Market at Crossroads; August 20, 2009

The lack of follow through of the selloff from Monday puts the immediate bearish scenario in jeopardy obviously. It's possible the final downward correction is over in wave B (of Y) and now wave C of Y is now underway to finish off wave 2. A break of the S&P futures 1016 level will bring this bullish scenario to the forefront. But if 1016 is broken, most likely it means that the final rallly leg in wave 2 is underway, and the market will reverse sharply in wave 3 down to new lows for the year.

High risk assets are already lagging behind, which usually happens at major market tops. Silver formed a head and shoulders pattern and is declining 5 waves and no where near new highs like the US indices are, the euro is in the same position as silver as it is having trouble rallying with the US stock indices, and probably most importantly the Chinese index is selling off sharply almost making it into bear market territory in a very short period of time. This risk aversion to risky assets occurs at market tops, not at the beginning of bull markets. The US indices may rally higher taking the S&P cash into the 1100 area (my target has always been 1067) but I expect many assets to lag and not make those highs such as silver, the euro, the Chinese and numerous global indices.

If the market barrels through 1016 in the S&P futures tomorrow, it most likely means wave 3 is coming very soon, like within a couple weeks!

Nothing Changed; August 18, 2009

Today's rally changes nothing. As long as last week's highs remain intact, the immediately bearish outlook stands. The market should decline in the coming days, and possibly much more. I remain short with my very long dated (2011) put options but sold my only short term options (August 09 expiration) yesterday on the big selloff. I have not added any positions yet but will post it here when I do.

Bottom line: the market is bearish in the short term.

August 17, 2009; Pullback Underway as Expected but Wave 3 Call Needs More Time

I don't have time to go into great detail but I wanted to post an update in response to the massive decline today. NYSE decliners outnumbered advancers by over 8 to 1 and over 90% of all the NYSE volume as to the downside. Weakness entered the market at the opening bell and was never alleviated, and the Nasdaq Comp did not confirm the highs of the indices, creating a bearish divergence that often accompanies major market tops.

Bottom line: I expect some further declines in the coming days, and I'm on high alert for signs that wave 3 is in fact underway. Right now, I'm only viewing this as a correction before new highs that take the S&P toward the 1100 area before wave 3 starts. One day of extreme weakness does not make a new trend or tell us much for the longer term. What happens in the next few days will tell us a whole lot more. If we have more days like today with similar weak NYSE internals within the next couple weeks then I will strongly place the wave 3 possibility on the forefront. But as of right now, it's just a temporary corrective pullback that should work lower in the coming days before one final rally.

Pullback Immenent; August 15, 2009

A significant pullback of some magnitude it at the horizon. Bullish sentiment is at an extreme, momentum indicators and the Nasdaq Composite compared to the blue chips are all posting bearish divergences, and today's NYSE breadth was very weak with all sellers in the market with the exception of the last 15 minutes of trade.

Whether this is the big wave 3 or just a pullback before one more FINAL rally leg is still undetermined. What is fairly certain though, is that a significant pullback should take place, bringing the S&P to the 930-950 areat at least. As always, I will be on high alert for signals that wave 3 is underway and will post results and conclusions as I see them. If the market doesn't pullback in the short term here and breaks last week's highs, then it's quite possible the market is making its last rally before wave 3 begins.

I maintain all the same positions I listed in my previous post.

Everything Still the Same, Wave 3 is Approaching Soon; August 8, 2009

Friday's big rally changes nothing to what I've said earlier. In fact, because the market has not pulled back to relieve the overbought condition for quite some time, it makes it more likely that wave 3 will start sometime by mid-September instead of it starting in the Nov-Dec timeframe as previously expected.

I remain half short with options dated well out in advance and will add to those positions as the S&P approaches the 1100 level. I currently own puts on the following:

S&P 500 (SPY)
Nasdaq 100 (QQQQ)
Silver (SLV)
Financials (XLF)
Russell 2000 (IWM)

Prepare for Wave 3 NOW, Just in Case; August 6, 2009

The market has reached a crucial point and all signs are pointed to a decline of significant magnitude either right now with the high in place at 1007.75 in the S&P futures, or that it will do so in a couple weeks most likely. Right now, the Nasdaq indices have lagged the blue chip Dow and S&P indices almost all week. The Dow and S&P made new highs yesterday and today while the Nasdaqs have not. This is an aversion to risk, which usually occurs at major tops. Also, NYSE breadth has been funky yesterday and today with more up volume than down volume but there were a lot more decliners than advancers. This all tells me the market is fractured and weakened. This may all resolve itself with a sharp rally higher after tomorrow's jobs report, but the evidence now suggests that a major top may be in place and I can short aggressively against the high established today at 1007.75 S&P futures.

Many other markets and sentiment indicators are lining up for a major selloff as well. Although I still think the market will rally close to the 1100 level before wave 2 ends and wave 3 begins, the market always fools the masses and surprises us. So I want to be ready for wave 3 NOW. Sentiment is at an optimistic extreme as measured by various technical indicators as well as just watching TV. The president has pretty much taken credit for an economic recovery, most TV talking heads are bullish and the only question is "how fast will this new bull market move", and everyone suggests buying on dips now. These are all signs of a major top at hand and positioned accordingly:

I'm buying longer term (June 2010 and Jan 2011) put options on the SPY, QQQQ, XLF and the SLV well out of the money. The reason is that if the market falls now just temporarily, I'll make money and take profits. But, if the market rallies from current levels in the coming week or so, then I know that wave 2 is in its last stages and wave 3 will begin shortly causing a catstrophic collapse and putting my options well into profit. So buy buying far out put options, I'll either profit from a short term decline now, or from a massive collapse over the next several months.

I only used half of my available capital so if the market rallies or moves sideways I can add to the positions accordingly.

Wave 2 in Latter Stages, at Least Short Term Decline Due; July 29. 2009

I updated my long term S&P futures chart (see right side of blog and above) which has followed my projected path (see red lines) the past few weeks. If it continues to do so, we are due for a short term setback, followed by one final strong rally to the 1000-1100 area before forming a major top that will be one for the history books. Any significant decline from this point will have my full attention. I will be looking for breadth, volume, sentiment, and most importantly - wave structure. But until the evidence suggests wave 3 is underway, I will plan for one more final strong rally where the bulls will give it everything they have to push this market to fulfill their new bull market dreams. But that's all they will result in.....dreams. It will lead to the biggest decline we'll see in our lifetime.

I'm watching.....................wating.

Wave 2 in Latter Stages; July 21, 2009

I haven't posted much because no opportunities have presented themselves until today. The straight line rally from last week should be finalizing now as many indicators are oversold and one can can't 5 waves up complete. And today's weakness drew me in to take a small short term short position on the S&P. But the rally later in the day put that play in serious jeopardy. The stock market needs to fall tomorrow early for the short term bear play to remain intact.

I don't think wave 2 is over yet, so this setback, should it occur, will only be temporary. I expect the S&P to get into the 1000-1100 area before topping and collapsing massively. Any new significant develops in that respect I will post here. Until then............I wait.

S&P Futures Big Picture; July 17, 2009

The S&P rallied before I thought it would, but that's no surprise as the entire rally over the past few months has barely taken a breather. This is typical of wave 2 rallies. It also makes it less likely that the alternate count is correct, which has this rally as a B wave. The projected path on the daily chart which I made a couple weeks ago is playing out. I expect a major top in the S&P between 1000-1100. Right now I am flat the stock market and will wait for signs of that major top before I consider re-entering the market. I play short term swings, but going heavily short will not happen until I believe wave 2 is over. I will update this blog once I start seeing strong evidence that wave 3 down is about to begin. It will bring about the shorting opportunity of a lifetime, and could make a savvy trader 500-600 S&P points in just a few months.

(Click on the chart above to make it bigger so you can see the wave count)

930 S&P Futures is Key to Bearish Case; July 15, 2009

No time to get into detail; but 930 S&P futures (935 cash S&P) needs to hold or the immediate bearish case is most likely broken. A break of that level will make the entire fall the past couple weeks a 3 wave drop and most likely complete. I will not be short at all on a rise above 930 S&P futures. As long as it stays beneath this level, the bearish case is in full force.

S&P Headed Toward 845 at Least; July 9, 2009

(I was unable to post anything the past couple days as I was not feeling well)

The head and shoulders in the S&P is proving to be a reliable bearish pattern as it has fallen over 60 futures points from the right shoulder. There may be a near term bounce, but it should be capped at the 900 level and lead to further selling. A close beneath the neckline at 875 should trigger a cascade of selling to the 845 target level I have. But it could possibly fall to the 800-810 if it so chooses. The short term trend now is down so I'm aligned with that trend.

Please Also See Updated Long Term Stock Market Outlook to the Right

Head Shoulders Suggests Lower Levels; July 4, 2009

Happy 4th of July all! I'm gonna celebrate America's birthday with a movie and some tri-tip grillin. I hope everyone has a nice enjoyable holiday.

As for the markets, they have not been clear lately but a massive head-n-shoulders pattern has formed on the above 8hr S&P futures chart above. A break of the 885 necklilne will open up the the market to a fall to the 845 level which is a prior congestion area. I added a little to my existing covered call S&P (SDS) strategy on Wednesday, once I saw the market topping in the afternoon. I am about half short of the full position I'd like to be and might add short on any large rallies toward the right shoulder area at 928.

For the head-n-shoulders pattern to hold, the market must stay below 958, but a strong break of 930 on big volume and expanding NYSE breadth would probably signal that 958 will be broken in the near future.

I have half of a full position short the S&P.

Stopped Out Most of Short Positions, Waiting....; June 19,2009

The market rallied completely unexpectedly as I surely thought it would fall today after Friday's action. July 4th shortened weeks tend to be bullish but I don't usually pay much attention to that type of stuff. The market internals were not impressive at all today but the Dow did confirm the rise from Friday in the S&P and Nasdaq which removed the bearish non-confirmation I discussed the other day. Plus, with the rally today, most of the major indices made new highs to where it creates a clear 3 wave decline from the highs a couple weeks ago. This means it's quite possible the short term correction is over. The market structure in the short term is now unclear, so I stopped out about 60% of my short positions at the highs today (unfortunately). I will wait for clarity on the short term structure before I get aggressively short again. The key element to all this analysis is that the long term picture points strongly toward much lower levels in the stock market.........specifically this means an S&P crash to the 400s with a year or so. So I do not want to lose focus on the bigger picture. So I will continue to look for shorting opportunities only.

I am currently short the S&P with a covered call strategy on the SDS.

Market Should Fall Monday; June 28, 2009

The market was fairly flat, but fractured on Friday and an divergence occured between the Dow and the S&P with teh S&P making a new daily high while the Dow did not. After this occured, the market sold off sharply into the close Friday. As long as this divergence holds, the markets should be on a downward trend.

Expect the market to fall Monday, especially at the open at the least.