Tuesday, June 15, 2010

Waves Relabeled, Bears Have Work to do Now

Yesterday I asked if we would get the follow-through to the end of day selloff that was a nice setup for wave (iii) of 3 of [3] or C. We got our answer quite early this morning. Above is a daily chart of the S&P cash index showing the all talked about 200 day moving average. The break below it was supposed to send the market down off a cliff. This didn't happen. The market then unsuccessfully tried to break above it 3 different times until finally today it broke above it, and closed well above it. So now the market is headed to the moon right? Just as the CNBC chatterers said armageddon would happen when the 200 day MA was broken to the downside, they can also be wrong about the significance of breaking and closing above it. I don't put much weight in moving averages, other than they might become self-fulfilling prophecies since a lot of folks do follow this very basic indicator. What would be extremely bearish though is if the market breaks and closes below it in the next few days. And looking at the count below, it's possible.

I reworked my wave count in accordance with the action the market is giving us. My last count has us in a wave (ii) of 3. That wave 3 should be quite fast and ferocious, especially because itself is part of a larger wave [3] most likely. The market has been chugging around and grinding higher way too long and way too much for this to be likely. So I eliminated it from contention. So the above count is possible. I didn't put this count as my primary count because it is very awkward in the way the degrees of waves subdivide. Wave 4 is very sharp and much much larger and longer than wave 2, which is odd. It just doesn't look right. But it violates no rules, and is still possible. With volume still light, and nothing really changed in the US or global financial landscape in my view, I don't see a reason for the bulls to be so bold on this rally.

Today's rally did make progress for the bulls though. They blew out the 200 day MA which may, in the short term, get some other bulls to jump in now and accelerate the buying from here. They held the S&P 1040 level after a couple attempts by the bears to break below it. And there are a few bullish reversal candles in place reminiscent to the last couple corrections we've had that led to new yearly highs.

So the bearish case has been weakened today, and the bullish case strengthened indeed. But the majority of evidence still goes to the bears in my view. So after today's break of yesterday's highs I only exited half of my short term short position. The market can turn down sharply in wave 3 at any minute, but I don't see any signs of that happening yet, and I don't expect to see any signs either - it should be a surprise. But by exiting some of my shorts I can have the freedom to add on strength, or jump back in on weakness when I feel a top is in, or almost in. A close beneath the 200 MA would be a good start for the bears.



Anonymous said...

Thanks for the update, I've been wracking my brain trying to make sense of this; it looks like we're in agreement, personally I'm looking to short S&P500 at around 1120.


Dave427 said...

Todd - Can you shed a little light on the psychology behind gap filling? Appears yesterday the S&P filled the open gap at 1115 from late May. Do you see gap filling as a conscious behavior, or something else? Do investors keep track of prior open gaps and work to fill them (this doesn't make sense to me if the gap is a year or so old).

Todd said...

Hi Dave,

I tried doing some research on gaps and their psychology but didn't find much of anything useful. I couldn't find anything of value in Prechter's book either, unless I'm missing something. Gaps are quite an unusual phenomenon in like you said how they tend to act as magnets that want to get filled. As to the "why" in a psychological sense, I honestly don't know.

Sorry I couldn't be of help here.