On May 1st I posted this SPY chart and indicated that we were in Wave 4, and that conditions have been met to complete the wave. The chart had FIB upside targets for Wave 5.
Finally, after what seems a life time, we can now count a solid 5 wave completion of the bull run. Typically bull runs last 2-3 years, bear runs last 1.5 years.
All the talk now is when is the bounce, where is the tradable bottom? The answer is: nobody knows for sure.
What I want to focus on is a different question: where is WAVE 1 likely to complete? Lets not look at tradable sub-wave bottoms within WAVE 1.
The point is, if we bounce anytime soon-should we cover our short or add to that short; sell short the bounce? We have to keep the concept in context. It's not important at what price the SPY bounces; IF THE BOUNCE IS A SUB WAVE, WITH FURTHER DOWNSIDE TO GO TO COMPLETE THE MAIN WAVE 1.
To look at this properly, the next chart is a Kagi 2% chart of the last bear market year, the 2008 Presidential election year.
Lets use apples to apples comparison years; 2008 bear-2012 bear, for a road map of dates and/or probable weeks of tops and bottoms of the MAIN WAVES, in order to maximize our profits.
In 2008, Wave 1 down started in May, and completed in July around option expire week. This is based on 2% moves in the index that trigger the black buy Kagi or the red sell Kagi. All the noise/sub waves in between are removed from the chart.
Our strategy-is to pile on to shorts, with every bounce in the market, all the way into July. In July, we apply a % trail stop that moves with the stock, raising our stop price as the short moves further into profit, until we finally get stopped out.
Just follow the blueprint from here; begin shorting option expire week of August, all the way into the Presidential election; cover for Santa Rally, short Jan 2013 for the final 5th wave.
Could a coordinated FED action put a wrench in this plan; sure. But we can deal with that if and when it happens. I believe the FED will not embark on QE3-4 months prior to a Presidential election; just as they took no action in 2008.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.