Trendline Breaks, More Declines to Come; June 15, 2009

The S&P futures finally broke and closed beneath the ascending trendline established for months as shown above. This is what I've been saying would signal the next significant decline phase. This, combined with the very weak breadth as more than 93% of NYSE stocks traded to the downside and almost 5 1/2 stocks traded down for every 1 stock that traded up. Volume was a bit light but that just opens the door for more sellers out there to come forward and push this market down. All this evidence suggests that the buyers have become exhausted and there really aren't any more out there at these levels.

Expect the market to decline to the 880 futures level at least with last week's highs remaining intact.

Stock Rally Severely Exhausted; June 13, 2009

The stock market rally is severely exhausted. The market cannot push higher over the past week, breadth continues to deteriorate, the small cap and tech indices are showing more weakness than the blue chips suggests people are exiting their "risky" assets, momentum indicators did not confirm the recent high in the stock market and several other indices did not confirm that high in blue chips. Usually when the market closes with NYSE breadth negative and the Nasdaqs and blue chips are mixed up and down it leads to a sharp decline shortly after. Well not only did we have that action occur Friday, but it's happened 3 times in a little more than a week! Again, this fractured non-confirmation failure to push higher is signs of extreme bullish exhaustion.

I still await a strong break of the trendline and ultimately a break of that 5 wave rally on Thursday which I feel was an "ending move". Once this occurs, we can be all but assured that a significant top is in place.

I'm short 65% total strength with the SDS (ETF) and a small bear put spread on the SPY.

EUR/USD Declining Impulsively; June 13, 2009

The hourly EUR/USD chart shows a five wave decline and a three wave WXY rally that halted twice at the fibo retracement level. With a stock market top at hand and gold reversing sharply Friday, I like the odds of shorting the EUR/USD here at 1.4015 with a stop at the beginning of the 5 wave decline at 1.4345.

Still Waiting for Trendline Break, Evidence Building of Significant Top; June 11, 2009

The market did a sharp rally today on the Treasury auction news and then reversed at the close. In my 15min cash S&P chart posted above you can see that the rally starting yesterday and ending today created a 5 wave move. This can often mean an 'ending move', such as a thrust from a triangle, for the entire rally over the past few months. I still await the ascending trendline on the daily S&P futures chart (posted above also) to be broken to the downside and closed beneath it. Until then I cannot be certain a top is in. Right now, things are looking good though. A break of the beginning of the 5 wave advance at 928 in the cash S&P would be the first significant signal that a top was in.

Trendline Holds.....for now; June 10, 2009

The trendline was broken midday but could not close beneath it on the daily charts. This tells me the market is short term bullish until a strong break and close beneath the trendline occurs. Regardless, any rallies should be short lived at this point and capped below the 1000 S&P futures level. The sideways action is "triangle-looking" which means one more sharp rally to a new high before a violent reversal. That will probably occur and take out the weaker bears before this market finally declines like I've been projecting for weeks.

Bottom line: the market is short term bullish as long as it trades above the blue ascending trendline drawn above on the daily S&P futures chart, and any rally should be capped below the 1000 level.

Break and Close Beneath Trendline Needed Soon; June 9, 2009

Above is a daily S&P futures chart that shows an ascending trendline that has been resistance and support several times since November of 2008. Obviously the market thinks this trendline is important. Right now the market is trading above it, but is having a very difficult time with any follow-through to the upside. Strong break and close beneath the trendline this week will signal the next decline phase underway with an immediate target of 875, and possibly much further.

The sideways action in the market is not encouraging for the bears because this might prove to be the 3rd time in a row the market corrects itself by moving sideways instead of down. Half of my full position will stop out at 958 in the S&P futures.

Top in, Monday Should Bring Selloff; June 7, 2009

I'm quite confident a top of significant degree is now in on the stock market. I expect the futures to hold overnight down mildly, or even up slightly into Monday morning's US open. Either of which should bring about a good selling opportunity with a stop loss at Friday's early morning highs.

This market is bearish and should fall Monday, and possible most of the week.

I'm heavily short as of Friday.

Stopped out and Re-entered; June 5, 2009

I was stopped out of my S&P trade right at the open but the market was sold off hard immediately. So I re-entered my short position on the rally later in the morning with a stop at today's highs. Internals look fractured and weak. Monday should bring us a selloff. I'll watch the structure and intensity of the selloff closely to try and determine if it's just a minor pullback, or if it's the beginning of wave 3 down to armageddon.

Some Type of S&P Top is in; June 3, 2009

Today's selloff got my attention. Not only was breadth and internals of the market weak with 85% of NYSE volume to the downside, and well over 400 S&P stocks trading down, but gold, silver, oil and the euro did strong sharp reversals today. This was a massive across the board selloff that also appears to be falling impulsively. Also, today's downturn has created a bearish divergence on the momentum indicators with the most reliable one being the RSI (see above daily S&P futures chart).

Although it seems a bit shallow and premature to call the wave 3 underway, it does appear that a great risk/reward trader exists at current levels on the short side. I added 10% more to my S&P short position with the SDS early in this morning's trading. My stop loss for this additional position is just above today's highs (949 in the futures). As long as I'm not stopped out, I will watch the structure and strength of the decline to determine if it's possible wave 3 is underway now, or if this current set back is just a pause in the wave 2 uptrend. Right now, I'd have to say it's the latter.

Q&A; June 2, 2009

The stock market appears to need at least one more high to complete a five wave advance at a small degree (15min chart). From there, we'll see what type of decline unfolds to determine if wave 3 down has begun, or just another temporary pullback within wave 2 before it grinds higher toward my target area of 1067 S&P futures. While we wait for this correction to unfold, I thought I'd answer a question by a reader:

Is there a timeframe that needs to be met for a P2 wave ? If P1 was 17 months how long would P2 have to be to qualify? Also if you could identify a target on the downside for DOW/S&P as well as a timeframe for P3 to play out that would be helpful. If for example P2 ends this summer and P3 has to be longer in length than P1 does it also have to be longer in terms of time ? If so then would P3 have to be longer than 17 months to the bottom ? Thanks!

First of all I'd like to make a correction. Last post I said wave 3 has to be longer than wave 1. This is not correct according to EWP. According to EWP rules, wave 3 just cannot be the shortest of waves 1 and 5. Usually wave 3 is the longest though.

As for time, it's very speculative and EWP only has "guidelines" for elapsed time, no rules. Ideally, we look for a correct proportion of time in fibonacci sequences relative to the prior wave with the trend. So wave 1 down took 17 months, so the fibonacci time sequences for wave 2 would be approximately:

4 months - July (23.6%)
6.5 months - mid-September (38.3%)
8.5 months - mid-November (50%)
10.50 months - mid-January 2010 (61.8%)

Anything greater than this would be highly questionable and put the wave 3 scenario in jeopardy; especially because the rally has gone so far so fast.

My original analysis pointed toward the 50% time level around November. However the market has rallied so much so fast, and optimism has skyrocketed with it, I have my doubts this market can hold up that long. Also take into account this is a huge degree bear market we're undergoing, and most bear markets unfold fairly quickly. So it should be of no surprise that this market may be unfolding faster than what is typical for EWP patterns. I think the best timeframe to look for a wave 2 top is sometime between July and November of this year. But again, there are no requirements for time under EWP, so wave 2 can top any day. The key to remember is that the larger longer term trend is down, and I am going to align myself with that trend.

The S&P futures topped in 2007 at 1586.75 according to esignal's data. The bottom occurred this year at 665.75. So wave 1 was composed of 921 S&P points. As I said before, wave 3 can be shorter than wave 1, just as long as it's not the shortest of waves 1 and 5. But ideally, wave 3 is the longest. If this is the case, wave 3 would need to be over 921 S&P points. As it stands now (S&P 945), that would take the S&P into the 20s. Again, time is very speculative, but I would guess that wave 3 down would take anywhere from 1 to 2 years. The alternate view has the upcoming massive decline as a wave C instead of a wave 3. In that case, the only requirement would be that wave C come below the extreme of wave A at 665.75. So to sum up, regardless of which count is correct, the upcoming decline will come beneath 665.75 which is almost 300 points, but can end up well below 100. If the latter were to occur, we most likely wouldn't even be able to profit from it all the way to below 100 because the financial system would not be able to withstand such a horrendous decline like that, and the futures, options, and equity markets would probably become dysfuntional, and average retail traders like us will most likely have our profitable positions liquidated. So the key is to catch the early stages of the wave 3 or C down, and then get out when the government starts getting too involved and when financial institutions literally start imploding. I will be closing my positions and moving to cash, T-Bills, and gold accounts at some point. Then, when the market bottoms, it will bring about the buying opportunity of a lifetime and afford all the sage investors an opportunity to get rich in a short period of time.

So the above analysis is the "perfect world" EWP scenario. But rarely do the markets give us such fortunate results. I'm actually targeting the 400s for my profit taking point. It is a prior congestion area decades back, and it seems to be a good area to start closing short positions and hiding my capital in bomb shelters to protect it from disappearing like what will happen to most people's money, unfortunately.

My best analysis suggests wave 2 will top between July and November of this year aorund 1067. Then a devastating fierce wave 3 will ravage the global markets, taking the S&P to at least the 400s sometime in late 2010, and wave 3 should end sometime in 2011. It's a bit too early to get too specific on that.

I'll post any significant developments or if I get fully short. Right now I'm only have short and am selling options against my position.

S&P Approaching MAJOR Top in Wave 2....Be Ready; June 1, 2009

I said in my last post that when a market unfolds too perfectly, it usually is not accurate. This by no means is a pat on the back for myself as I lost money on the trade anyway. The market is exhibiting typical wave 2 characteristics in that:

1) the wave is very sharp and strong; and
2) it's accompanying a social mood that the worst is over and a new bull market has begun.

I had to readjust my daily S&P futures chart to update the projected wave count and path in the coming days. The fact that this rally has only corrected with sideways movements, and small dips tells me that it's quite possible the rally will end sooner than I expected at the end of this year. With the current wave count and sentiment reaching a bullish extreme almost matching that of the bullish extreme met October 2007 when the market toped, it tells me I have to be on high alert for wave 2 to complete and a huge devastating wave 3 down to unfold at any time. Perhaps even by next week! I'm watching closely and will update my blog with any significant changes or important information I obtain. Until then, I expect the market to grind higher toward my target of 1067 in the S&P futures.

Here's a question someone posted to me on the blog that I want to respond to:

Do you think it is possible we are in wave 1 of bull market? Perhaps October crash was wave 3 followed by wave 4 up in Jan and Wave 5 down in March? If you say we are in wave 2 pending wave 3 and wave 3 is longer than wave 1 then we are headed to 100 on the S&P ?

Of course it's possible this is the first wave of a bull market. Nothing is certain. However I think this is a very low probability for several reasons. The most important being that: 1) the rally has been done in overlapping waves that cannot be counted as an impulse wave under EWP which would open the door to a new uptrend starting now; 2) bullish sentiment indicators are almost at the same levels reached at the market top of October 2007, yet today the S&P is over 600 points lower. I can't see a new bull market starting with almost 90% bulls out there and the S&P being only at 950. That's the sign of a major top forming again, not the beginning of S&P 2000; and 3) The EWP I have on the entire bear market decline from October 2007 is a very nice and clear 5 waves down (see "Long Term Stock Market Chart" on the top right side of this blog). With 5 waves down it means that new lows must be achieved to finish the pattern. That 5 waves down has to be either an A wave which means the rally is a B wave, and a C wave will bring us to new lows. Or, the 5 wave decline since October 2007 is a wave 1 which means a wave 3 will come next bringing us to new lows. Either way, the March 2009 lows will be broken, and whether it's a C or 3 wave, both waves are very destructive in their composition according to EWP.

As for the length of wave 3. Yes, you are correct that wave 3 must be longer than wave 1 and it will bring the S&P into the 100s or lower. This is correct, and it is likely to happen with the credit deflation scenario unfolding. When you deal with percentages of declines, not point declines, it will put it into better perspective then. The S&P should be well below 100, and the Dow in the hundreds, by the time this bear market is over. Hard to believe, but that's what the evidence strongly suggests.

S&P Futures Structure Too Perfect??; May 22, 2009

Well the S&P futures have fallen a perfect 5 waves, then rallied in an WXY combination correction that halted right at the 38% fibonacci level before retreated ferociously to the downside at the end of today's trading. One more piece of evidence for the short term bearish case is that in late day trading the S&P cash market made a slight new high just above 895.61 while the S&P futures did not make a new high. As long as this divergence stays in place, the market is immediately bearish.

This is really too perfect and my experience has been that when the market unravels perfectly, be cautious. In the past I've used that to dive hard and heavy into positions and I've been burned a few times. I always have to remember and practice good money management no matter how "perfect" the setup looks. Analyzing and predicting the markets are never a sure thing, they only give us an increased probability when used properly.

I believe the S&P is in a 3rd wave now within an X wave. If so, the decline should accelerate next week in a continuation of yesterday and the very end of today's trading session. And despite the fact the market was up most of the day, declining volume well surpassed up volume on the broader market today, although there were still more advancers to decliners. But this is not consistent with the strong breadth we saw during the major rally phase the past few months. So it appears the major rally phase is weakening substantially and taking a break right now. I expect more selling at least into next week, but possibly much longer.

Updated Daily S&P Futures Chart; May 22, 2009

Above is the daily S&P futures chart and it shows my projected short term movement in the market with a lowered stop loss to 924 and support areas to exit or take profits.

At Least Near Term Decline Unfolding; May 20, 2009

Today brings about a great trading opportunity. The market has been showing signs of weakness because the volume on the upmoves has been declining and breadth keeps flipping sharply to the downside when the market has decline at the end of the past two trading days. Plus, the VIX is looking very "complacent" right now, and the market has been shooting up and down wildly yesterday and today. This all has the signs of at least a short term top of some significance being at hand. If so, strong support should be at 875 and then 824 in the S&P futures and a hard stop can be placed just above the recent highs at 931.

The larger trend is down, and if you look at my daily S&P futures counts on the right side of this blog and in posts below this one you'll see that this decline is probably going to be a wave X or B. A final rally leg should ensue that should act like a bullish vacuum that should suck any remaining doubters or bulls into buying the market. I project that level to be just above 1000 in the S&P. That will be the biggest bull trap of all times and will lead to a catastrophic decline that should take the S&P to at least the 400s, if not lower.

But with the larger trend being down, this rally going almost straight up with no relief, and with a huge catastrophic wave C or 3 down on the horizon, I AM ON HIGH ALERT FOR THE BIG DECLINE PHASE GETTING UNDERWAY. So this decline will be labeled a wave X or B by me until I see evidence to the contrary, i.e. horrible breadth, high volume, and numerous 5 wave declines, etc. But for now, it's just a corrective decline that should eventually lead to higher levels before a major long term top is in.

Currently, my only positions are long the SDS (double short the S&P ETF) and selling call options against it. I have half of the total position I want to take on it at this point.

Big Collapse based on what facts?; May 19, 2009

The title of this post is a question someone posted to this blog. It's an excellent question and I'm glad it was asked. My primary reason for suggesting a big collapse is coming is what EWP tells us. A five wave move, an impulse move, tells us which way the trend at one larger degree is. As you can see from my daily S&P futures chart posted on the right side of this blog, the decline from October 2007 was in a clear 5 waves. With 5 waves down, it means it is most likely either a large wave A of a correction, which means a wave C will take the market beneath the 2009 low before bottoming; or it's a large wave 1 of a 5 wave move and a ferociously devastating wave 3 will break beneath the 2009 low. So either way, according to EWP the market will make a new low in either a large wave C or 3, and both waves are very strong and ferocious in their nature. So according to EWP, a big collapse is coming.

I'm not much of a fundamental guy, but the fundamentals support this as well. More details on this can be obtained at www.elliottwave.com and Bob Prechter. But comes down to credit deflation. The past 30+ years had this economy and the stock market rise on credit, which is fake money. Now credit is drying up and and disappearing so all those values of credit inflated housing and commodities are now being destroyed. This deflationary spiral will not stop while housing continues to crumble and unemployment rises. There's much more to discuss on this issue and I am not an expert on the matter. I just focus on the technicals mainly. But if you'd like more info on it, please visit www.elliottwave.com. They are a great organization with valuable insight and seem to really care about helping the "little guy" out.