Option Milliona...'s  Instablog

By Chris Diodato

In my Tuesday post and in today's post, my objective is to support my thesis that the market is going to make some sort of important top around October 22-26. In another post, I used the Demark sequential to show that the market will be very vulnerable to bullish exhaustion. Now, to explore the market with the very little known methods of W.D. Gann.

Here's the chart of SPY (I used the ETF because I wanted gaps included. Indices don't gap). I use the "Square of 52″ and the 45 degree and 22.5 degree angles to find points of support and confluence.

(click to enlarge)

The market seems to respect 45 degree trendlines from market bottoms quite well. The practice of drawing those trendlines for support has been used since the early days of point & figure charting. What I consider more notable is that when an important 45 and 22.5 degree line cross, the market tends to reverse. The next cross is scheduled to be around October 24.

Before we finish, let's show one more chart. Here's the same chart, with the Elliott Wave labels, and the time length of each of the two impulse waves, A and C, labeled.

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The equality point for wave C gives us a price target at 1566 on the S & P 500 on the last day of October.

So, in summary

• Demark Sequential says we are vulnerable to a reversal near October 26 on both monthly and weekly time frames
• Gann angle analysis says that a key pivot will occur near October 24
• Gann time degree analysis says that the market will top on October 31, just in time for Obama to get reelected
• Elliott wave analysis says the top will be around 1566 on the S & P 500

Now I definitely won't be doing this type of analysis that often, but it's just nice to sometimes get a different point of view, and especially one that you will never see on the news media. To judge this signal when the time comes, look for consolidation during the last two weeks of October and our first sell signal in the beginning of November. Until then, if you're not long, you're wrong!

Happy trading!

~Christopher Diodato

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

By Chris Diodato

So called "experts" on the major business news stations scrambled this afternoon to explain oil's sudden decline of 4% at 2 P.M. EST. Attempting to find some sort of causality, news anchors rationalized the decline by suggesting that there may have been rumors of the government considering a release of oil from the Strategic Petroleum Reserve (SPR). Frankly, I believe that Democrats in office, seeking to maximize their appearance of doing "good will" for extra votes, would not use the SPR this far away from the election.

Watching the price movement today in an Elliott Wave and Gann framework, there is not enough information to confirm a new down trend yet. Below is what I consider the most probable wave count for oil, using USO. The chart for crude is very similar, but much more difficult to see.

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This is not a line chart of the data. It is a study called the "Zig-Zag" which only shows price swings resulting in a 1% move or greater. It makes analyzing waves much easier. From this scenario we arrive at three different scenarios, which I'll phrase in "if/then" statements.

• If USO declines below $34.70, we are in wave 4, which means that USO must not move lower than $33 for the bull trend to stay intact.
• If USO breaks $33, that means that a larger bear trend is active, and that USO could break down to around $22.50 (unlikely).
• If USO does not decline below $34.70, but still corrects, then it is a wave "4", which means we get another weak upward push before correcting.

Either way, two of our three scenarios result in a wave four correction. Fours are characterized by "surprising disappointment." I believe that an SPR rumor appearing from smoke is a surprise enough. With wave 2 (July) taking the form of a quick decline, I expect the corrective wave four to be some sort of triangle or rectangle.

Which levels are acting as strong support for oil? For this, I will use the actual chart for crude oil futures. This chart looks very cluttered, so definitely open the larger chart.

(click to enlarge)

Notice the two rectangles, filled in with pink and gray. Each of these levels are confluence zones, or major support areas. The pink level around $93.75 would correspond to an overall wave "4." For those not familiar with the implications, that means that oil is still in a fierce up trend, and will not be ending soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

By Christopher Diodato

You can hear the same question across most media outlets. What recovery? Most world markets made their final top in August of 2011, right when the US had its credit rating downgraded. Since then, America has been the only major index to continue to make new highs. This could lead one to think that the recovery has reached a point of stagnation.

However, it gets worse. The Shanghai Composite index looks like it never even had a recovery. Here's the chart.

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Note the target of 1018 in the long term. What's the adage? A mania always ends below the starting point?

So, why place importance on the Shanghai Composite? China is an emerging market, and investing there is still a high risk/high reward situation. The China 25 index (FXI), (FXP) is what some would call the "government monopoly index," while the composite contains other, smaller, companies, and is therefore more representative of the health of the Chinese economy.

Essentially, it's the riskiest index of a risky country, and therefore, it usually leads both market tops and bottoms. So, when a sell signal is issued in this index, as it was when it broke 2100 last night, expect the rest of the market to follow through soon.

Happy trading!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.