on a few points and wait for the retracements then getting caught in one of those whiplash trades where probability and risk are non manageable.
If this is the turn to the downside wait it out until we have made a decision in the 718 to 767-770 range. Sit and wait, let the market decide this week what we will do and then get ready for some good trading for the rest of the quarter.
Good luck everyone. I may be posting less this week due to personal travels so review my weekend posts whenever you are in doubt if I am not here for more detailed guidance.
Sunday, February 1, 2009
Weekend Special: The other side
Quite a few of you had asked me for more justification on the bearish scenario I had described. I do admit I lacked the proper technical justifications with clear examples and descriptions as to why we are going down and how far it will be.
- My long term bearish outlook
Before we go into our current market conditions lets review what elliot wave theory means when applied to a major bear market. If you do not know what elliot wave theory is look it up on google first to get a better idea. Here is a basic explanation:
Wave 1: while wave 1 is occuring no one expects it to be the first cycle of a major down turn, news and information is still very positive, price targets are still favoring bulls, as prices drop volume does not increase enough to set of alarming indicators.
Wave 2: Corrective of wave 1, with a 61.8% fib retracement, investors may seem bullish again as we are retesting the upper ranges on the retracement.
Wave 3: very bearish sentiment, prices drop quickly with little and short lived retracements, usually strongest wave exceeding wave 1 with a ratio of at least 1.61:1 (up to 2.61:1 possible)
Wave 4: corrective of wave 3 with smaller retracement compared to corrective wave 2, should not exceed 38.2% fib levels, usually sideways trend pattern, difficult to identify start and end of the wave
Wave 5: here is where many technicals differ, some say this is the strongest wave, others say it is weaker then wave 3.
So having this quick recap lets apply some of those theories on our current recession. Let me show you the waves first. Use the graph as a comparison.
Wave 1: during wave 1 many were still very bullish on the market. Look at commodities and technology 12 month price targets. All were still up sky high with forward P/E's of 25+. People were still buying into the "cheap" financials.
Wave 2: we retraced exactly 61%, many investors were very positive and kept their initial long term price targets.
Wave 3: our big crash, huge volume, we had no retracements to speak off while this wave was occuring and dropped substiantially in a short time frame. Very bearish sentiment.
Wave 4 (potentially current wave): retraced 25% thus far (my jan target of 945 I had posted in December). As you can see above its normally a sideways type pattern and hard to detect. We have been trading rather sideways and you can see in my forecasts I am unsure if we are already at the end of this wave or we still have a chance to get to the 38% retracement which is the 1000 mark I keep on hinting at.
Wave 5: So the question becomes can we get away with a black eye or will we get our legs broken. One thing we have to our possible advantage is the wave 1 to wave 3 ratio is normally 1.61:1 or only slightly more (on rare occasions up to 2.6:1), our ratio currently is 2.2:1 leaning towards the strong side (wave 1: 1575 - 1257 = 318, wave 3: 1440 - 741 = 699). This could give us a chance to have the final wave shorter as wave 3. So the question is will this be 640 or 480 as the final bottom?
Now you can understand why I have been so bearish since summer 2008 (went 100% cash at white dot). To take this further, apply this pattern to the dot com crash as an example and take a look at wave 5 there.
- My long term bearish outlook
Before we go into our current market conditions lets review what elliot wave theory means when applied to a major bear market. If you do not know what elliot wave theory is look it up on google first to get a better idea. Here is a basic explanation:
Wave 1: while wave 1 is occuring no one expects it to be the first cycle of a major down turn, news and information is still very positive, price targets are still favoring bulls, as prices drop volume does not increase enough to set of alarming indicators.
Wave 2: Corrective of wave 1, with a 61.8% fib retracement, investors may seem bullish again as we are retesting the upper ranges on the retracement.
Wave 3: very bearish sentiment, prices drop quickly with little and short lived retracements, usually strongest wave exceeding wave 1 with a ratio of at least 1.61:1 (up to 2.61:1 possible)
Wave 4: corrective of wave 3 with smaller retracement compared to corrective wave 2, should not exceed 38.2% fib levels, usually sideways trend pattern, difficult to identify start and end of the wave
Wave 5: here is where many technicals differ, some say this is the strongest wave, others say it is weaker then wave 3.
So having this quick recap lets apply some of those theories on our current recession. Let me show you the waves first. Use the graph as a comparison.
Wave 1: during wave 1 many were still very bullish on the market. Look at commodities and technology 12 month price targets. All were still up sky high with forward P/E's of 25+. People were still buying into the "cheap" financials.
Wave 2: we retraced exactly 61%, many investors were very positive and kept their initial long term price targets.
Wave 3: our big crash, huge volume, we had no retracements to speak off while this wave was occuring and dropped substiantially in a short time frame. Very bearish sentiment.
Wave 4 (potentially current wave): retraced 25% thus far (my jan target of 945 I had posted in December). As you can see above its normally a sideways type pattern and hard to detect. We have been trading rather sideways and you can see in my forecasts I am unsure if we are already at the end of this wave or we still have a chance to get to the 38% retracement which is the 1000 mark I keep on hinting at.
Wave 5: So the question becomes can we get away with a black eye or will we get our legs broken. One thing we have to our possible advantage is the wave 1 to wave 3 ratio is normally 1.61:1 or only slightly more (on rare occasions up to 2.6:1), our ratio currently is 2.2:1 leaning towards the strong side (wave 1: 1575 - 1257 = 318, wave 3: 1440 - 741 = 699). This could give us a chance to have the final wave shorter as wave 3. So the question is will this be 640 or 480 as the final bottom?
Now you can understand why I have been so bearish since summer 2008 (went 100% cash at white dot). To take this further, apply this pattern to the dot com crash as an example and take a look at wave 5 there.
There is a possibility that my wave count for wave 3 and 4 is incorrect - in elliot wave theory wave 4 is the most difficult to count correctly from start to finsih and only becomes clear once wave 5 is confirmed. My bullish scenario (updated 2 days ago) ignores the trade action in november when we created the low. I said:
"* we have the exception of our Nov capitulation that created the low. How can we justify this key difference? - we were coming off one of the steepest down turns with VIX at levels never seen before and a fairly quick reversal leading to a rally from 740 towards 900 in just 5 days on extremely high volume. Is that enough to ignore or remove from this analysis? You be the judge."
This same can be applied here. If that is the case here it means we are currently ending wave 3 - this could have occured 2 weeks ago at the 804 low or the more likly scenario can occur next week when we dip into 700's as the market is waiting for Obama to create the new "savior" plan. I do believe on our next visit at the 800 we are breaking it to the downside. If this is to mark the end of wave 3 it should not drop below 765-770 and needs to break back above 800 within less then 2 days. If we are to break below the 765 and AND break the low of 741 it seems the count has been correct as this would indicate the start of wave 5.
My incorrect count here is very possible and would be inline with the wave 1 to wave 2 count and my bullish rally towards the 1000 mark as the corrective wave 4. What do you guys think?
So after all this review we do have to be more careful yet again on the break of the 800. I know it may be confusing and difficult to try to make out where we will head from here - I am in the same boat but I am confident now more then ever that we have covered everything to be ready for the next move. Next weekwill be deciding for all of us and will confirm our wave counts and of course the resulting trade action. Are we entering wave 4 or entering wave 5?
Friday, January 30, 2009
Weekend Special: What has changed?
Lets first review the week. If you have not caught up you may want to read my 2 breakout scenarios posted this month.
1. Mid Term bearish play towards 640
2. Mid Term bullish play towards 1000
Both scenarios still hold true as we have no clear signs of either direction. Personally, I am leaning towards the bullish side for reasons I am explaining below.
Last week I had anticpated a breakout based off our long term falling wedge reversal pattern. The attempt occured just as I had described it as a 3 day scenario, however ended in failure with our reversal on Thursday.
While we are approaching the bottom ranges yet again our volume picks up drastically. This was clearly visible again on Friday this week. Any attempts on the upside are occuring on lower volume and are beaten down again by the bears. So what do we make off this? We continue to have bad news and fundamental concerns within the market place but are not able to break the market down further. Investors may be comfortable with this 800 range as a bottom at least for now.
We ended the week exactly as we started it - something I did not think would occur but this leads to further conclusions we can take. One of the key differences between this week and last week is our divergence on the MACD. We had negative divergence coming into the week and are now at zero. MACD divergence never stays at zero for long.
Our trade channel is getting narrower and narrower and the current pattern is coming to a completion. We all know long term pattners will give us great insight of things to come, especially one that has been building up for almost 4 months.
Now why am I still bullish while we continue to spend the majority of our time on the bottom end range. Take a look at the updated daily graph below for some insight. I have made some more marks at key points. Vertical lines whenever we have zero divergance and a 20 day moving average. Now the interesting thing is the comparison to our January to March 2008 time frame. We are setting up for an exact replica as you can clearly see.
1. Mid Term bearish play towards 640
2. Mid Term bullish play towards 1000
Both scenarios still hold true as we have no clear signs of either direction. Personally, I am leaning towards the bullish side for reasons I am explaining below.
Last week I had anticpated a breakout based off our long term falling wedge reversal pattern. The attempt occured just as I had described it as a 3 day scenario, however ended in failure with our reversal on Thursday.
While we are approaching the bottom ranges yet again our volume picks up drastically. This was clearly visible again on Friday this week. Any attempts on the upside are occuring on lower volume and are beaten down again by the bears. So what do we make off this? We continue to have bad news and fundamental concerns within the market place but are not able to break the market down further. Investors may be comfortable with this 800 range as a bottom at least for now.
We ended the week exactly as we started it - something I did not think would occur but this leads to further conclusions we can take. One of the key differences between this week and last week is our divergence on the MACD. We had negative divergence coming into the week and are now at zero. MACD divergence never stays at zero for long.
Our trade channel is getting narrower and narrower and the current pattern is coming to a completion. We all know long term pattners will give us great insight of things to come, especially one that has been building up for almost 4 months.
Now why am I still bullish while we continue to spend the majority of our time on the bottom end range. Take a look at the updated daily graph below for some insight. I have made some more marks at key points. Vertical lines whenever we have zero divergance and a 20 day moving average. Now the interesting thing is the comparison to our January to March 2008 time frame. We are setting up for an exact replica as you can clearly see.
Review the colored dots with the data.
Red = below dma, negative divergence, setting a low point in the market, recovery off the lows
Blue = reversed breakout above dma, positive divergence
Yellow * = above dma, positive divergence, reversals once we break below dma, uptrending MACD
Violet = below dma, negative divergence, large intraday ranges, test at the dma (wed this week) with a quick reversal down to the low ranges
* we have the exception of our Nov capitulation that created the low. How can we justify this key difference? - we were coming off one of the steepest down turns with VIX at levels never seen before and a fairly quick reversal leading to a rally from 740 towards 900 in just 5 days on extremely high volume. Is that enough to ignore or remove from this analysis? You be the judge.
Indecision in the market place is not easy to trade and you are always in conflict with either taking a quick profit just to see the trend continue strong after you exit or attempting to trade a trend just to see your stop loss take out your position that had strong gains. In hindsight we can easily explain and justify the moves that have occured but when you do not know the next 1 min candlestick it is difficult to make a trade especially in a market place that can snap any second - we have seen how violent those moves can be and they can come at any second. Do not let this month get you discouraged - it won't last and we will be able to trade with a proper trend again soon.
So in summary - we are well prepared to identify our next 8-12 weeks once the market gives us a sign. We have two scenarios coming into next week starting Monday with either one last day spent at our lows and possibly a dip into the 700 range that will quickly reverse as a v-bottom or a weekend surprise with a strong gap open. I for one am excited again to start February with a good understanding of where we will end up this quarter.
Kind of ironic that we closed the week at 8000 on the DOW. Will it be the last 8000+ close this quarter - or will it be the last time we almost dropped below 8000? We will make a turn early next week so be ready.
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