Strange Day Today, How do we Weigh the Evidence?

So today was a strange day since I expected buyers to push this market higher into the long weekend on light volume so money managers could inflate their books for an otherwise horrible month for stocks. But that didn't happen obviously. Instead, once the Spain downgrade news hit the floor the market tanked, rebounded a bit which nearly got the NDX to a new high before violently selling off into the close near the lows on the day. The sharp selloffs late in the day ARE in fact characteristic of what we can expect from a wave (iii) of 3 of [3] or C. Plus the wave structure counts complete very easily at this juncture with a WXY double zig-zag correction composing wave (ii). Whether it complete or not, you can easily see that this rally looks very labored, and is not unfolding impulsively. So I have high confidence that this rally starting this week is just a correction.

With that said, there are a few problems concluding with high confidence that wave (ii) is complete:

1) Today was the end of a horrible month for stocks, so perhaps anyone who made a little gain on this recent wave (ii) rally would want to lock those gains in for the month of May on their books. This would result in another buying spree early next week when the new month starts.

2) There's a 3 day weekend and investors are still spooked, and with the Spain news hitting the wires late in the day, no one wanted to be caught fully long on a 3 day weekend where more news can come out and wipe people out next week. This is also evidenced by the VIX which surged 8% on the day, suggesting that investors are still nervous and buying put options to protect positions over the weekend. But if nothing happens over the 3 day weekend, it may mean the buying spree continues next week into at least the 1105-1120 range I cited yesterday.

3) The market declined in a series of 3 wave drops this afternoon, suggesting this is just a correction. I looked at some of the other main indices to try and see if any made a new high, which would create a divergence and therefore explain why the S&P and Dow did not make new highs after their corrective looking decline. But only the Nasdaq 100 came close to making a new high, falling less than a point short of that new high. It's possible to count the decline as a "leading diagonal", but that is unlikely to be the structure that kicks of a wave 3 at multiple degrees.

4) Despite the Friday before a holiday weekend, volume was fairly strong considering the circumstances. So how does that factor in? Unfortunately I'm not sure, but I thought it was interesting that there was some volume on the board today.

Unfortunately there are too many "X factors" and inconsistencies in the overall outlook at this point to conclude with high certainty that wave (ii) has ended. But we should know soon enough on Tuesday when trading resumes. A wave (iii) of 3 of [3] or C should be unmistakeable in structure as it should practically be a straight line down. Anything short of that would most likely mean this was just the start of a mild correction before we make new highs into the 1105-1120 zone I mentioned yesterday. It would take a break of 1066 in the S&P cash index to significantly strengthen the evidence that wave (iii) of 3 of [3] or C is underway. Until then, I'll expect the market to climb higher where I'll add to my short positions on the way up with my stops placed just above 1174.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Wave (ii) Continues

The above chart is of the daily S&P cash index. It shows how simple candlesticks can tell us what the crowd is doing. Tuesday the bears pushed the market down heavy, but the bulls sharply reversed that, creating a bullish reversal candlestick. After a small setback yesterday, the bulls regained firm control of the market today with about 3% gains across the board. Does it feel like a wave 2 yet? I'd sure say so. This wave 2 should alleviate the large amount of pessimism and panic that wave (i) of 3 of [3] or C created and get those cartwheeling blindly optimistic bulls back on CNBC talking about "great values" again.

Also notice on the above chart that strength is still showing in the candlestick formations. After a big reversal day Tuesday, today the market closed up big on its highs. This suggests we have a bit further to go for wave (ii) to end.




So far, I'm counting wave (ii) as a double zig-zag. It can always morph into a triple zig-zag, but I'll make the market prove that to me. The market closed above 1100 today so I'm already dipping my toe into the short side again with a stop just above 1174. The market has strong resistance to break through in the 1105-1120 range due to fibonacci retracement levels, and prior congestion areas. There's also an open chart gap at 1115 that will probably be filled before wave (ii) ends, so I'll be watching that level carefully.

So right now, it appears that wave (ii) is going to push higher and at least get into the solid resistance range of 1105-1120 quite soon. The action of the market around that area may help us determine how mature wave (ii) is.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Wave (ii) Has Two Equal Interpretations

The market rallied in the morning but had no follow-through, then reversed sharply into the close. Although the reversal has only created 3 waves from today's high, it definitely has the possibility of morphing into a larger 5 wave impulsive decline. Above are the internals that were flipped from very strongly bullish, to closing the day practically flat.



BEARISH COUNT




The above count suggests that wave (ii) is already complete after getting to the prior 4th wave area of 1090. This means that wave (iii) of 3 of [3] or C is now underway. There should no mistake about this wave as it should be practically a straight line down. Anything short of that type of behavior tomorrow would make this count highly suspect. The opportunity here is great for the bears with a great shorting opportunity for huge profits and minimal risk as stops can be placed just above today's highs. So the key to determining if this count is correct is if today's highs remain intact, and if the market undergoes absolutely fierce selling very soon. If not, then the short term bullish outlook below will be the most likely count.


BULLISH COUNT




The fact that the internals of the market still closed somewhat flat despite the big down move at the close makes me think this short term bullish count is also a strong possibility as well. This count also supports the time element associated with wave (ii) compared to wave (i). Since wave (ii) would have completed after about 1 1/2 days of trading for the bearish scenario mentioned earlier to occur, it weakens its probability a little bit. But since this is a wave 3 of [3] or C we're in now, that type of short rallying is quite possible. Regardless, the above short term bullish count is possible as well, and it will become my top count if the market doesn't tank hard tomorrow. This would suggest that wave (ii) is still underway, and after wave X bottoms, another 3 wave ABC rally will occur above today's highs, most likely well into the 1100s.

So there you have it. If the market just absolutely tanks tomorrow, then the bearish count first mentioned is the most likely scenario. But if the market doesn't tank hard tomorrow, then this bullish count will get priority.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Wave (ii) of 3 of [3] or C is Underway

The market surged lower in wave v of (i) early this morning with extremely weak internals making me think that possibly my primary count might be wrong and that we're in some degree of 3rd wave. With that in mind, I was looking for continuation to the downside with the same internals and strong volume the rest of the day in order to confirm that hunch. The opposite happened though. There was absolutely no follow through after this morning's drop and the market spent all day working higher with increasingly bullish internals and strong volume. So the primary count I listed yesterday remains on track. Wave (i) has completed and now a wave (ii) rally is underway. The first target is the prior wave 'iv' area around 1090. But since it's a second wave it probably will be a bit deeper than that. So I'm looking at the 1115 level for perhaps a better stopping point. We'll get a better idea of when this thing may top as the structure unfolds.

The key level for the bears is 1174. As long as that remains intact, I see this current rally as an excellent opportunity to establish, or add, short positions to catch a wave (iii) of 3 of [3] or C, which would of course be a massively fast and strong decline. But the market must stay below 1174, otherwise it will look more like a 3 wave decline from the highs on the year which suggests the market will continue on higher from there to make more new highs.





Above is a daily chart showing the S&P's reversal today that created a bullish reversal candlestick. There has been a lot of support at this level over the past few months as you can see. But what's important is that for the first time, the S&P broke the series of higher lows it's maintained since the March 2009 low. Outside of using EWP, that's one of the first signs that a trend is broken. So if this wave (ii) rally is capped below 1074 and then reverses to break today's lows in the future, it will be yet another great indicator that will strongly bolster the view that the big wave [3] or C is underway. But in the short term, the wave count and the above daily candlestick, have the market appearing to be in rally mode for a little while.





And lastly, above is the count no one wants to talk about, or think about. Above is the very bullish possible alternate count. As long as the market stays below 1174, then this count is not likely. There is just too much technical evidence that the larger uptrend from the March 2009 lows has exhausted so this count has no merit unless the market can prove that it does. It will only prove it has merit if it can get the S&P above 1174.

On a psychological note: I noticed this morning as the futures were down heavy that there were a lot of doom and gloomers on CNBC. This normally gives me pause and has me thinking about covering some or all of my shorts. But because we might be in a large wave [3], I know that we may get that kind of psychology through a lot of the move down, especially when we reach the "point of recognition" which will be at a wave 3 at mutliple degrees. But today that hunch proved right as the market was just too oversold, and the news and mood just too negative to sustain further losses. This wave '(ii)' rally will have to alleviate that doom and gloom mood before wave '(iii)' can start. But what's interesting is that I'm already seeing signs of it today. Carter Worth on CNBC already told people to start buying and that support has been reached, and other folks are "buying the dip" and suggesting we're in a range now. Once we get toward the wave '(ii)' top we should see most people on financial news talking again about all the stocks they're buying and focusing again on the so called "Recovery", without much regard for the downside risk. Then we'll know that wave '(ii)' is in it's last throws. So be on the lookout for the bulls to regain confidence and get blindly optimistic again in the financial media. That will be another que to start getting short again, in my opinion.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Is Today's Decline a 5th Wave as Forecast?

The market continued lower this morning, right on track with my two top counts posted yesterday, although the internal weakness of this market suggests the alternate count for a "flat correction" is most likely not valid anymore. The 2nd alternate (bullish) has been completely eliminated. The primary count suggests this current decline today is wave 'v' of '(i)'. But looking at the internals of the market I'm not so sure of that anymore. As you can see above, the NYSE has 92% of its stocks trading to the downside, 93.7% of volume to the downside, and only 14 stocks in the S&P 500 trading higher today. This is a very weak market, across the board selling, with the bears firmly in control. This is not typical of a 5th wave which should have more moderate internals that diverge from the very weak internals of wave 'iii'. Today's internals are more like a 3rd wave. It's POSSIBLE that what I have labeled as wave 'iv' is actually a wave 'ii' and we're in wave 'iii' right now. So that's something to consider.

The action of the market later today and into the close will be important. If the market can rally back strongly and improve the above internals on solid volume then it's quite likely today's decline was in fact wave 'v' as charted above, and that a fairly large wave '(ii)' rally will be underway soon. If the market closes on, or near, its lows on the day then I might have to rework the count to make it much more aggressively bearish in the short term.

More later.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Market Tried Popping, then Dropped

Primary Wave Count




The market dropped early in the morning but spent most of the day rallying after that which flipped a triple digit Dow loss into a gain by late morning. But in the last half hour of trading, the bears came roaring in and pushed this market down. The rally today was extremely weak as you can see it looks like an ending diagonal-type structure, and the internals on the move higher were nothing to get excited about. The last half hour though destroyed the bulls' hopes and the internals quickly went quite negative into the close as the market closed on the lows and took back all of Friday's gains. Also keep in mind that Friday's crazy late day rally and huge volume could easily be due to options expiration occurring that day, and that Mondays have been very bullish the past several months. So today's feeble push higher and reversal to close on the lows speaks loudly as to the strength of the downtrend, and that the bulls are tired and getting smaller in numbers.

There are three ways to view the current short term structure in my opinion and I have them listed in priority of likelihood. Please click here to view the larger degree wave count in yesterday's post. The above chart is a closeup S&P chart of the past 3 trading days. It's possible to count the correction complete today with wave C of 'iv' being an ending diagonal, but today did not exceed wave the wave 'a' high so it's a bit suspect. However if wave C is an ending diagonal, then it implies that the rally was extremely weak, and it would explain why it couldn't muster up a new high to begin with. So it does remain quite possible. Plus, the intensity and speed of the selling into the close does look and feel like the larger downtrend has resumed. Under this count, we should see continued selling tomorrow to complete wave 'v' of '(i)' that will go to below 1055.90. A break above 1090.16 would negate this count, while a break below 1070.31 would increase this count's likelihood.



First Alternate Count




The above count is my alternate count showing that a "flat correction" is underway. This is because wave 'a' is composed of three waves up, and that today's high did not exceed the wave 'a' high, suggesting that perhaps there's more upside to go for wave 'iv'. If this count is correct, we should see the S&P break below 1055.90 where it should soon reverse and rally sharply in a wave 'C' to complete wave 'iv' just above 1090.16.

So both counts suggest weakness to new lows in the very short term. In order to discern between the two counts I'll look at the internals and wave structure. Extremely bearish internals combined with clear 5 wave patterns would have me conclude that wave 'v' is underway. Seeing as that 5th wave can be extended waves, and that the current wave 'iii' is not too long for a wave 3, it's possible that wave 'v' could really shoot to much much lower levels. Any lack of the above mentioned evidence would keep me on guard for the flat correction scenario and a sharp reversal after a new low beneath 1055.90.


Second Alternate Count




Lastly, here's my third most likely count, a bullish count. This would have been my first alternate count if it weren't for the fact that today's late day selling came with about 2 S&P points of the 1070.31 level that will negate the entire count. And seeing as that the momentum to the downside was increasing at the end of the day, it's quite likely the market will have a weaker open tomorrow morning that will break below 1070.31, negating this count. Plus, the wave 'ii.' of C correction is extremely deep here, and although possible, it's quite unlikely. Also, waves 'i.' and 'ii.' are quite long in time and price compared to the wave 'a' subwaves, so this count doesn't have EWP's "right look" either. But a sharp surge higher tomorrow on strong internals will put this count right up front since it's still possible.

So there you have my three top counts. I think it's important to keep the bigger picture in focus while trying to maneuver in and out of these short term moves which analysis of them is very speculative. The bigger picture suggests we are in a major declining phase in a wave (i) of 3 of [3] or C. I'd only be looking for selling opportunities and keep risk controlled.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Monday Pop, then a Drop

It's been an extremely busy week for me and I'll finally be back to posting the usual posts in a more timely manner starting Monday.

Friday was a wild day and had monster volume with the Dow closing up triple digits. On the surface it looks like the bulls put in a bottom and might be back in control. But Friday was options expiration, so the big volume number is probably just attributed to that instead of a rush of bulls coming into the market. And the big triple digit Dow rally came in the last 30 minutes of trading, more in line with options expiration, or short covering into the weekend, rather than a big bullish move also. The late day rally also lines up well with the current wave count above. It shows wave 'iii' ended and now at least an ABC rally for wave 'iv' is now underway, if it didn't already finish on Friday. Despite that the futures are down right now in overnight trading (9pm PST), I feel Friday's late day rally will continue on into Monday as well, especially since Mondays have been bullish days for the past few months anyway. But the rally should be capped at 1115 in the S&P cash index since that's where wave 'i' ends, and more heavy selling to new lows should occur soon. If 1115 is broken, then the wave structure I have above is wrong, and the market is probably just subdividing lower which would actually suggest even more aggressively bearish moves to the downside. Only a break above 1174 would severely weaken the short term bearish case. So as long as 1174 remains intact, I'll be looking at counting the market from only a bearish perspective. Any rally tomorrow that remains below 1115 might be a good opportunity for the very aggressive bears to get short and put stops just above 1115.

So the key level for the above count to remain on track is 1115, and the key level for the overall short term bearish case remains at 1174.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.