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Market Collapse of Epic Proportions

|Includes: SPDR S&P 500 Trust ETF (SPY)
Market Collapse of Epic Proportions

Courtesy of Allan

Let's make the case with our biggest picture time frame, the SPX_Monthly Trend Model. This trend model reversed SHORT with the April-June decline in the market.  Note also that these monthly signals measure in years, not days, not weeks.  The implications are for a heck of a ride down in the months and perhaps years ahead. 

 SPX_Monthly Trend Model

There are two Elliott Wave counts embedded on this chart.  The first one (blue)  is automatically applied by my Advanced GET software.  I have been using this software since 1994.  It works more often then it doesn't, I give it a lot of weight.  It represents the most bullish of the two EW counts, yet still projects a move to below 600 on the SPX, as is suggested by the horizontal blue support line in the lower right corner of the chart.

The second wave count (black) is from Robert Prechter, the controversial EW analyst that EW wannabes love to disparage because of his missing calls in the past.  They ignore his body of work which is staggering in its prescient analysis and observations of not just the stock market, not just the economy, but in particular social mood as the driving engine of all things financial, in the evolution of society to some extent the rise and fall civilization itself.  

A little too sweeping?  Only if you believe the ignorant, snide snippets of opinion of him so rampant on the Internet.  Not if you read is seminal works, Elliott Wave Principle: Key To Market Behavior and especially, the most important publication of last twenty years, Socionomics: The Science of History and Social Prediction.  There is no better Elliottician alive today.  Agree with him or not, I think his opinion is always worth paying attention to. 

All that said, I've placed  Prechter's Cycle degree wave count on the above monthly SPX chart, a completed Wave 1 (early 2009), a completed Wave 2 (April, 2010) and now the beginning of Wave 3 down.  From Prechter's  January, 2010, Elliott Wave Theorist:

The very center of the wave structure-the most volatile point in an impulse-should occur in 2010 when the market reaches wave iii of III of 3 of (3) of 3.  In a bull market, this point in the wave structure marks the time at which investors in the aggregate stop worrying about the downside risk and begin projecting ever-higher levels (for example, by writing books about stocks for the long run and Dow 100,000).  In a declining impulse wave, such as the market is in now, the same point marks the time at which investors in the aggregate stop focusing on the market's upside potential and start worrying about how far down it will go.  This is a very rare event at Cycle degree, and its upcoming occurrence will be stunning enough to set records for financial panic (emphasis added).

Let's translate all of the above into some workable, tradable, ambitious strategies.  Below the Weekly and Daily SPX Trend Models:

SPX_Weekly Trend Model
 
 SPX_Daily Trend Model


The two most important characteristics of these trend models are first, the current dominant trends, which in these cases are both DOWN and second, each model includes a trend line that represents a reversal of the current trend.  In the case of a rally that extends, or in the event that these dominant trends are short-lived rather then the beginning of something massive, these trend lines will be broken to the upside and, "All bets (on the SHORT side) are off."  

I utilize these trend lines and trend models extensively in my subscription service, my private email list in which I give real time market observations and updated short-term trend model analysis.  On Thursday our SPX_60 and SPX_240 models reversed SHORT and captured most of Thursday's decline.  Our VXX_240 model has been LONG since August 11.  We use these short-term models for entries into the SHORT side in conjunction with the longer term Daily and Weekly SHORT trends in the SPX.   

There is no one strategy that fits all traders.  For some, simply buying an inverse ETF, such as the SDS, when the Weekly Trend Model went SHORT on May 3rd at SPX 1111 provides all the trading that is necessary to garner the most from an existing trend.  For others, the Daily Models provide more active entries and exits.  Finally, for the very short-term oriented traders, I update the 60 and 240 minute models in the SPX and QQQQ throughout the trading day.

I don't know what is going to happen next in the markets.  Monday, even next week, can go either way, as is always the case.  What these Trend Models of varying lengths do for me is assure me that the market isn't going to go too far in either direction without me.  That removes a lot of uncertainty from trading.  But even more significant, there is absolute assurance that if the above wave counts unfold as forecast, they will do so with me on board.   

With the Monthly, Weekly and Daily Trend Models all pointing down coincident with a compelling EW case of an imminent market collapse of epic proportions, a persusive case can made for being SHORT the market, right here, right now.  

Allan’s “Trend Following Trading Model” is based on his trend-following trading system for buying and selling stocks and ETFs. Most trades last for weeks to months. Allan’s offering PSW readers a special 25% discount. Click here.  For more details, read this introductory article. 

Disclosure: none