We have a sudden breakdown last Monday preventing SnP500 (and Dow Jones) from, re-testing their broken Daily 50ma Resistances. Thus the short-term Buy Setup last Jan 28 failed to materialize resulting in a losing trade for many who got caught by the un-expected sell-off.
This can happen more often to the downside since fear is much stronger emotion than greed. Once a breakdown happens, tendency for traders is to try minimize their losses on long positions. Investors follow suit as the sell-off progressed with no let-up. Thus, creating a self-sustaining downward spiral interrupted only by the closing bell.
But not everything is hopeless as this sell-off is still considered Profit Taking instead of some Financial or Fiscal Crisis about to erupt at any moment.
Dow Jones Aggressive Scenario on the weekly chart is starting to materialize:
<< DJ Weekly (Before): http://g15.picoodle.com/ltd/img15/5/1/14/aarc/f_141u_73c_ubk5c.png
Obviously, the breakdown of the past few weeks resulted in DJ failure to finalize the 1'-2'-3'-4'-5' sub-waves for the 5th wave rally resulting in two possible scenarios on the medium-term:
>> Dow Jones Daily: http://img10.imagefra.me/i525/aarc/141u_44f_ubk5c.png
>> DJ Weekly Scenario 1: http://img15.imagefra.me/i525/aarc/141u_9db_ubk5c.png
>> DJ Weekly Scenario 2: http://img15.imagefra.me/i525/aarc/141u_e27_ubk5c.png
>> DJ Monthly RSI Dip: http://img10.imagefra.me/i525/aarc/141u_096_ubk5c.png
The weekly chart has 5 weeks down that can correspond as a pink iv-th wave for the pink ii-nd wave (= 4 weeks down) for the first scenario.
In Scenario #2: I assume the 3rd wave rally actually started at the Nov 2012 bottom then counted the number of bars for the 2nd wave (= 28 weeks). If a Running Correction is actually happening as illustrated on the daily chart; then 27 weeks, from August 2013 high, could be a rough estimate for the 4th wave. 37 weeks for the 3rd vs. 23 weeks for the 1st results in 1.608 ratio. Close enough to the 1.618 Fibonacci projection number for an extended 3rd wave. The 3rd is actually not an extended wave when price points are measured being less than 1.618x of the 1-st.
* A third weekly chart scenario is that the green i-ii-iii-iv-v has just completed and a black 4th wave is already in progress that should consume 6 to 14 weeks depending on where the 1-st wave actually terminated. This should result in a relatively strong rally that should last 16 to 23 weeks (again, depending on the termination point for the 1-st).
The monthly chart RSI tested the upper trendline resistance and was rejected. It is now testing the lower trendline support with the blue dotted line a potential support for a Cross-over Reject Trade Setup. 16,300 to 17,150 remains the Major Fibonacci Extension Resistance Range for Dow Jones. In the absence of a major crisis happening; a breakout above 17,150 should happen. Whether a sustained vertical rally can be sustained for a prolonged period of time (by Irrational Exuberance) remains highly suspected and should be taken with a healthy dose of skepticism.
** Note that the monthly chart introduced another potential scenario quite different from what are illustrated above on the weekly charts. Nothing is perfect. Markets listen to no one. We just have to trade/invest them the best way we can.
Finding a good entry is of paramount importance. Using intraday charts can reduce potential loss but can result in several whipsaws in some cases:
>> SnP500 Intraday: http://img10.imagefra.me/i525/aarc/141u_2fe_ubk5c.png
For now, SnP500 is providing a viable Divergence Buy Signal on the 60min chart - albeit not an ideal one since it is still highly susceptible for a spiral meltdown.
>> SnP500 Weekly Aggressive Scenario: http://img10.imagefra.me/i126/aarc/141u_a6b_ubk5c.png
The Aggressive Scenario for SnP500 has been illustrated since Nov 20, 2012 Scenario #2 and in May 2013 with the SnP500 Dummies Guide using equal moves for the upper ranges that correspond to their lower range rallies and corrections. See previous Comments for the Dummies Guide.
We are still far from the highly anticipated 10% to 20% correction majority of traders and investors are waiting for. Thus, there should be considerable reluctance to support a bounce toward becoming a rally at this stage.
For practical Swing Trading Strategy; there are two possible entries:
- Buy a minor a-b-c down using either the 5min or 15min charts in Thursday with a stop loss either today's bottom or a little below the maximum run rate allowance for the less nimble traders.
- Buy on a recovery rally above the Daily 200ma for Dow Jones then set the stop loss at the most recent low. Risk gets larger but at the same time reduced potential whipsaws.
For the more conservative Swing Traders: Perhaps waiting for SnP500 to test it's Daily 200ma Support can be the more practical way to trade the markets. Each person has his/r own tolerance level when it comes to trading the markets. Thus, very hard for us to gauge effectively how the markets will perform at these lofty levels … until it becomes too late already to either buy the markets (or short them) for the majority of market participants.
UP HERE ..... the risk of trend trading the markets reached it's maximum as the probability of a correction or a trend reversal becomes much higher. Thus, this analysis is suitable only for the more experienced traders who can react correctly/effectively to the many vagaries of the markets' price actions.
For the bears: Obviously, their wait for a re-test of the Daily 50ma Resistance becomes much longer. And the sudden breakdown can be considered a blessing by some but can be considered an un-expected move that introduced new risks in shorting the markets:
>> SnP500 Weekly Conservative Scenario: http://img15.imagefra.me/i525/aarc/141u_08b_ubk5c.png
>> SnP500 Daily: http://img10.imagefra.me/i525/aarc/141u_1bc_ubk5c.png
The Conservative Scenario does not follow the EW Rules since the 4th wave penetrated the 1st. In many cases, actual practice do differ from theory. EWA is not the master. The markets are the masters we have to follow despite their many imperfections.
Monday's breakdown can be a blessing IF SnP500 decided to just keep going down using extremely shallow pullback up (called Dead Cat Bounce). But if a rally above the uptrendline suddenly happens then it can result in a major short squeeze among the bears and possibly scaring them hard enough in order for them not to short the markets once SnP500 re-tested the 50ma resistance.
As indicated since late last year; the 1823 to 1923 levels are the Major Fibonacci Extension Resistances on the monthly chart for the SnP500. Thus, I decided to start raising at least 10% cash on my long-term positions by trimming/selling some of the stocks/ETFs that were able to make a 1-2-3-4-5 rally and/or A-B-C rally on their monthly charts. = DONE.
For short-term to medium-term; the objective is to trade the markets either to the upside, or to the downside, depending on what particular Trade Setups presented themselves on a moment to moment basis. For now, I bought YM (again) using the 60min Divergence Buy Signal. Stop loss is set at today's low. Trailing stops will be initiated as soon as DJ forms at least an a-b-c up on lower timeframe intraday charts.
Will try to short the markets (using ES), if SnP500 goes into a weak pullback up on the daily chart that should last 3 to 5 weeks.
For those who are getting more confused why there are too many scenarios: These were the initial scenarios introduced last Nov 20, 2012 (Fiscal Cliff Crisis = Opportunity?) that clearly illustrated what happened in the past should result in a complex rally with indeterminate outcomes for the medium-term future:
All three scenarios have the same expected initial run ups and should differ only at the upper portions of their rallies. DJ Weekly Scenario 2 is based on SnP500 Scenario #3 with a twist.
I re-introduced them last May 2013 with the Russell2000 performance quite different from SnP500 and Dow Jones and thus required special consideration.
There are other possible scenarios but they happened less often in the past. And thus not worth considering unless and until one or two actually presented themselves in the near future. Not all rallies are created equal in price runs nor are they exactly the same in shape or form.
There will always be pimples, warts, and sometimes big scars that differentiate one rally to another even if they look almost exactly the same to the less trained eyes. Thus differentiating which correction corresponds to which rally and which ensuing rallies near the top run correspond to the rallies at lower levels becomes very important in finding how, where, and if possible when; will they are going to terminate. Alas, finding tops is far harder than finding bottoms since rallies have the tendency to levitate before they finally collapse majority of market participants never expected to happen - until too late.