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Litmus And Acid Tests: FOMO Vs. Exuberance Phase

Note: I already posted this instablog last week. Somehow it dissappeared. Don't know what SA programmers are doing with the website. Posting instablogs and comments got a lot frustrating for several weeks now as they can either not get posted or disappeared later on. User interface also got revamped that made it less intuitive. I never used a word processor before in making instablogs and comments but now forced to save my work before posting. And making online modification(s) can be an exercise in futility. Definitely a change for the worse.

Added the Holy Grail Setup for the daily below and updated the Bearish View on weekly chart to highlight the Bearish Doji Bar. All other charts don't need constant updates - besides, this instablog might just disappear again.


A month went by without a hitch for the bulls.

But how do we know if a rally is sustainable or not given the current short-term overbought conditions? One way is to subject them into some true or false litmus test to have some preliminary readings.

>> Spx Litmus Test:
>> R2K Litmus Test:

>> DAX Factor:

>> Holy Grail Setup:

Earlier, SnP500 was supposed to be undergoing a Type II five waves rally wherein the v-th wave of minor i-ii-iii-iv-v must be the shortest in order to result into a minor a-b-c pullback down that should last at least a few weeks - for the trend trade bulls. For the contrarian bears, a minor i-ii-iii-iv-v meltdown should happen if the Type II rally proved right. Unfortunately for the bears, bulls have a slight edge. Thus, instead of weeks of a-b-c pullback down, the higher probability right now is perhaps a few days to several days of pullback down should be the next expectation followed by more upsides or Spiral Meltup.

Obviously, Russell2000 is a different breed. A 'mustang' perhaps but then in order to know if it has mustang blood is to subject it to the litmus test. Wavecount for the bulls is i-ii-iii and since the ii-nd wave retraced less than 38.2% then the iii-rd should be shorter and the v-th the shortest of a i-ii-iii-iv-v minor rally. Mustang should produce a longer iii-rd preferably 1.62x or more longer than the i-st to prove it's worth and transition the short-term price action from fear of missing out to exuberance phase. For the bears, this rally is of course corrective a-b-c up and R2K will collapse very badly.

I highlighted DAX early this week as high-probability trade setup. Right now the breakout rally proved very strong as expected. TA traders would expect the initial breakout to be equal to the longest leg of the consolidation range before another pullback down happens again preferably re-testing the breakout level @10,827. EW'ers expect the iii-rd wave to be longer than the i-st as the ii-nd wave retrace was far more than 38.2% of the i-st as this is the usual Type I of i-ii-iii-iv-v rally. Obviously, DAX will have to collapse below the ii-nd wave to invalidate the bull thesis.

SnP500 potential Holy Grail Trade Setup is self explanatory.


Acid tests are much more severe compared to litmus tests. How to find gold carats in seemingly innocent rock or rocks is with acids of course.

>> Indu Acid Test:
>> Russell2K Acid Test:

Dow Jones passed the initial litmus tests on the weekly chart together with R2K. They are now talk of the town and are expected to go into Spiral Meltups.

The acid tests for gold content is if they can rally above their Fibonacci Contrarian Bear Ranges. How much gold content we still don't know. Too little and it's not worth expending lots of acid to process them into jewelry grade. Thus, they will have to rally some more and break above their Fibonacci Contrarian Bear Ranges in order for market participants to become exuberant and not just reluctantly buying because they are afraid of missing out. Otherwise, panic selling their 'false' gold can happen if they collapse back below their breakout levels and go challenge the November lows.

>> SnP500 Acid Test:
>> Bearish View (updated):

Spx is still far from passing a litmus test. Ironically, the acid test Fibonacci Contrarian Bear levels are lower than the equal move target. At any rate, bulls will have to show their true worth by rallying vertically preferably into 2,411 to show some exuberance. Otherwise, the bear count might prove the right choice after all.

Right now is the critical point for the Bearish View to start kicking in with a Doji at the top run many bulls feared. With the divergence sell signal not very credible as it is almost a double top MACD already, not very convincing. But then who knows what might happen next.


Trading Strategies:

When the going gets tough "Don't just do something, Sit There!" was paraphrased by Warren Buffett in late August to September 2015 when the whole world was coming to an end (again) for his investments. Right now it is the opposite as market participants, who have been left behind, are starting to feel the weight of FOMO on their shoulders.

- For swing traders who have not taken partial profits (yet); taking partials remain very much recommendable as SnP500 is now considered by some EW'ers their best Wrecking Ball to date. I don't subscribe to that type of wavecount but then who knows what might happen next.

- Obviously, for those who took partial profits in late November, they should not feel jittery right now. That was the purpose of partial profit takings --> to prevent emotions from taking over later on when the going gets tough.

- For medium-term traders who have not taken partial profits; perhaps they should take some for keeps sake. Nothing is perfect no matter how high-probability trade setups can be.

Obviously, the most important parameter to consider whether they will fail the acid tests is for them to collapse toward the November lows. Very basic from the point of view of Elliott Wave Analysis. How to formulate most effective and most efficient trading strategies is the hard part. I find partial profit taking(s) the more effective in preventing knee-jerk emotional responses when the s*** hits the fan.

For now the better trading strategy = Wait and Watch.

The potential Holy Grail Setup comes in perhaps at the right time for Santa Rally if we get a decent minor pullback down next week. Otherwise, the 10ma remains a high expectation support among very short-term daytraders and scalpers with such a highly vertical run up.

Swingers might also want to buy DAX on a pullback down when it happens. For those who bought using the breakout strategy, good for them. Hard stop is usually the most recent lower high printed in December 2 as usual wiggle room for such type of discretionary trade. Rewards vs. risk are obviously very high, worth the effort for many swing traders and even some medium-term traders.

* I sold the last 1/4 ES positions at little less than 200 points profits/contract at it's 138.2% Fibo Contrarian level on daily chart. Not bad at all but not very good. Objective is to just square my 2016 trading profits to 3x bread-and-butter with 3 successful swings and one scratch. 2016 is my best year so far next only to 2010 where I sold lots of Zombie stocks bought in March 2009 when they rallied 3x to 5x; many went up 10x to 20x; and some more than that. 2013 was also very good with highest run rate on annual basis by SnP500 of 33% rally. But then I was using 2xSSO as primary trading vehicle with some eminis sprinkled around. For 2016, I concentrated on YM and ES as I gained some more confidence in using them through the decades. Definitely not suitable for newbies as it is almost impossible to control emotions with such highly leveraged instruments without significant experience.

** Still holding the YM Free Trade bought in June 27th post Brexit Fiasco. Will just have to keep rolling it. Good for 2017 if we get at least a mini-exuberance rally. Hopefully, I will be able to extend winning streak to 9th next year, but the 8th Wonder of the World theory hangs heavy - psychology. A master trader would usually panic when her account went through something like a 1-2-3-4-5 monthly or quarterly pattern over several successful years. We know what usually happens next. I don't monitor that way as I'm not that performance oriented. Prefer just trading for a living and if I outperform some years so much the better.

Good luck FOMO Trades ==> Exuberance Phase.

And have a Merry Christmas.