Value of Perfect Information

Name: Bill

Bio: I am an Aerospace Engineer by profession but trading is my true passion and I have been trying my hand at it for nearly 20 years. I have gone through the typical progression of starting out trading hot tips, then fundamentals and news, and finally various TA methods. When all was said and done my best success has been with using E-wave as a primary trading tool so that is has been my focus for the last several years. I do also combine my E-wave analysis with time cycles analysis as an aid in deciphering the highest probability wave count. And the biggest piece of the puzzle for me in recent years has been a greater emphasis on money management and risk control. I intend for my blog to be a trading journal where I share my current E-wave thoughts on the the S&P E-mini futures contract which is my primary trading vehicle.

Posts by Bill:

UNSTOPA-BULL!

Written by Bill
December 10th, 2009 at 10:40 pm



That’s right, this bullish juggernaut is unstoppable. And per my wave count the parabolic melt-up phase is about to begin (see chart above). We saw a wave 1 up from 11/2 to 11/16, then complex wave 2 correction of several weeks of sideways motion. Only the Dubai fakeout was able to produce any meaningful dip. This type of sideways correction where the overbought reading are worked off with time rather than price is MEGA bullish no question about it. Then since yesterday’s wave 2 low we have formed a series is 1’s and 2’s on the hourly chart with wave 3 of 3 of 3 due tomorrow. What does that mean? It means MASSIVE gap up tomorrow and a rally that will completely decimate the bears.

Of course there is an army of bears out there who will point to the rising Dollar as being bearish but they are just plain wrong. The rising Dollar is a sign of economic recovery in the US therefore it is bullish for stocks. Think about it, the Dollar rally was not based on flight to safety or deflation fears but was based on strong employment numbers. That is bullish. Don’t get suckered by the rest of the bearish crowds groupthink. The rising Dollar is the final hook that will trap the bears.

The Santa Rally Express has left the station, better get aboard before tomorrow’s Retail Sales report IMHO.



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Fed Gone Wild!

Written by Bill
November 22nd, 2009 at 9:20 pm

Some amazing statements by Fed governor Bullard on the wires tonight, saying the Fed may NOT actually end the Quantitative Easing in March 2010 as they had previously promised. What is more amazing is that Bullard is actually considered to be one of the more hawkish members of the FOMC.

http://news.yahoo.com/s/nm/20091123/bs_nm/us_usa_fed_bullard

All I can say is BUY GOLD!!!!… Your paper money is headed for worthlessness as we have out of control spendthrifts and money printers running the Executive Branch, the Congress, and even the Fed. There is no fiscal discipline to be found anywhere in the government. Maybe this will change after the 2010 mid-term elections, but don’t count on it. We just keep taking one step closer and closer to Weimar Germany.

Evidently Gold futures tonight agree! (see chart below)





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Was That the Correction?

Written by Bill
November 15th, 2009 at 10:00 pm

Remember the well known seasonality trade that said we were going to get a big pullback from August into November? That well known seasonality “should” have been even stronger with this year being the 1st year of the Presidential Cycle (see chart below).



So, what happened? Well, it’s possible that correction DID actually take place in the form of what is called a “running correction” in Elliott Wave parlance. Take a look at the SPX chart below and notice the area I have boxed in that was supposed to be the seasonal pullback time period. Notice that at the end of this period the low in early November was only slightly above the high in early August. So, for that 3 month period the SPX basically went sideways in order to work off  it’s “overboughtness”. Notice also all the overlapping waves during this period which is also the hallmark of a corrective structure.

So, in essence we may have actually seen the seasonal pullback in the form of a sideways to slightly up drifting market. If so, then what does that say about what we should now see during the positive seasonal period that is in effect from now until year end? I’ll give you a hint… The bears will getting lumps of coal in their stockings this year.



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Tactical Considerations

Written by Bill
November 8th, 2009 at 2:34 am

Although I use E-wave as a primary Technical Analysis method in my trading, another major factor in my trading is Tactical Analysis. How I would describe this is that I look at things like the monetary policy backdrop and market sentiment to give me a big picture directional bias. When the Tactical and the Technical line up saying the same thing that provides a strong edge.

Unfortunately right now is not one of those times. My Technical E-wave work looks bearish, but my Tactical Analysis tells me to expect higher prices. For those who are Mortie’s Premium subscribers you get to hear my Technical Analysis on a daily basis so I won’t rehash that here. But, suffice it to say 1090 ES is a major battle line IMO. I call it the “Maginot Line”. So, as long as we are below it I have to give benefit of the doubt to the bearish scenario. But, what I really want to review in this post is my take on the Tactical backdrop.

First let’s start with Monetary Policy. Like it or not (and most Permabears hate it) the Fed is a MAJOR factor in determining the direction of the stock market. So, what did this week’s Fed statement tell us? I won’t reprint the entire statement as those who wish to read it can do so www.federalreserve.gov. But, IMO the money quote is the following:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

This answers the question everyone was asking about the Fed’s “exit strategy” from the ultra loose monetary policy that has been stoking asset bubbles in just about every risk asset under the sun. The Fed is spelling out the factors that must change in order for them to end the easy money. They are the following:

1) “low rates of resource utilization” – Translation: Unemployment rate must decline.

2) “Subdued inflation trends” – Translation: Core PCE must rises above their 2% comfort zone.

3) “Stable inflation expectations” – Translation: I think the Fed is watching the Long Bond Yield as their benchmark for inflation expectations. They certainly can’t be watching Gold as that would certainly not be signaling stable inflation expectations. So, it would take a significant uprising by the Bond market vigilantes to get the Fed’s  attention.

Out of these 3 criteria, the first 2 are severely lagging indicators, which means if the Fed waits for those signals to tighten policy it will be far too late and they will be well behind the inflation curve. Not to mention that we will have massive bubbles in stocks and commodities and a major collapse in the Dollar. Only criteria number 3 is forward looking, so really the only hope to avoid bubble mania is for the Bond market to revolt. That is why barring a major spike in Bond Yields the liquidity backdrop remains very bullish for stock here IMO. “Don’t Fight the Fed” is a Wall Street truism that has stood the test of time, and right now the Fed wants investors to take risk (ie. bid up stocks). So, to bet on a resumption of the bear market here and now is to bet the Fed will fail. And that is not a high probability bet IME. Of course that argument won’t dissuade the “P3″ cult one bit as they will just parrot the Prechter pablum about “social mood” and say the Fed is powerless. I always get a good laugh from that one as Fed and “powerless” is an Oxymoron as far as I am concerned. How can the entity that controls the creation of money be “powerless”. OK, enough of that rant but you get the picture…

Aside from Monetary Policy the next fly in the bearish ointment is trader/investor sentiment. I keep hearing how there are “too many bulls”. But for there being so many of them they sure are hard to locate . Don’t take my word for it though. Just go peruse a handful of the most popular trader blogs and read through the comments sections. I guarantee you will find a ratio of at least 10 to 1 bears to bulls (and I am being very generous as it really is probably more like 100 to 1). You will see that same thing in recent investor/trader opinion polls like AAII, or following the money by looking at things like Rydex fund flows and small trader options activity. The retail crowd is skeptical and cautious at best and downright frothing at the mouth bearish at worst. And it is amazing how eager everyone is to call THE top and resumption of the bear. If this was indeed THE top then IMO it will certainly go down in history as the most well called top ever. And you will soon see many newly minted millionaires in the comments sections of your favorite blogs as they all cash in on their lottery ticket P3 crash puts. Is it really that easy?

Now, I’ll be the first to admit that if I was just looking at E-wave counts I would strongly consider the mega-bear scenario and at the very least a substantial intermediate-term decline. But, the monetary and sentiment backdrops are not supportive of that scenario right now and that prevents me from getting too “beared up” just yet. Maybe, I will be wrong and it will be different this time. But in my 20 years of trading I have never seen a major top occur with this kind of monetary policy and this kind of widespread bearishness so soon after a top.

The only way I can reconcile the bearish Technical with the bullish Tactical is if we see a major dislocation in the bond market very soon and/or we see retail trader sentiment do a rapid 180 to bullish capitulation. Of those 2 bearish catalysts the former is the more likely IMO and the one to keep and eye out for. So, I will be watching the bond market closely, following all Fed speeches for subtle clues, and of course watching to see if the army of retail bears ever thins it’s ranks. If we can get some of those things to line up then we could be looking at a strong bearish edge. But, for now all I see is mixed signals.



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Has the Fat Lady Sung?

Written by Bill
October 18th, 2009 at 2:59 pm

I was taking a look at all the popular blogs out there that have a primary focus on E-wave and I noticed something very odd. They ALL agreed that the rally from the 10/2 low has not topped. Now, to be fair a 1-day decline is not compelling evidence that the top is in, but it seems to me that in the past when we have seen such sharp declines off a new recovery high we have had no shortage of top calls. This is especially true because the vast majority if not all public E-wave blogs are authored by dyed in the wool Permabears.

So, even though I was also in the camp of looking for one more rally, my contrarian instincts tell me to look at the possibility that the market “sneaked” one past us E-wavers and put the top in at the close Thursday, with Friday’s decline being wave 1 of the first intermediate-term decline since the March low.

My wave count is shown below. I did the count on the SPX cash index instead of the futures because IMO it is much cleaner and easier to read in this case. If this count is correct and the top is in we should know right away, as a big gap down Monday would be strong evidence, and a drop below last Wednesday’s INTC induced gap up would be further strong evidence. Below the 1060 SPX cash would be confirmation IMO that this count is correct and the fat lady has indeed sung.



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Going Up?

Written by Bill
September 6th, 2009 at 10:54 pm

After pondering all weekend on the wave count and with some help from Miramar’s astute observations I have settled on a new preferred wave count for ES. As the chart below shows, I believe that W5 is extending and that the rally from 8/17 to 8/25 was just wave 1 of W5 with the subsequent irregular flat correction being wave 2 of W5. If this count is correct we should see a gap up Tuesday morning and then a large rally to new recovery highs by mid-week. IMO this count will be confirmed by a rally above 1028.



The alternate count of course would be that W5 did complete on 8/28 thus ending the impulse up off the March low and that the decline into 9/3 was wave 1 down of a new intermediate-term downtrend that will at least correct the rally from the March low. This alternate count would become the preferred count if we take out last week’s low of 991.

Now we just have to wait for the market to tip it’s hand as to which wave count is playing out. We should know by mid-week.



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Next Move Is Important

Written by Bill
September 3rd, 2009 at 12:30 am

Just a very quick note as I am technically on “vacation” this week. On last night’s chart I was labeling the nascent pullback as a 1-2-3 decline thus far. But today’s lack of downside follow through has me rethinking that count, as it currently counts a little better as an A-B-C especially since Wednesday’s intraday low occurred right at wave C = 1.272 x wave A. So, I am now including both possible wave labeling on tonight’s chart. The next move now becomes very important. A further sharp sell-off from here would validate the 1-2-3 labeling, while a rebound above 1010 would validate the A-B-C count. The reason it is so important is that if this pullback begins with a 3 wave corrective move rather than a 5 wave impulse then we know that the Bear market has not resumed and that higher highs will follow this pullback.

That’s all for now, tomorrow should be an important day for the bull and bear camps. Let’s see who wins the battle.





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The Market Speaks

Written by Bill
September 1st, 2009 at 10:29 pm

Yesterday I proposed 2 potential wave counts, 1 near-term bullish and 1 near-term bearish. I stated that my line in the sand at which point the bull count would be eliminated was 1008 for ES. We blew through that level early on today and it was all downhill from there. My working count by default is now the near-term bearish count which as mentioned yesterday says the impulse off the March low has completed and at a minimum we should now see that long awaited 10% correction. The chart below shows the early progression of this count. Below today’s low, the next downside target by my work is in the 982-984 zone, and then below that is 970-972. I expect those to be decent support but to eventually give way, as I believe this correction is eventually headed for at least a test of the 950-960 key support. For now the strategy is to short bounces and watch the tape action unfold as I gather clues as to the quality of this pullback which will become especially important as we approach 950-960 in the days/weeks ahead.



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One Bullish Alternate Left

Written by Bill
August 31st, 2009 at 7:26 pm

There is one bullish alternate count that I overlooked yesterday that could be playing out here. The chart below shows this count where Friday’s marginal new high was only the ‘b’ wave of an irregular flat correction. If so then we either completed ‘c’ of 4 today or will do so tomorrow with a marginally lower low. The line in the sand for this count is 1008. If ES drops below 1008 then it would eliminate any near-term bullish counts in my estimation and next minimum downside target would be 975, followed by 950 and obviously there are lower targets that can come into play but we can cross that bridge when we come to it. Of course the bear count would be what I presented yesterday, which is that the impulse off the March low completed last Friday and we are either in wave 1 or A down (or will complete wave 1 or A tomorrow with a marginally lower low). Then we would see a wave 2 or B rebound followed by a significant downside breakdown in wave 3 or C.





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Extending or Ending?

Written by Bill
August 30th, 2009 at 3:28 pm

First off, sorry for the lack of posts last week but I was out of town due to last minute travel plans and was unable to find time to do any trading or even keeping up with the market very closely. Good thing is after the wave 3 rally that my last post predicted the market pretty much went sideways the rest of the week.

Now, I see two possibilities. The first is that Friday’s quick spike higher was the completion of wave 5 of W5 of Daily 5 off the July low, which would mean that the entire impulse off the March low has now completed and we should see a Weekly Wave 2 pullback which will likely be the long awaited 10% correction. The second possibility is that Friday’s spike was just wave 1 of 5 of what will be an extended 5th wave. The line in the sand for me is the uptrend line in the attached chart. Below that would confirm W5 is completed and that an Intermediate Term top is in place with at least 10% correction to follow. On the other hand a rally above Friday’s high would confirm and extension of Wave 5 of W5. I am pretty agnostic as to which it is so I will let the market speak and will react accordingly. Either way we should know early on this week probably by end of day Monday which scenario is playing out.





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