Friday, November 28, 2008

S&P Big Picture; Nov. 28, 2008

I just thought I'd post a "big picture" chart of the S&P. As you can see we're in for some very choppy and sloppy trading over the next few months until wave (5) of [1] bottoms. I see this as a good range trading opportunity, i.e. always have short and long positions on and sell into rallies and buy into declines. To do this I will own call options on the major indices and own double inverse ETFs shorting the major indices. When the market rises and falls I will take profits accordingly. The key thing to remember is that this decline is not over and that we'll make one more new low before we establish a major bottom and rally for months. Once wave [1] bottoms, most likely sometime at the beginning of next year, we will undergo a huge wave [2] rally that will last most of 2009 and the news and psychology will be overwhelmingly bullish. I can guess that this optimism will be due to the Obama hype that he will save the world. Wave 2's tend to be very strong and deep rallies so this will be a great buying opportunity. But until we make new lows from this year, the bias is still to the downside.

As for the short term, the rally continues to float higher with weakening momentum. I continue to short into the rally and will continue to do so until a major selloff occurs to relieve the bearish divergence in the momentum indicators. Right now, the more it rallies, the more it pulls back on the rubber band that will lead to a huge snap back decline. I think with the beginning of a new month coming next week, and black Friday sales out of the way, it opens the door for a large pop rally in to around 950 in the S&P possibly before it rolls over and sells off massively. Again, my short term target for the S&P is the 800 area to fill a small open chart gap. That seems like a good place to take a lot of profits on my short positions.

To sum up the short term: prepare for some more rallying to possibly the 950 level next week. But it will soon lead to a big selloff to at least the 800 area shortly after that.

Gold About to Fall; Nov. 28, 2008

I just wanted to post a gold chart because I've built heavy short positions the metal over the past few weeks. It appears to have made a strong 3 wave rally and is currently in a consolidative pattern similar to a triangle. This appears to be a 4th wave. So I'm expecting one more pop to a new high around the $840 level which is the 61% fibo level of the entire decline in Oct. From there, gold will decline to a new low on the year. My target is $650 which is about 20% lower from current levels.

Wednesday, November 26, 2008

Alternate Scenario, but Same Ultimate Result; Nov. 26, 2008

The market dipped at the open today but was immediately bought up and is now trading in the positive. The Nasdaqs seem to be leading the way up now (contrary to yesterday), and have made new highs on the week. The Dow and S&P have not though which is very short term bearish until they do. NYSE breadth is still fairly strong telling me there's still buying demand in the market. Watching financial TV and reading financial articles there appears to be no shortage of analysts who have an indicator calling a bottom in the stock market. Many seem to be rushing in to buy so that they don't miss the "deals of the century". But after Friday and Monday's massive surge, the market has had no follow through and has struggled to maintain any gains. This accompanied with the weakening momentum, tell me the rally is severely weakening and at least a good solid correction is warranted. The key is recognizing the turning point.

Above I made a chart with an alternate view of what will unfold in the coming week or so compared to my primary most favored count in the prior post. If this week's highs are broken in the Dow and S&P, then the chart above will become my primary choice. The reason I'm opening the door to some more short term bullish movement is due to the following:

1) due to the holiday there is light volume so a small amount of buyers can shoot his market higher, and with NYSE breadth bullish, it shows that the bulls are in control right now.

2) the structure in the chart above looks extremely similar to the last big rally we had earlier in the month. The market shot up to one more new high before selling off again to new lows. So new highs on the week are possible.

3) NYSE breadth is still strong and until sellers come back in the market, it will probably continue to drift higher.

4) So many people think a bottom is in it's ridiculous. There is so much hope that this is finally "it" and it's time to buy in preparation for Dow 30,000 in the coming years. This hope is lifting the market..........for now.

But regardless if the above scenario is unfolding or the one below in the prior post is unfolding, the end result is the same; a big selloff to at least the S&P 800 area in the coming week or so. So new highs and rallies should be sold into in preparation for that.

Tuesday, November 25, 2008

Big Sell Off Coming Very Soon; Nov. 25, 2008

The market showed huge signs of exhaustion all day today. The market opening higher this morning as a true gift. It was like the S&P was yelling at me through my computer, "SELL ME!! SELL ME!!" So I did. In the futures, the S&P made a new high but the Dow didn't, creating a bearish divergence. Plus, carry trade currencies were weaker this morning despite the stock market's apparent strength. This was all bearish and told me the rally into the open was bogus. The market sold off right after the open and didn't recover until the last 30 minutes of trading where it failed to make a new high on the day. Again, this shows exhaustion of the bulls as they are really struggling to inch the market higher now whereas before it was so easy. On top of that, breadth declined significantly from the past two trading days, and the Nasdaqs closed significantly lower than the S&P and Dow. The Nasdaqs have riskier tech stocks and the fact that they were so much weaker today tells me that people were selling their riskier assets and taking profits. The Dow and S&P should follow soon, as they usually do.

The above chart shows the elliott wave count I have. Tomorrow, or very soon, we should undergo a strong decline in a wave C. My target for the S&P is the 800 area as there is a small chart gap that will probably want to be closed. The one thing that can screw up a perfectly good wave count and technical setup is a holiday with light trading volume. Tomorrow and Friday should be met with light volume meaning just a few traders will be around and they can shoot the market all over the place. This can benefit the bulls or bears. But the setup I have now shows that the bears will be the benefactor of this. Regardless of what happens this week, the rally is exhausting and momentum indicators continue to show bearish divergence and are now crossing down on the bigger time frames which all tells me that we are in for a big decline soon. If the market manages a new high above today's, I will short again, and continue shorting until a big selloff relieves this overbought condition and bearish divergence on the momentum indicators. I predict tomorrow will be a big down today, and quite possibly Friday as well as just a few amount of traders shoot this market down as they take profits at the end of the month.

Monday, November 24, 2008

Momentum Indicators Show Severe Weakness; Nov. 24, 2008

After observing the 15min. S&P futures charts I see a severe divergence already building into the rally From late Friday into today. Observe the above 3 charts which have various momentum indicators on them. Notice that on all 3, the price of the S&P futures rises (see ascending blue line) yet the momentum indicators fall (see descending blue line). Most importantly, the RSI indicator (red) is showing a severe bearish divergence as well. Often times when a rally or selloff moves very far very fast, divergence occurs and therefore calls for a healthy correction before perhaps continuing. This severe bearish divergence on all 3 momentum indicators, especially the RSI, tells me we are in for a very strong correction soon.

This does not change the fact that a multi-week bottom is probably in and a major rally phase is underway. All it means is that this severe weakness can be used to close existing short positions and/or establish long positions. But these charts tell me a big selloff, whether it be a correction or a continuation of trend, is coming soon.

Rally Structure Turning Very Bullish; Nov. 24, 2008

The rally continued all day and has now traced out a clear 5 wave pattern starting from Friday's lows (see wave count on above chart). This tells us that the new short term trend is now up. This, combined with the very strong NYSE breadth today warns that a near term bottom may be in for the year, and a multi-month rally phase is underway. With 5 waves up now, and bearish divergence on the RSI (see bold blue lines on above chart), it tell us that at least a correction is coming. Not to mention we've rallied over 900 Dow points in 2 days. The key will be to observe the structure of the decline once this rally is over. If it looks corrective, then we'll look to exit short positions and flip to a more bullish bias. One area I'm looking at to do this is an open chart gap in the S&P around the 800 area. I feel any correction should at least close this gap. So that will be my short term target to close some short positions and perhaps start establishing long positions.

To emphasize, this is only short term bullish movement that should only last a few weeks, or into the beginning of next year. The larger longer term trend remains down. So I'm not a long term bull now, just being very cautiously bearish trying to make a little money on short term rallies.

Tomorrow should be a very telling day of where we're headed in the next few weeks.

Not Buying the Rally...Yet; Nov 24, 2008

The rally from Friday and into this morning was unexpected as far as strength and length. As you can see from the above 15min S&P chart, it's a straight line up. That won't continue, and it's gone up too much too fast to buy into at this point. The elliott wave structure calls for at least one more new low, I project to the 710 area in the S&P before a significant bottom forms. However the length and strength of this rally is not something to blow off, especially considering we've profited so much on the short side up to this point and we know a bottom is forming. Caution is warranted. Whether a bottom has been formed or not, once this rally gets some pullback I will be buying more S&P ETF call options and selling my short S&P ETF positions to prepare for the big rally that will come soon.

NYSE breadth today is very strong, with advancers outpacing decliners by 7-1 and 93.5% of all volume to the upside. This tells me that no sellers are in the market today and heavy buying demand is in play and will probably last all day unless some huge selling power gets ignited somehow. I do feel that it's just that the sellers became exhausted last week after pushing the market down 13% in two days and now the bottom fishing crowd has come in to dominate the day. Again, supposedly this rally is based on a government official appointed by Obama. What?! And the Citibank bailout. And we know how well all the previous bailouts were recieved in the market. This does not seem bullish to me. It seems again like a "hope" rally, in that everyone "hopes" the bottom is in and they don't want to miss the big move.

Bottom line: I still feel we have new lows to achieve in this market before a major multi-month rally ensues, but seeing as that we're so close to that happening, any weakness from here on out I will be moving my bias to the long side.