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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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  • Wednesday, August 4, 2010 - Ending Diagonal in Play 12 comments
    Aug 4, 2010 5:00 PM | about stocks: SPY, UUP
    In previous posts I have been outlining some Elliot counts, both top interpretations say the market is very near the end of a counter trend rise. While counts on anything less than an hourly chart become murky (in my opinion at least), on daily charts, patterns tend to be very crisp. The best count now is the ongoing correction is an expanding flat, with a ending diagonal in the C wave position (the C wave is the rise since the July 1st low).

    Chart 1- SPX Ending Diagonal

    It looks to me like we are in the last leg of the diagonal. Today we most likely finished up the B wave of wave 5, and now we have a final C wave left to go. Ending diagonals tend to end with a thrust above the top of the trend line, followed by a violent break down. A break of the wave 4 lows would signal the next leg lower is starting. If confirmed by a momentum sell signal, I will be taking action on the short side.

    Since I think the operative scenario is much more likely deflation (see previous articles on the bearish case), watching the dollar can also provide clues for the stock market. Most are already familiar with the negative correlation between stocks and the dollar during deflaton. Since the top in the dollar in early June, the UUP has retraced 61.8% of the rise since the December lows, sentiment surrounding the dollar is again very low, and today we might have had a bottom put in place.

    Chart 2 - UUP

    With a near perfect Fibonacci retracement, very bearish sentiment, and now a reversal on high volume that breaks a trend in declining volume, the dollar may have very well put in a low. I will be watching carefully for signs of confirmation, but this also has bearing on the stock market, signaling the "risk off" trade may be back. The timing is also what is interesting to me; just as the pattern in stocks says we are about to top, the pattern in the dollar says we are about to bottom.

    Disclosure: Long SPY puts.
    Stocks: SPY, UUP
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Comments (12)
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  • Author’s reply » Tonight Cramer, the clown prince of finance, and excellent herd wind sock is saying that the market is incredibly strong and wants to go higher into the Friday employment number. I agree only because the best wave count is saying we can go higher tomorrow, possibly Friday. That being said, it is also saying that once it hits this target, it should absolutely tank. When Cramer gets this bullish, recommending everything and ignoring anything negative, a turn is hilariously right around the corner.
    4 Aug 2010, 06:13 PM Reply Like
  • Well--in principle I agree with you. I concur market should go a little higher and then tank; whether that is this week, I can't say. Often I have seen markets change direction around Option Expiration day, in this case August 20th.
    Given your analysis of market direction and so forth, do you think puts expiring August 20 are attractive?-----they are getting very low in price. Or is it better to pay more and get September options?
    4 Aug 2010, 07:05 PM Reply Like
  • Author’s reply » Levels where the market is likely to head in one direction or the other is much easier to determine compared to specific timing. Leaving so little room for error adds a huge amount of risk. I prefer to go very far out, and let the market tell me if I'm wrong. I don't want to be in a position where I'm right on direction but lose 100% because I was off by a week. But that's just me.
    4 Aug 2010, 11:35 PM Reply Like
  • If the monthly job report gives even a slight edge to bulls then the market will take off. If the report comes really bad, then S&P will lose probably 30-40 points. A question for you, Do you think that high frequency computer trading alter the market's movement? If that is true then how much?
    4 Aug 2010, 10:24 PM Reply Like
  • Author’s reply » Events such as government reports do not drive markets, but can add short term volatility. HFT in my opinion also adds to volatility; most HFT algorithms basically have similar mean reversion strategies. If all the HFT programs operate similarly, then during outliers such as during the flash crash they can propel the markets downward extremely quickly.


    Overall, I prefer to look at the market, sentiment, and it's internals. These are MUCH better indicators of future direction than "news." I personally do not know any successful traders that anticipate or trade "flow."
    4 Aug 2010, 11:31 PM Reply Like
  • Author’s reply » Also, I would add that we are entering a seasonally weak period; September, October...
    5 Aug 2010, 12:35 PM Reply Like
  • Author’s reply » This morning futures are down on large volume after the jobs number. More importantly, we have an ending diagonal pattern. Once the pattern in finished, prices should drop VERY quickly and substantially out of the pattern. This is why I prefer to just look at price action. The pattern and indicators are very clear about what side of the market one should be one, while news chasers received a very mixed picture regarding employment this week. As Hobo investor said, "If the monthly job report gives even a slight edge to bulls then the market will take off. If the report comes really bad, then S&P will lose probably 30-40 points." I just disagree with the premise that the market works this way.
    6 Aug 2010, 09:34 AM Reply Like
  • Obviously you are right Bill, sentiment dominates news in this low volume, lower IQ environment ( though maybe the scope of HFT is still distorting my perception of "big money bullishness"). Everyone is hell bent on dumping cash before QE2 and they are all pouring into gold, stock indexes and anything with a decent yield. The misconception of low supply of these "fixed assets" is possibly more extreme than anything the financial world has ever seen. Reality is telling us we're right and there seem to be big sellers keeping a lid on prices, but the buyers are still buying. The world is not producing/profiting so even though the dollar may lose value, so too are the companies that once made more dollars. Dollars will continue to exist, many corporations will not. Timing this thing has been torture (for me) but once this topping process is finished we should head back down to reality unless 1 Yen = $1
    6 Aug 2010, 10:25 AM Reply Like
  • Author’s reply » A close here will generate another stochastic sell signal on a daily chart. In my experience, if you get a sell signal that fails, as the one did last week, it is usually a warning, and failure in following signals is much less likely. Thus far, I cannot count "5 down" on a short term chart, but a break of 1088.01 on the S&P (the 4th wave low) will confirm that pattern is finished and the next leg down has started.
    6 Aug 2010, 10:37 AM Reply Like
  • Author’s reply » Haven't posted in a while, but to be honest there hasn't been much to report, the setup is complete and we are just waiting for a close confirms the next leg down has started, which looks like today... I am working on a new article that should be out by the end of the week, possibly as early as tomorrow. It will be entitled, "September & October will be a Blood Bath."
    11 Aug 2010, 02:09 PM Reply Like
  • Inquiring minds want to know: will it be a straight line down, or will we stair step down much as we have stair stepped up?
    11 Aug 2010, 06:52 PM Reply Like
  • Author’s reply » If this is indeed third wave down, it should be bigger in terms of points, and faster in terms of slope, than the first wave. So if you look at the decline from late April to late May (or late June, depending on your Elliot wave count), that is your base line rate of decline, but odds favor falling faster and harder than that. Furthermore, declines tend to occur at a much faster rate than rises. Ironic, isn't it? Everyone wants a bull market, but it's actually easier to make money in a bear market because of speed and expansion in volatility. The short answer is a strait line down.
    11 Aug 2010, 07:04 PM Reply Like
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