Thursday, July 22, 2010

Bears Need to Take out 1065 and 1057

Not much new to add from this morning's post. The bullish potential still remains, but the bulls have not broken above any key levels so the bear stance remains intact, although less likely at this point. The way this market has been see-sawing up and down the past week or so it wouldn't surprise me to see a big down day tomorrow. With that in mind, as a bear I'd like to see the 1065.25 level broken to severely weaken the bullish wave count. A break below 1056.88 would then put the bears back in control in my opinion because at that point the two 5 wave rallies I labeled in this morning's post would create a larger 3 wave rally which would probably be a zig-zag correction. But as long as 1065.25 remains intact, I'd have to slightly favor the bullish case at this point.

One thing to note is that again volume appears light with NYSE volume barely kissing the 13 day moving average. So for the bulls to get me to go long I'd need to see follow-through to the upside tomorrow above 1100 on at least decent volume.

So a break above 1100 on above average volume would get me bullish with the meat of a 3rd of a 3rd wave up possibly underway. A break below 1065.25 would probably get me interested in the short side while a break below 1056.88 would have me aggressively looking for shorting opportunities. Until one of those scenarios occurs soon, I remain neutral in the short term.



Dave427 said...

Todd - Would appreciate your opinion on the effect of program trading on EW patterns. First of all, how much program trading occurs? And, do you see program traders building programs that emulate the herding instinct simply because the program builders are too part of the herd? Or do program traders operate somewhat apart since the programs make the trades, not the person?

Thanks for your posts!

PrincipleAnalysis_Blogspot_Com said...

Hi Dave, I’m not an expert at all on program trading and I’ve heard a wide range of numbers as to how much volume program trading actually accounts for on a given day. But from what I know about it, my opinion is that program trading can throw a bit of a wrench an EW pattern, but only in the short term. EW works best when the waves are created by a large crowd psychologically reacting to the given environment. But when a program is making trades, the wave patterns lose that edge. But markets will correct themselves back to the mean so to speak. So even though a short term spike or move may be caused by a computer program immune to human psychological impulses, there is still a large group of humans out there still able to react to what that program did. And those humans will adjust the market accordingly over time.

Take the “flash crash” for instance. If you look at the decline on a closing basis, it looks much more like a typical impulsive decline than it does on regular intraday charts. In my opinion, this illustrates the “crowd” correcting a short term move based on computer programs and reverting to the mean of the EW structure over the longer term. The intraday charts show the entire 5 wave drop was a bit sloppy, although still impulsive, but the closing basis decline looks much better. If the “flash crash” was just a correction, or a glitch, then the crowds would have shot the market higher right from the bottom, which would have left a 3 wave drop. But instead they corrected the extreme drop a bit, then pushed it to new lows. So despite the short term spike lower from computer programs, the crowd still saw that as the appropriate move and pushed the market lower to complete an impulsive pattern.
So in the short term (1min-1hr time frames), it’s possible for computer programs to cause problems to EW patterns, but over time the crowds will rule and reliable patterns will still be formed. Again, this is just my opinion. Take it for what it’s worth.