Tuesday, February 9, 2010

Financial Thunderdome Continues...

The market was wild today, giving me a couple "fakeouts" to the downside, but the market kept pushing higher to make new highs. Internals were extremely strong, but volume was very light, as it has been the last few days of rallying. So even though everyone in the market was buying today, there was just a small amount folks participating. Today's sharp rise, especially late in the day, seemed a lot like a C wave. Recently, spikes higher have been met with fierce selling. As a matter of fact, the S&P has only risen 26 points from the bottom in these last 3 days of rallying. For some reason, it feels like it's risen much more. Prior that, the market made much more progress as it declined. This easy down and hard up behavior, combined with the 5 wave drops and choppy low volume rallies, tells us that the larger trend is still down.

But the key question is, when will the rally end? Well if the above count is correct, wave ii of (iii) should end prior reaching 1105. So that's the ultimate breaking point for this count. A rally above that level would probably mean that the drop to Friday's low was a B wave of a "flat correction", leaving us in a wave C to just above 1105 to complete wave (ii). Either way, the market should not break this year's highs, and it should barrel much lower, and very fast. But the above chart shows my preferred count. My target for wave ii to end is around the 61% fibonnacci level at 1081. The market fell about 2 points shy of that level today, so it's possible a top is already in. If not, we may see a test of 1081-1092 later this week to complete wave ii.

With that said, I don't want to get too caught up in the real short term ups and downs. I would be comfortable sitting on a short position with a stop just above 1105, or if I was really aggressive and mentally disciplined, I would simply wait for signs of weakness and keep shorting aggressively against the most recent high. That was a failed strategy today, but with the profit potential of a wave iii of (iii) being so great, someone could get stopped out several times before catching this wave and still make a profit overall. The hard part is having the mental fortitude to take several losses just to make one quick large gain.

Bottom line: look for wave ii to stay beneath 1105 with potential stopping points being 1081-1090, but can top out at any time. A rally above 1105 would mean it's a wave C of (ii) in a flat correction which would end soon anyway.

The GBP/USD has in fact worked its way higher since exiting my short postion at 1.5633 as it currently has a top in at the 1.5750 level. So exiting the short trade at 1.5633 has so far proved to be a wise move. A top may be in right now at 1.5750, but there's little evidence to confirm that. So I still want to get in to catch the next round of selling as I still feel this pair has much further to fall. So I'm moving my "sell stop" order up a little to 1.5555, and if it executes then I want to have a protective buy stop order at 1.5760. My goal is to wait to see if the pair rallies further and shows signs of a top where I can re-enter short at a higher level. If the pair doesn't work higher, then I'm assured I'll still catch the meat of the next decline with my "sell stop" order at 1.5555.


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