Value of Perfect Information

Name: Rich P.

Web Site: http://ew-indextrader.blogspot.com/

Bio: I've been trading in the market for about 6-7 years now, and became very active in 2006. I started the usual way paying for various newsletters and thinking I would make a million dollars if I just kept at it compounding my returns. Well in 2007 I pretty much wiped out my account (>90% lost) on a major option play that didn't go my way (can you say no risk management). In 2008 I took a severance package and went FT in the market while I scouted the market for new FT opportunities. In 2008 I was able to completely re-coup my '07 losses and bank some nice gains using front month options, following the trend, and a more disciplined approach. In an effort to improve my risk management, I embarked on a plan to trade the E-Mini Futures. I focus on market structure using Elliott Wave Analysis, RSI, MACD, trendlines, and channels. It's all about the swings...

Posts by Rich P.:

No clear victor…yet

Written by Rich P.
August 30th, 2009 at 6:12 pm

Today’s post is going to highlight why the market put Friday’s action right at the edge.  With little favor towards bull or bear.  Before I go into the particulars, I want to ensure everyone knows where I stand.  This is a bear market rally:  sharp and swift;  that is how you can spot them a mile away.  We WILL return to lower lows, but picking the top HAS been dangerous.  But there are signs in the price action that a top MAY be in; however, price has yet to confirm it, so we will wait until the market provides more of the puzzle that we Elliott Wave Technicians enjoy so much.



The above chart is the daily SPX.  We have a nice bearish wedge forming that began back in early May.  Since that first touch we have had 4 more assaults on breaking this wedge to the upside.  So far, not one has succeeded.  Last week; however, was a different kind of assault.  Instead of lasting 1-2 days and giving up, the bulls attacked the resistance line 3x in the last 5 days and kept price close for the other 2.  In each of the 3 assaults, price was turned back.  In fact, after all was said and done, all the market was able to produce was one beautiful weekly doji candle depicted below.



 

This is the back drop for what will be next week: a range expansion week with a major breakout.  But the question is in which direction?  Generally range contraction is a sign of a top as fear is a stronger emotion than greed.  And with the exception of a short squeeze, fear can open up the market easier than any bull move.  I have hard time believing there are enough bears around to squeeze; however, the sell stops under the market msut be far and wide.  I give this evidence to the Bears 1-0.



Now this next chart shows the last two corrective moves off of the top trendline.  Notice something similar here?  All three boxed waves are equal in value.    The previous 2 waves were corrective in nature.  Was Friday’s also?  I give this piece of evidence to the Bulls: 1-1.



This chart shows what happened on Friday at the hourly level.  The 34 SMA has been a clear indication of ST directional change on the hourly chart.  Friday morning we blew right through it, then spend several hours hovering before the bulls closed the day above it.  The break was bearish and the close above it bullish.  I give this a tie: 1-1-1.



This last chart shows how close the bulls are to the cliff.  While they were able to get price above the 34 hourly SMA, the price pattern could still work out in favor of the bears with a massive down move starting on Monday as the last move was only able to attack the .786 retracement of the last wave.   Should price move below Friday’s low, then Thursday’s low should come easily and the unraveling will likely come with it.  With so many other Bearish factors, I have to give this piece of evidence to the Bears: 2-1-1. 

Not a strong case, but Monday should be the deciding vote.  It should make for an exciting week. 

 

 



Elliott Wave, Markets | Comments (3)

Critical timing windows and market symmetry

Written by Rich P.
August 9th, 2009 at 9:02 pm

I’ve been out for sometime busy with life and summer vacation.  Now I’m back and getting ready for a new school year (tomorrow) and some deep analysis on where we are in the market. 

When looking at possible turning points I like to see how many technical factors line up at a certain spot.  The more that add up the more confident I am in the trade.  There are several lining up with last week’s push higher, so in this post I’m going to examine a few different technical factors that I look at to see where we might go from here.  These include:

• 21 week pivots
• Fibonacci Retracements
• Market Symmetry and Counting Waves



 

21 Week Pivots

There has been a distinct pattern in the market for some time.  Going back even further than the start of this bear market, though I am only showing the pattern since the October 2007 top.  The pattern is this: every 21 weeks (+/- 1 week) the market makes an important pivot in the price action.  This pivot could either be a high pivot or a low pivot.  And the pivots do not have to alternate.  In the pattern that is in my chart there are two sets of 21 week pivots that you can trace through the price action.  Last week was week 22 since the last pivot.  If the market did make an important pivot last week, it will obviously be a high pivot.  Now this doesn’t mean that we’re going to new bear market lows, but it does mean that the market could be in for the biggest pullback that we’ve seen since this rally began in the beginning March.



 

Fibonacci Retracements

When a countertrend develops it will generally retrace the previous price wave anywhere from 38.2% to 61.8% although 78.6% is usually the extreme level and only occurs in the ‘B’ and the ‘2′ position of a wave count.  Last week marked a very important point as the S&P 500 retraced 38.2% of the bear market rally from October 2007.   This means that this bear market rally has met the minimum level of retracement.  Does it mean that the market can’t go higher?  Absolutely not, but it does mean that the market is likely to meet significant selling in this region as the big players will at least test the stamina of the bulls.



 

Market Symmetry and Counting Waves

One thing that I’ve found in my wave counting is that there is a consistent symmetry in the underlying price action during a larger price wave.  Once that symmetry ends, then the larger price wave also ends.  There has been a very distinct corrective wave that has shown up 6 times since July 7th and 5 more corrective waves that are all 61.8% in size to the other 6.  This is absolutely remarkable market symmetry.  When the market began to sell off near the end of Friday, the market ended at the perfect spot to add one more corrective wave to the previous 5 61.8% corrective waves.  Should the market keep heading south, it can travel as far as SPX 1004 before it will be equal in size to the other 6 larger corrective waves.  Should it travel even farther than that, then that would mark the end our market symmetry and likely the end of this price wave since July 7th and a larger corrective wave will begin.

 

 

 

My Elliott Wave Count

From the bear market low the market completed a 5 wave move that I am labeling primary wave 1/A.  Since then, the market is tracing out the corrective pattern equivalent of a zigzag.  Our wave X of the zigzag was extremely shallow (23.6%), and that generally creates the environment for a shallow Y wave, which began on July 7th.  If the market holds 1004, then I’ll expect the market to make a move for 1050+ area. From here should the market drop below 1004, I am expecting one of the following scenarios:

• either another X wave to 940-970 range
• a larger degree b wave down to 815-860
• a resumption of the bear market to new lows

Certainly with this kind of probabilities, it is important to manage risk and watch how the market is behaving as it approaches these levels.



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Objectively Counting the Waves

Written by Rich P.
July 21st, 2009 at 12:39 am

When I first started trying to apply Elliott Wave Analysis to my charts and trading I floundered all over the place. I tried to measure every wiggle as a wave taking it down to a 1 min chart all the way up. In the end, the market did whatever it was going to do, and I was left staring at the screen as the market continued to defy the waves I was applying to it. I felt like if I was ever going to be a successful Elliott Wave chartist, then I needed to come up with some objective ways to measure the market’s price action. Here is what I came up with:

• 8/34 Simple Moving Averages
• RSI Indicator
• Fibonacci Retracements
• Price Channels
• Time Frames

When it is all said and done, this where I begin with my charts. Certainly there are times where the market moves so quickly that it might be hard to catch a particular subdivision of a wave on a chart. This is how I apply the above tools.

8/34 Simple Moving Averages

I found as I watched the market that the price action tended to touch and go the 8/34 SMAs in a way that was very similar to the wave patterns I was looking for. You’ll notice that in the above chart I use a close below the 8 SMA to denote a wave. If price closes below the 8 and not the 34, then that generally denotes a subdivision to the wave. Sometimes it is not a perfect counting system, but it has benefited me greatly.

RSI(5)

I use the RSI Indicator to help me measure oversold and overbought areas in the market. Since a price wave should create an overbought/oversold condition, I use this to help confirm my wave counts with the moving averages. Often times the corrective waves don’t make it all the way to the oversold area (<30), so that is important to watch for. I added my price wave counts to the RSI Indicator, so you can see how I can count the waves with the RSI too.



Fibonacci Retracements / Extentions and Wave Parity

There are common relationships between waves that I use to start to identify potential price targets. The most common relationships I use (in order of importance) are:

• wave c = a
• wave c = a * .786
• wave c = a * .618
• wave c = a * .382
• wave c = a * .500
• and the same relationships between waves 1 & 5

I use the same Fibonacci ratios for key retracement (in order of importance) areas:

• .786
• .681
• .500
• .382
• .236

Fibonacci ratios cannot be used in a vacuum. I like to put them on the chart and then look at key support and resistance areas along with trend channels. Where more than one line up is where I put likely targets.

Time Frames

One thing that I have had to do as I’ve tried to chart the waves is realize that sometimes it is easier to take a top down approach instead of a bottom up approach. I like to use the 5/15/60 minute time frames to do my short-term charting. However, in the long run, I always will use a higher time frame chart over a shorter time frame chart. Sometimes the noise from the market can make the waves to hard to read at the shorter time frames.

Summary

Charting Elliott Waves is not an easy endeavor. It takes practice to apply the Elliott Wave rules and the guidelines that are outlined in Robert Prechter’s book Elliott Wave Principle. Using some objective price indicators allows me to focus on the patterns and not worry about measuring every wiggle. Practice with your own charts and see if you can’t find some ways to bring some objectivity to an otherwise subjective art!

[tags]Elliott Wave, Technical analysis, RSI Indicator, RSI, Robert Precther, Elliott Wave Principles, stock market, Moving Averages, Price Channels, charts, SPX 500, S&P 500, Fibonacci Retracement, Fibonacci[/tags]



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The Dam Is Ready to Break, but When?

Written by Rich P.
July 12th, 2009 at 9:15 pm

While I have my own blog, I do post here at the Boston Wealth site every week or so.  My goal is to try and post something different than my daily rant on my site.  As my last analysis is critical to the ongoing market forecasts, I decided to recreate here too.  I hope you enjoy!

**************************************

The funny thing about the market is it tries the patience of all. With a nice head and shoulders pattern in place and everyone talking about it, the question is likely not if it will be confirmed but likely when and how far a drop. One thing will be for certain, the move will not be text book.

From, here I have outlined what I think are the three highest probable paths the market will take:
- a bounce to the 910 area
- a solid break of the trendline with a selloff to the 780-815 area to finish off intermediate wave B
- a solid break of the trendline and an eventual move to new lows




Scenario #1: A Bounce
This is the fakeout scenario. This is where all the bears who recently got short have to cover and all the bulls believe we are heading to new highs. This is the scenario that will assure us that this is intermediate wave B and later in the year we will head to new highs. I’m looking for a close above 890 for this scenario and a strong up day tomorrow.



Scenario #2: The Bullish Sell Off
This scenario leads to an immediate and strong sell off tomorrow. As strong as the sell off is though, the market will begin to regain composure in the 840-850 area while the market continues to make its way to the 815 zone. Under this scenario, the bears will be disappointed as the market will regain its footing much to their dismay and begin a choppy range bound assent to new highs later in the year.


Scenario #3: The Bearish Sell Off
This is the beginning of the next leg of the bear market. Primary wave 2 will be over and the market will head to new lows. This is where the market takes back all the paper profits that the retailers gained off of the March low and likely some more as the Bulls try and catch a falling knife and the Bears who were looking for a bounce get run over in the fall. If the market does sell off tomorrow, watch what the market does on the way down. No need to be a hero and try and catch the turn perfectly when there may not be one.

Summary
So where do I place the highest odds? I would say scenarios #1 and 3. Both of these would hurt the most people (Bulls and Bears alike).



Markets | Comments (2)

A Look at the SPX Sectors

Written by Rich P.
July 6th, 2009 at 10:44 pm

When looking at possible trend changes, I think it is always a good idea to examine some of the key sectors that make up the S&P 500 to see how they are fairing.  Today’s post will focus on the Financials (XLF), Technology (XLK), Energy (XLE), and Health Care (XLV) sectors.  These four sectors make up over half of the S&P, so watching them for signs of a breakdown should give us early confirmation for when and how far the next turn down comes.

Let’s start with a quick look at the SPX. This is an hourly chart and you’ll quickly notice that we have a double bottom on a smaller time frame with a test of that bottom today.  So, we could be at the beginning of new bull move to new highs.  However, we also have a non confirmed Head and Shoulder’s pattern (that could be confirmed any time) along with a short-term bearish bias as long as price continues to stay below SPX 930.  A break below today’s low will leave open the possibility of a retest of the March lows.

Financials (XLF)
The financials were certainly beaten up the most when we were hitting the lows in late February and early March.  They were one of the first sectors to turn up and have had quite a rally off the lows.  As you can see from their chart, however, the financials have been unable to string together the higher highs and higher lows that the other sectors were able to do in June.  A break below 11.20 and the financials could be an anvil pulling the SPX over the cliff.

Technology (XLK)
The technology sector has always been one of the strongest throughout this bear market.  Keeping above their bear market lows in early March, they have now formed a nice double top.  They are currently hanging on for dear life and a move below 17.60 will certainly spell disaster for the market.

Health Care (XLV)
With Health Care likely the most shielded industry from the current economic woes, it should be no surprise to see this sector holding up the best.  However, they are currently at the bottom of their channel, and a break here will put an end to the good times.  Keep an eye on 25.40.

Energy (XLE)
With everyone so bullish on commodities and the reflation scenario, one would think that the energy sector would be holding up much better.  But a look at their chart shows they have already broken down from a bearish wedge and have closed below key support.   Price looks poised to ‘kiss’ the breakdown good-bye tomorrow.

Summary
My best conclusion from looking at the SPX heavy weights is that the market is at the cliff and already leaning over.  Tomorrow’s rally (if there is one) should not reach higher than 915, and if any of these sectors break down early, look at it as a sign to go all in on the short side.  Happy Trading!



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Counting the Waves

Written by Rich P.
June 30th, 2009 at 1:24 am



For my first post, I thought I would breakdown the waves off of the March low.  I had originally counted this as a triple zigzag, but as I was looking at the corrections and seeing how the puzzle pieces would fit best together, I came to a different conclusion: a 5 wave move with a subdivided 3rd wave. 

To start my analysis, I took all the corrections off the bottom and compared them in terms of price and time.  All together there were 9 waves.  Standard EW says that 9 waves is an impulsive move, so I wanted to see if any impulsive wave formations could be formed using these 9 waves without breaking any of the cardinal rules (i.e. wave 4 overlapping wave 1, wave 3 cannot be the shortest, etc.).  In addition, I was looking for guideline of alternation where waves 2/4 alternate between a zigzag and a complex corrective wave structure (i.e. flat, triangle, etc.).  What I came up with is shown here:

Minor Wave 1
This was the fastest and strongest part of the move: 166 points in 20 days.

Minor Wave 2
This was the first correction off the rally.  It lasted a mere 4 days (2 trading days) and was a 32% correction of wave 1.   

Minor Wave 3
This wave subdivided with 2 corrective waves of just under 50 points each (minute waves 2 & 4).  In the subdivision, minute wave 4 alternated with minute wave 2 to form a corrective flat.

Minor Wave 4
While this wave only corrected 32% of the previous rally, it did last 8 trading days (a corrective triangle) and alternated with Minor wave 2.

Minor Wave 5
This was a quick burst out of the triangle and was instantly sold.  It lasted less than one day and was good for 28 points.

Intermediate Wave B


We’ve finished minor wave A (67 point correction in 12 days) and are currently working on finishing minor wave B (so far a 39 point move lasting 6 days).  We are hitting against a very strong resistance level, but we do have the end of month/quarter tomorrow, which does have a bullish bias.  Either way, the high for July will likely be either Wednesday or Thursday.  I’m looking for a minimum of SPX 815 to finish off Intermediate Wave B.

One more thing to add. If we somehow move to new highs, then that would put in a play an 11 wave move off of the low, which is a corrective wave count.



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