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Bill L.
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Methodology: setups require certain criteria to be met before trades can be executed, which include weighted statistical studies on several indicators of price, breadth, volume, and sentiment . Amount of risk taken is proportional to how many indicators are aligned. I mainly trade market... More
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  • Near Term Picture Cloudy...  12 comments
    Jul 16, 2010 4:09 PM | about stocks: SPY, SPXS

    Reduced BGZ holdings in my short term trading bucket today. While over the last few days I suspected the environment favored a decline, and we are getting one today, the Elliot wave structure has moved from favoring an impulsive decline from the April highs, to a leading diagonal from the April highs. Long term, I remain short for all the reasons I have outline in the past, as well as both patterns resolve themselves by heading lower. In the short term however, this suggests that today is a correction and that the 7/13 highs will broken.

    I was reluctant at first to label the decline as a leading diagonal because first off, they only occur about 20% of the time, meaning you will be wrong 80% of the time labeling it as such. Second, while "sloppy" looking you could label the decline an impulse without breaking any rules (though several guidelines are "bent").

    A few things bothered me about the impulse labeling, however many of which seem to get resolved if you label the decline a leading diagonal. I really started favoring this labeling today because the decline from the 7/13 highs just cannot be labeled as "5 down," which is what I was expecting. In lay terms, the decline appears to be a correction.

    This labeling seems much more reasonable. This would imply that prices bottom shortly, if not today, then rise in a corrective rally that does not break the April highs.

    So the next question is where would such a rally end?

    There are a cluster of price/Fibonacci targets near 1140 being arrived at early next month.

    The last thing I will say, neither scenario can be eliminated at this point on a larger time frame chart, such as on a daily chart, and I remain longer term bearish. In the short term however, wave structure took a different turn than what I expected. And when the market does something I do not expect I always trim trading exposure until I get a clearer picture. I am still long some BGZ as Elliot is a useful tool, but not the holy grail, and many other indicators are still saying a larger decline is on the horizon. The next day or two should clarify what is taking place. No changes in long term trading bucket.


    Disclosure: Long SPY puts, Long BGZ

    Stocks: SPY, SPXS
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Comments (12)
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  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » Just to amend this blog entry, this scenario is not tradeable... yet. It simply went from what I thought was a lower probability to a 50-50. When I get uncertain, I get smaller (but I am still very short overall).

     

    PS - If you enjoy reading my stuff, please hit the recommend button on my profile and on individual articles. It lets me know I'm not talking to myself. Thanks in advance.

     

    -Bill
    16 Jul 2010, 05:58 PM Reply Like
  • lower98th
    , contributor
    Comments (1411) | Send Message
     
    Bill: Thanks for all your posts. I read this twice, looked up "leading diagonals," and refrained from posting a comment that said, "Huh?"

     

    So do I get that there is a 50/50 chance that this is a correction that will reverse soon, leading to an interim (lower) top. And still some chance that it is a leg in a stronger downward move?
    16 Jul 2010, 07:53 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » When I first started learning Elliot, I was like "huh?" all the time. I'll start with the big picture first and try and break it down.

     

    First, I think we have started a decline that will test the March'09 lows, and a trend that will last at least the rest of 2010.

     

    The first leg down in the resuming bear market started in late April.
    -If you label it as a typical impulse wave, it counts best as starting on April 26, the impulse wave ended on June 25 (wave 1), and had a correction that ended on July 21 (wave 2), and now we are stair stepping lower on the next leg down (wave 3).

     

    -If you label the first leg down as a leading diagonal, it also started on April 26th, but bottomed later, on July 1st. If this is the case, we are still in a relief rally that is correcting the first leg down (wave 2).

     

    The only real difference is if the first scenario is playing out we should be absolutely tanking next week... for several weeks in fact. If the second scenario is playing out the market keeps correcting higher to about 1140ish, then starts tanking. Both scenarios end with the market tanking. A loss that big however in my short term trading bucket is unacceptable, even if I believe the market will still turn lower, but from a much higher level.

     

    If the current decline continues strongly into next week and takes out the July 1st, 1010 low, then the first scenario is playing out; market is headed to much lower levels immediately.

     

    If the market bounces back next week and breaks out above the July 13 high of 1099, then the second scenario is most likely playing out; the market will head to 1040 over the next two weeks before then resuming lower.

     

    ------
    I posted a few days ago that I had bought more BGZ, so I felt obligated to post something saying I was selling some, and why. I don't want to be like everyone else on SA who just shoots out random picks and then you never hear from them again. Especially if it turns against them.
    16 Jul 2010, 08:36 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » Also...

     

    Regarding the 50-50 probabilty, that is not an arbitrary "it will or it won't happen" call. I hate being wishy washy, but that is the way I see it. The leading diagonal is more rare, but the subdivisions the last few days lend themselves more to that count. Looking at the other indicators I follow, they currently don't provide much in the way of clues either. For example the McClellan oscillator was reading overbought, indicating a decline, but not so overbought that it would greatly increase the odds of a more protracted sell off. The 5 dma of the put call ratio near the 200 day mean, not really lending itself to any particular direction. The latest Investor's Intelligence survey shows a nearly equal number of bulls and bears, again not really saying much there. Etc,etc. Hence... 50-50 probability.

     

    The good news is price action should let drop clues quickly early next week.
    16 Jul 2010, 09:03 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » Not much to add today and few clues. However one thing that stands out... the Total Put Call Ratio ended the day heavily favoring the call side at .72. So options speculators are betting heavily that today's lows will hold. This is about 1.25 standard deviations from the mean. As a contrarian, in my view this tips the scale ever so slightly favoring a further decline but again, neither scenario can be ruled out yet in my opinion. Waiting for more clues and some more levels to be broken before taking any other additional action.
    19 Jul 2010, 05:55 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » The clouds are starting to part a bit. I said yesterday that the $CPC showed that speculators were positive that yesterday was the bottom and that a new rally leg was starting. Ironically, I stated that shifted probabilities to favoring more downside. A strong close down today will put the SPY below Friday's lows, as well as breaking a minor trend line originating from those lows.

     

    A strong close today was also line of a fractal momentum sell signal; a sell signal occurring on a monthly, weekly, and daily scale. I prefer this to be confirmed with an Elliot pattern and traditional technical analysis. Most people lack the discipline to wait for so many factors to line up, and it can be frustrating to wait for a 80/20 setup. I just happen to hate losing money more than waiting.

     

    On a fundamental basis, the stock market has once again lead the way as we see negative data starting to flow through and appear in earnings revenue misses, GDP revisions, and housing numbers. Unfortunately for them, the market is still historical overvalued... By a lot.

     

    Will update after the close.
    20 Jul 2010, 11:08 AM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » It's days like today that best illustrate why trading discipline is so important. The initial break down at the open was extremely tempting to short, but I waited for a confirmations using several techniques, which did not come, and now the market is higher.

     

    You have to remember, 95% percent of traders fail. But in a way, this is what lets a disciplined trader succeed. You are sitting at poker table where you know nearly everyone is inferior. They are betting on pairs, before seeing the flop. You wait for a good hand and pay little to see the flop before betting bigger. Most poker players fail for the same reason most traders fail; they want to play every hand.

     

    I was discussing AAPL with a colleague a few minutes ago and he said, "look at it run, they have no restraint." This is a perfect example of betting big before seeing the flop. In my view AAPL actually looks like a great sell setup evolving, but with no trigger and confirmation, I am sitting on my hands until a break down. The top tick is the most expensive. Pennies in front a steam roller. Choose your wall street cliche, but it's true.

     

    Will comment after the close.
    20 Jul 2010, 03:08 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » Not much to add. The break down this morning looked good early off, but with no follow through by the close, I'm still sitting tight waiting for actionable signals.

     

    I noted the put call ratio hinted on the bearish side, and now other possible bear hints may be manifesting. If you look at the rallies on July 7th, July 13th, and now today, July 20th, each rally has had a steadily decline up/down volume ratio. So less and less internal breadth on each rally leg. Also, the McClellan oscillator moved up today to about 1.5 standard deviations from the mean, so the $NYMO is now starting to flirt with over bought levels. I was pretty split on the near term direction, and I still am, but we are starting to get some bread crumbs hinting the path going forward is down.
    20 Jul 2010, 05:29 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » Elliot structure is still split, but as I noted were are starting to get some bread crumbs. Today's action also seems to hint towards weakness.

     

    Despite the "good" earnings reports from investor favorite AAPL, the market has had a lot of trouble just moving sideways. In fact AAPL might complete and opening gap reversal today. We discussed discipline yesterday in the context of buying AAPL ahead of the "flop," and so far the traders jumping the gun last night in after hours are underwater. I rarely invest in individual stocks as I hate outside risks, but I must say, the AAPL chart looks terrible, and could easily shed 25 points (target 200 dma).

     

    Around 3am I started to think the leading diagonal scenario was coming back into play as the e-mini S&P started trading higher, but the 30 minutes into the open and trading had completely reversed the electronic session gain. Some more bread crumbs indeed.
    21 Jul 2010, 11:49 AM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » A very exciting day. Adding shares of BGZ tonight in after hours in the short term trading bucket. Things have really started to line up, favoring an immediate decline.

     

    There was a stochastic bear cross on 7/14 with a bearish belt line candle close the following day. Bouncing of the 50 dma again, today's close sets the SPX up in line with a monthly, weekly, and daily momentum break out sell signal. This strongly suggests that the Elliot wave pattern playing out is (iii) down. Furthermore a 20 day cycle peaked yesterday (with the actual peak being right hand translated, which usually occurs in a bear market) and has now rolled over. If accurate, we should hit a target of around 925 to 900 (the bottom of the bearish trend channel formed the from April top) August 2nd (plus or minus 2 days) when the cycle bottoms.
    21 Jul 2010, 05:04 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » Sorry, I mean the cycle is LEFT hand translated.
    21 Jul 2010, 05:52 PM Reply Like
  • Bill L.
    , contributor
    Comments (691) | Send Message
     
    Author’s reply » New blog post where I have added the chart I am working off of. I will continue my commentary there.

     

    seekingalpha.com/insta...
    21 Jul 2010, 07:04 PM Reply Like
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