Friday, August 19, 2011

Risk of Stock Reversal Increasing

I'm not too interested in reading the internals today since it was an options expiration day which can skew these numbers a bit.  However, considering the fact that there's usually heavy volume on option expiration day, the fact that there were only 1.5 billion shares traded lends itself to a Minor wave 5 outlook that is finishing up most likely.

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The more conservative way of counting the subwaves of Minor wave 5 is above.  I have 5 Minute waves almost complete which will wrap up Minor wave 5 very soon in the process.  I know that these waves are small for Minute waves relative to the prior Minute waves in this decline, but 5th waves often unfold imperfectly from what I've seen, so I'm planning for the most conservative scenario, which is above. 

I've removed most of my short positions to reduce risk.  The market has moved in my favor big enough and fast enough to warrant some profit taking at these levels.  Sure, Minor wave 5 can turn into an extended 5th wave and cascade downward to significantly lower levels.  But at this point that would just be a guess since there's no evidence to support that here, and the risk of a very large Intermediate wave (2) starting at any moment is great.  So the risk/reward for the bears here is not appealing to me.  So I took profits today.

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The other more aggressively bearish outlook is posted above.  In a perfect EWP world, and a world that I wasn't trying to reduce risk on my short positions, this count would be my top choice.  The count shows only a Minuette 5 waves completing here for Minute wave ((i)).  Meaning that after a corrective Minute wave ((ii)) rally, the market will continue much lower to complete all of Minor wave 5.  The possibility that this count may be in play is the reason why I kept a very small short position in place still.  If the structure clears up in the future to make this count a high probability, and the opportunity arises, I might attempt to re-enter on the short side if I can keep risk tight.  But for now, this count is only in the back of my mind as I try to reduce risk in preparation for a big Intermediate wave (2) rally.

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The euro arguably completed a 5 waves down with a sharp corrective rally today.  I didn't label the chart because I don't want it to be misinterpreted that I actually buy into the view that this proposed 5 wave decline is the start of a new downtrend, because I don't.  The daily chart of the euro shows what is clearly a corrective downward move by EWP standards, meaning the next big move is up.  Aside from the series of lower highs in place that keep me from getting long for now, the euro does look overall bullish to me here.  Stocks have sold off drastically the past few weeks yet the euro has held firmly still, partly because gold has been in a blowoff top - or vice versa.  So I don't see how the euro will all of a sudden tumble at the tail end of Intermediate wave (1) in stocks.  Most likely the euro is waiting for Intermediate wave (2) in stocks for it to start declining, or it's going to rally with stocks' Intermediate wave (2), then decline hard with stocks' Intermediate wave (3).  There are too many "ifs" and question marks here for me.  So I'm standing aside for now.

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