Value of Perfect Information

Trend day down. Trend day up. Trend day down.

This is a day trader dream

What happens really is that market sells with force and we get a nice down day. Then dip buyers come in at oversold conditions to roll their dice at glory, and we get a nice day up, but they do not do so on huge volume. Sellers re-appear and crush the dip buyers into losses. And it goes on until either sellers stop and join the dip buying party (end of correction), or dip buyers get the message and start looking for bounces to get out of mounting losses. The latter is the situation where oversold stays oversold and bounces never bounce high enough for those trapped because of their dip-buying excursions. Then, overhead supply builds and resistance levels mount and things get really ugly

So, if this is going to be just a correction, buyers should force it into a turn soon.

Regardless, judging by the volume of the recent declining days, and the force and fluidity of today’s dump, dip buying is something I’d rather not do at this point. Let the real champions pick the bottom!

This is a 15-minute chart of the index that I showed on my blog on Thursday.

The amazing 20-point run of yesterday had taken the index to a point where a perfect channel could be drawn. Today, all of that bounce was given back, and then some. The channel I drew yesterday held to perfection. Sometimes, we get it right

Today felt as if Thursday did not happen. But wait a second! Didn’t I say the same thing last Friday in the blog post of October 23? Friday, October 23, also wiped off an impressive bounce of its preceding Thursday. Seems like people do not want to be stuck with stuff over the weekend

Anyhow, if the count in the chart above is correct, we may be close to a bounce for a minor wave 4. There may be a bit of residual selling early next week before that.

Note that I can count the above chart in other ways as well. I just went with this one because I like its momentum profile and MA alignment. But, as usual, I shall try not to get caught in short term counts and shall pay close attention to important levels and trend lines.

Speaking of important levels, bulls lost the 1041 level. They also failed to prevent a close below 55 EMA

Index also closed below the broken March trend line with an emphatic candle on expanding volume. It just does not look good for the bulls. Can they redeem this? Of course! They, as we have been saying for days, need to spend money across the broader market.

Daily volume was heavy. Breadth was ugly!

The last time down volume trumped up volume like this was October 1. That selloff proved to be the washout event and bulls came back albeit at pathetic volume. This time, breadth has deteriorated further and the lead up selling has been at higher volume that it was prior to October 1. So, the situation is a bit more hostile to the bulls. We’ll see.

McClellan Oscillator (MO) is mired in oversold territory

You need to go back to February to see comparable behavior from MO

This is one of my favorite breadth charts

Short term breadth is very oversold

Many a moon ago, I was saying that the bears of the last drop had no significance in the course of the market action, and that market needed new bears with capital and conviction, and that new bears would have to come from the ranks of well fed bulls. I repeated that almost daily and constantly advocated watching for signs of distribution. We have been seeing heavy distribution for days in a row.

So far, market has delivered two good bounces off short term oversold conditions. Both of them fizzled and market got even more oversold. But have bulls really changed sides? Have the fat cats finally said that it’s over. I don’t know. All I know is that, if there still are bulls and green shooters out there, they should deliver a rally soon with a chart like above. Failure to do so will be very telling. TRIN MAs moving like that can make the environment very unfriendly to bullish aspirations.

A study of S&P’s cyclical momentum helped me plan ahead for a possible peak. It also helped me take a short stance near the recent peak with relative confidence.

This is an updated chart

CCurve is at a critical juncture. It is sitting on its uptrend since July. I will regard a break of that trend line as a second piece of evidence for magnitude momentum swing failure at the recent price peak, and may plan to get more aggressive on the short side. If it turns and make a higher peak than the last peak before making a lower trough, I will regard it as an indication that another momentum up cycle may be in the works, and may become wary of the short side.

VIX finally broke out of its down-sloping channel

It is at a long term level of resistance, and I wouldn’t be surprised if it ebbed back. Regardless, if it starts an uptrend, it would be supportive of a downtrend of the broader market.

—————————–

Hypothetically, assuming rather foolishly, if the market has topped (at least for a good correction), what can I expect as a possible target at this point?

This is a weekly chart that I have been showing a lot recently

There is a strong technical support band around 930-950 that coincides with 50% retracement of the rally since March. David Rosenberg, in his daily musings, says that he regards 850 as value given current numbers, so, I am gonna say that somewhere around 850-950 (I know it is a wide 100-point band) may be good drop target for what I know now – all hypothetically, of course.

If market indeed starts going that way, I would not be surprised if we started hearing rhetoric in support of another round of stimulus money. Keep that in mind.

Nas100 had a bad day as well

Above average close below 55 EMA with an ugly candle.

It is still in the weekly box formed by some price points that I calculated in September

My price points have been my trading markers and I see no reason why I should abandon them

Bears need to break the techies down or all of this might end up being just another meaningless correction. For me, there is no way around it, if bears are serious, techies have to go, and go faster than the broader market.

Let’s Wrap Up:

Short term picture does not look very good at this point. I am operating under the assumption that a top is in, expecting an OEW mid-term trend change. Technically, everything that I look at tells me that, at the very least, a good size correction in underway.

Market prices and breadth are sufficiently oversold to produce a bounce. Failure to bounce in the coming week may be interpreted as a serious sign of bulls losing their grip on the market

Support is 1018 and 991. Resistance is 1041 and 1061.

Short term trend is down. Mid-term trend is up. Long term trend is down.

Today I read in another financial website that they were calling for 1050 on the S&P 500;  well so did I!

 http://bostonwealth.net/2009/05/16/fair-value-of-sp-500/

 …and three days later I refined the S&P 500 at 1034!

http://bostonwealth.net/2009/05/19/another-way-at-looking-at-sp-500-fair-value/

…and I warned about the negation of the head and shoulder pattern

 http://bostonwealth.net/2009/07/15/has-the-sp-500-head-and-shoulder-pattern-and-what-follows-been-negated-after-the-break-of-the-neckline/

…and I said if we make it past 950, to the moon baby!

http://bostonwealth.net/2009/07/20/to-the-moon-or-the-down-the-shaft-express-train-straight-down/

I also presented on June 8, 2009 the following:

http://bostonwealth.net/2009/06/08/outcome-possibilities-using-historical-data-for-sp-500/

Outcome possiblities using historical data after S&P 500 has returned more than 30%

 …and this after nearly nailing the bottom in 2009 from October 2008!

http://www.bostonwealth.net/wp-content/uploads/2009/08/2009-08-07-bensprediction1.png

If I must say so myself, this is as close as you are going to get in this market in achieving that “Value of Perfect Information”!

So where do I think this market is heading now?  Sign up for my newsletter at bwm@bostonwealth.net for a special newsletter reserved for my newsletter subsribers that will go in the next few days giving you my market insight for the rest of the year!

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.

This is a follow up of my post over the weekend of the SPX extreme Bollinger Band penetration.

http://www.bostonwealth.net/2009/07/25/bollinger-band-third-rail-deviation-spx-analysis/

This 2 hour candle chart and the first candle of the market open penetrating the 3rd extreme Bollinger Band suggests price will track sideways and return to the mean.

Notice the MACD divergence is still in play.

With the a.m. Globex momentum follow through into the US Market open, it is very important to follow the Asian and European markets overnight trading.

It is very possible we will have one more lift in the a.m. session. Also with the US Dollar beginning to show some strength, this could be the beginning of a market REVERSAL late in the Day and into next week.

We will see how things look a few hours before the open. I am cautious here and will be out of the market by close Friday.

Follow my SPY Day Trades live on Twitter. http://twitter.com/Neboxian

[tags]SPX 500, S&P 500, Extreme Bollinger Band ,Bollinger Band, MACD,MACD divergence,US Dollar ,Reversal[/tags]

The title of this post say’s it all, don’t shy away when the best trading in some time is upon us. Contrary to what the street wants everyone to think, the market moves when people least expect it. Personally, I did not expect this market to bust through resistance levels of 950, or even 970, neither did most traders I know. I think we are overextended at these levels not because I am a perma bear but because volume is still lower and lower each day on the major indexes. If we are moving higher on program trading churning millions of shares in front of big block orders, everything is synthetic and bloated. I’ve read some interesting articles on how most of these programs work, most are very simple and rely on very simple concepts, heck I wouldn’t mind getting a grey box program going. I am an American and a capitalist, if something generates me trading profits I’m gonna go for it, maybe the playing field has changed for the next 3-5 years? This could be the case because retail has been blown out and a lot of big money is NOT coming back into these markets. Circling back to theme, “Don’t leave your desk early.” There may be some interesting trading opportunities, lots of news stories and takeover chatter seem to be working (coming in clusters), so don’t shy or you will miss the pie. Per my observations the past year, the market seems to rip up when everything KNOWS the market should be moving down, and vise versa. Don’t fight the tape, if we tank today I’ll buy puts but I won’t make any calls until I understand the tape and the trend. In the tech sector the ride looks to be over, the NASDAQ has been up what 10 days in a row Microsoft had less than stellar earnings and they are the big fish on golden pond. Hedge Accordingly

[tags]Microsoft, MSFT, NASDAQ, SPX 500, SPDR, S&P 500[/tags]

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]

Well with the “Head and Shoulders” pattern being negated,  http://tinyurl.com/klm6hj  we now need confirmation that we are indeed in a continued bull market phase.  As such we need confirmation between the indexes.  We have all learned that the Dow Theory calls for the Industrial and Dow Jones Transports to confirm each other to validate this new bull market.

Of  late the Transport Average has not been as important a signal over the last century, and one needs to look at the S&P 500 index for broader confirmation.

So the targets we would need are as follows:

S&P 500 above 950 would lend credence to a primary Dow Jones Industrial Average advance. 

S&P 500 below the all important level of 870 would open the door to the dreaded down the shaft, express train, straight down to 666.

[tags] Head & Shoulders Pattern, S&P 500, Dow Jones Industrial Average,  Dow  Jones Transports[/tags]

The S&P 500 has just completed a head and shoulders top and has broken its neckline which is considered a bearish signal moving ahead.  The downside price target should be equal to the distance between the head peak and the neckline. This break of the neckline implies a downside target of around 810.  Interestingly though is that the American Association of Individual Investors, AAII,  bearish sentiment is now at 55%, which surprisingly has not been this high since early March 2009 and we all know what happened back then!  

Interesting as well is that investors are still moving into corporate bonds.  The ratio of treasuries over corporate bonds is still less than one and currently at .95;  investors still have confidence purchasing corporate debt in that investors are still willing to put faith in our corporations. When the ratio is more than one, investors are flocking to the safety of Tresuries and confidence in our corporations is waning, and likewise it is not good for the economy and earnings

That ratio can also be found in my Treasury/Corporate Ratio category on the right and here:

http://www.bostonwealth.net/category/markets/market-sentiment/treasurycorporate-ratio/

A sobering fact:  As of June 30, U.S. stocks have underperformed long term Treasury bonds for the past five, ten, fifteen, twenty, and 25 years.

A ray of sunshine: There’s almost never been a 30-year period since 1802 when stocks have underperformed bonds.

The bad news:  The current long term treasury yields are too low. Long bonds have a track record of yeilding much more than inflation; something investors are acutely aware of when investing in long bonds.

A recent study has shown that  long term bond rates on average have exceeded the inflation rate by about 2.4%. However seeing that the 30 year yield is around 4.3%, an investor can figure out that this only 1.9 percentage points of its current yield represent compensation for inflation over the next 30 years.

So why would you buy long bonds.  The rate is so low that you can hardly keep up with the consumer price index’s overall historic average

Update:  johnrr has solved this test!  See comments below.  New test nest weekend and winner and all that provide comments get different market reports.  As tests get harder, I will be offering free airline points and Marriott hotel points enough for a free night stay.  Yes and the Marriott includes the Ritz but you will have to win a few tests to get that! 

Why is this time different so far and is still only a bear market rally at best?

An analysis of the prior twelve historical lows in the S&P reveals that it can be identified as a substantive low if certain conditions are met.

First is that the S&P crosses above both the 50 and 200 day moving averages. Paramount is that the S&P then goes back and retests the lows, and if that happens, then the next year produces on average, a return of the magnitude of about 25%.

So based on this historical data, this year we should be seeing the S&P around the 1200 level. Well then what gives? Why is this year different so far than the prior twleve historical lows when we have the major crossover as described above?

Because since achieving the conditions mentioned above, this year we have failed to go back and retest the lows.

Orignial quiz was posted earlier.

The answer can be summed up in four words… ok who knows.. let’s get some lively discussion going!

I wil provide answer if no correct answer by late Sunday evening Eastern time zone!  First one to get it correct gets either the S&P Bull’s Eye Report or the S&P moving average crossover report.  Your choice!

Ok I will be nice.  Anyone who comments,  can email me at bwm at bostonwealth dot net and request one of the two reports after this test is completed late tonight!

Outcome possiblities using historical data after S&P 500 has returned more than 30%