Thursday, June 25, 2009
Needless to say, today's rally was a complete surprise. I still do not fully understand what all the excitement was about. I do know that volume was not that strong and NYSE breadth was moderately impressive, but not nearly as strong as one would think it would be after such a strong rally. Consumer discretionary names led the market higher, along with technology again. The sharp rally caused me to close by bear put spread positon on the SPY at a $1.04 profit per contract. Right now we have only 3 waves down from the highs put in last week, and the two downward waves are counted clearly as 5 wave moves. As of now, this could be just a zig-zag correction that has completed, and just a few S&P futures points shy of my 880 target I originally set out with. It's quite possible that today's action is the start of the next bullish leg that moves this market to new highs, or at least attempts to do so. With that in mind, caution is warranted, and I do not want to let good profitable trades turn into bad ones. A break of the wave B high of 923.25 in the S&P futures would put the immediate bearish count at severe risk because it wouuld confirm just a 3 wave move downward from last weeks highs. A 3 wave move is a correction, and therefore new highs on the year will be achieved. So I want to stop out of at least half my position on a break of 923.25 in the S&P futures.
I will close my remaining futures positions and the extra short ETF positions I picked up along the decline if the S&P futures break 923.25. I will maintain my covered call position on the SDS as that is a long term income yielding position.
The market rallied into the Fed announcement but then sold off in the afternoon creating a nice bearish reversal day. Then the futures rallied to new highs in the Asian session overnight but then sold off once again in the European session and into this morning's US session. The selloff broke the low of wave X, labeled in the chart above. This overlapping nature of waves tells us that the rally is clearly corrective and that new lows on the week will be achieved. My wave count suggests that the market just completed a "combination" correction according to EWP which composed wave 2. If correct, it means a wave 3 within wave C is getting underway in the very near future. This of course means a massive selloff is on the horizon. I'm positioned accordingly with my short S&P mini futures contracts, bear put option spread on the SPY, and a covered call strategy on the SDS.
Tuesday, June 23, 2009
The market did nothing today, probably a "wait-and-see" approach to the Federal Reserve meeting conclusion and public announcement coming out tomorrow late morning (PST). There are various ways to interpret the short term wave structure and outlook but I don't want to get too caught up in the minor ups and downs in the market because the important point for trading is that the larger trend appears to be firmly down still. I think the 880 S&P futures level might offer a good support level, although the wave structure suggests that this level might get blown away soon.
Today's sideways action can be interpreted as a triangle in the S&P and the Nasdaq composite. Triangles only occur in 4th waves and B waves. The current market conditions suggest a B wave which should be followed by a sharp thrust upward in a C wave. But triangle thrusts are terminal, or finishing, moves. So that rally will be quickly reversed and the downtrend will resume. The other scenario had today's sideways action as an actual correction where the small 5th wave labeled on the 2 hour S&P futures chart above is extending, or it's a wave 3 within C.
All of the 3 scenarios eventually lead to lower levels, and 2 of the 3 lead to sharp big moves to the downside. So I remain heavily short, ready for a brief sharp rally where I can add to those short positions.
I'm currently short Sept. S&P mini contracts, have a bear put option spread on the SPY, and a covered call option position on the SDS.
Monday, June 22, 2009
If you shorted the S&P futures at the top (952) where I thought we had a nice reversal and a high probability of a top in place then you'd be in the profit $3,200 per contract right now! I personally put in a sell stop at 919 so I'm currently $1,550 in the profit per contract right now on top of my current ETF and bear spread option positions. I've eliminated over 4 weeks of losses in only 6 trading days, and more profits should come for the shorts in the near term from what I can see. As I said in my previous post on the cash S&P index, the selloff was broad-based and very strong, no bulls were really in the market and with 5 wave declines and choppy rallies accompanying that it's quite clear the bears are in full control.
Wave structure suggests we're probably in a 5th wave of smaller degree so a near term bounce may come soon. With my projected target area of 880 only 10 points away, I'm planning on a further decline tomorrow morning to that 880 level where we may see a corrective rally take place. So I will be taking some more profits off the table if the market opens down 5 or more S&P points tomorrow in preparation of that bounce. But the rally should be short lived (depending on its structure) and it will just give me another opportunity to reshort the market again. I do feel we have further declines to go and this could very well be the beginning of the major wave 3 down I've been calling for that sends us into a full blown depression. So I'm on high alert for signs that may be occuring. With that in mind, I don't want to get too cute buying and selling too large of positions on short term moves. The larger trend is clearly down at this point so I want the majority of my position short for the longer term. I am merely playing little pieces of my portfolio on short term moves.
I remain short the Septermber S&P futures, a bear spread on the SPY, and covered call options strategy on the SDS. So I am still heavily short the S&P at this point.
The markets continue to fall as planned. Above is a 15min cash S&P chart showing that the market is falling in 5 waves (impulsively) and rallying choppy corrective waves. Breadth and internal strength of the market continue to be extremely weak telling us that the bulls are exhausted and the bears have full control. Technicall, a small degree 5 wave decline appears to be completing as shown above so caution is warranted for getting aggressively short term bearish at this point. However, this was an across the board very strong selloff which tells me most likely we'll see further declines in the very near future before a meaningful bounce. I closed a very small short S&P position today because I feel I just have to take at least some profits when the market falls this much in a day. I will add that position back if the market rallies tomorrow. But as of now, it appears the market will fall further in the coming days or weeks, and I'm on full alert to see if the big wave 3 down is underway or not. Right now it's inconclusive.
Last post on June 18 I projected a sharp rally to suck in the last bulls and finish a 3 wave corrective rally and resume the decline. My target was around 930 cash for the short term rally to end and it made it to the 927 before topping. Then a small 5 wave drop occured Friday and now this morning, right on time, the market is selling off sharply. My S&P cash index target is 880 for the immediate short term, but this market possibly has much much more bearish potential. So I won't be anxious to completely liquidate my positions. The break of 900 in the S&P today caused me to add to my short positions and a cash index close today will cause me to probably add to my short futures position.
The market is weak and can fall much further in the near future. But 880 is the first wall to break down. A strong break in that level can result in a an acceleration to the 800 level.
By being patient and sticking with my analysis and not letting emotion take over my trading strategy, I've gained back over 4 weeks of losses in just 6 trading days as the market stands now.