Financial markets are known to push people just past the breaking point before reversing strongly back to the larger trend. This is perfectly normal for wave 2 behavior, which I believe is over at this point. While our line in the sand laid forth on Wednesday was pierced to the upside, the utter lack of strength in our once leading indexes, the $NDX and $COMPQ, certainly beared watching. As I write, the $NDX is down a little over 2%, while the larger $COMPQ is down just under 2%. Yes, I know that DELL had bad earnings, that accounts for one stock. Something else had to give to get the reversal in breadth, and price, that we have this morning. For those of you who use pivots also, you might note that /NQ (Nasdaq futures) opened below the S1 pivot this morning, rallied up, and turned down from a little beneath it, a strong bearish sign.
This image represents a complete reversal in breadth from the past 2 days. The chart below indicates that the price is confirming this reversal by breaking through the lows of 8/26, a previous 1st wave low. As Elliott allows it at this point, the probablities of a corrective pattern taking us to a lower low is almost solely contained to an expanded flat. As it stands now, that is still a possibility, as the market has only had 3 waves down thus far. If this is the case we should be looking for around yesterday’s high for a target, as illustrated by the other chart below.
And the best working alternate…
On Tuesday I mentioned that everyone was watching FRE and FNM. I told Mole yesterday that their momentum and/or rate of change was falling off a cliff, and that that was a strong bearish indication. Today, they have both finally decided to turn down. While this is just one day, it ends the four day uptrend in which these stocks have almost doubled. We need moves like that in a bear market, otherwise we would have nothing left to short. While I wasn’t happy to see it, I am happy to see it coming to an end. Here is a quick chart of FRE, 20day 10minute. I used the most recent move down and up as a reference. There are other highs that I could base this off of, but the implications remain the same no matter which high you use. Notice the break of the trendline, the A=C equality, the retracement to the 23.6% fib, and the beauftiful gap rejection.
This is another chart I posted on Tuesday night. While the major two that we have been watching (FRE and FNM) are breaking down, we need some confirmation by the rest of the sector. As soon as the $BKX breaks that lower support level, we would have great confirmation in that the financials are moving lower collectively.
Lastly, I will toss out an interesting trade that I took yesterday. This is not a recomendation to follow me into danger, but I think there are some interesting elements that combined to make this a high probability trade IMO. I grabbed a small put position on MBI. Let me throw up a chart, and I will walk you through my reasoning.
After rallying nearly 500% since it’s June lows, MBI gapped up and ran an astounding 30%+ yesterday. It made a higher high on a slight divergence in the RSI. It pushed outside the 20Day 2.0 Bollinger bands, as well as outside the 2.5 Bollinger band on a 100Day setting (not shown). A move back inside either of these would be a fantastic reversal signal, as we are outside of the range of 95% of the past 20 days, and 97% of the action in the past 100 days. That is a pretty good indicator that this rubber band is stretched to the breaking point. I think this stock can easily head back to the $5 range in a short matter of months, as soon as it closes inside these levels. As I said, I only picked up a small position yesterday, but here is why I did it…
Notice the IV in the back months. 100% for OCT and 133% for NOV. These may seem very high, but looking at the average implied volatility, we would see that these levels are relatively low. I also notice that by the end of the day, the volume on the OCT 14 Puts had pushed about 15K contracts changing hands on ZERO open interest. This is a tell tale sign, while not always correct, it is a great indication of an explosive move. I ran through some quick calculations, and found that certain options could potentially double on volatility alone. Then when you throw in a 60% loss or so in stock price, these things have fantastic potential. Here is how they are trading today, with MBI down between 5% and 8%. Notice the IV’s today…
With a vega of .02, a 50% gain in IV should translate to a $1 increase in option price. That alone is a 30% to 50% move in option price depending on your strike. I got a chance to get these options at a low IV yesterday, and it is much higher today. Ideally, you would look to enter positions with a low IV, especially if in the past the IV has exploded above 200. Typically, I do not trade options with IV over 100% because I trade OTM options, and that IV greatly affects the time value in my options. I decided to go ahead and take this because I liked the set-up so well, and liked the “multiple streams of income.” (delta and vega)
That said, the market is treating the bearish case very well today. In fact, given the action of $NDX and $COMPQ, the indexes I follow closest, I am forced to return the near term trend to down. Almost everyone that I have heard expects the “big boys” to come back and squeeze the shorts out of the market. Since that is what everyone expects, I am not surprised to see the market selling off hard today. It should be an interesting day on Tuesday.
Hopefully this can spark some interesting discussion. I would love to hear thoughts or questions.
I will apologize for my absence tonight, I had a few things come up. This will be quick, but I will follow up with some more commentary during the day tomorrow.
As the market stands right now, we have breached Fridays highs on some of the indexes ($SPX, $INDU, $RUT), leading us to seriously question our wave 3 count. Here’s what I mean.
While losing status quickly, the true EWT rules allow for a retracement of up to 100% of the first move down. Any sharp turn down could quickly accelerate lower.
The probabilities of the near term bearish case are waning rapidly. Any break of the uptrend lines of this rally (not shown) with conviction should be monitored closely. Likewise, any push above critical levels should be viewed bullishly into the 12200-12400 range at this time. That said, near term trend indicator is set to mixed (with positive overtones), while longer term remains firmly down at this time.
I will be back tomorrow with some longer term ideas that you might find interesting.
I’m going to make things extremely short and sweet tonight as our comments counter indicates that the majority of our audience is either enjoying a week in the Hamptons or has simply walked away in disgust until after Labor Day.
I’m not going to sugarcoat it – today was not a fun day for the bears. I expected a little rally today, but low volume or not, the breadth was very strong and the bulls were in complete control. Even though we had a bit of a pullback late in the day, we closed not too far from today’s highs. So, the one question in your mind is probably where do we go from here. The answer is in the only chart I’m going to post tonight, which pretty much tells the story:
SPX in limbo land.
Tomorrow should be extremely interesting, as we are at a fork in the road on a short term basis. You know as Yogi Bera once said: ‘If you come to a fork in the road – take it!’ In all seriousness: If we wind up breaching the Friday highs we will need to completely revise our wave count, and in that case our upwards target on the SPX would be the area around 1350. Now, that is the scary scenario for us bears, but the highest probability remains a drop towards challenging the July 15 lows and that very soon. In order to put the bullish scenario to the sidelines we would need to breach the 23.6% line which marks the 1257 zone. Once we get there things should speed up quite nicely.
The one thorn in my eye is something that became more apparent when I was drawing the ‘fancy’ chart above. As you can see we have been spent a LOT of time inside 23.6% – 38.2% zone. It’s about time that we push outside of this ‘limbo area’ with some confidence otherwise this implicitly would defeat the wave 3 of 3 scenario. For the EWT challenged, let me explain: According to EWT this third wave down is supposed to be extremely violent and put the fear of God into those pesky permabulls. However, if we forget the wave count for a moment things are still looking pretty sideways as of now. Berk and I have been arguing about that point today and I concede that the wave count can be interpreted that we are moving down fast enough. But I personally need to see a bit more conviction – pre Labor Day week or not. At some point we are running out of excuses and need to see a monster drop that whipsaws the bulls for a change. That’s my personal opinion and I have tried to visualize my prospective in the chart above.
As a final point: The treasury yields ($TNX) actually finished down today after rallying up in the morning. We had the same situation happening yesterday, when I was looking at the treasuries after the market closed and liked what I saw as a bear (e.g. dropping yields = bad for market). However, in early morning trading they pushed up strongly and that in combination with futures in the plus (@ESU8, @YMU8, @NQU8) gave me a strong indication that the market was going to rally today.
So, my plan is to go to bed early tonight and get up 1/2 hour before the market opens (hey, I live in CA – I need my beauty sleep) to make sure that those yields don’t paint a rally again while I’m not looking. If you are short the market right now (and Berk and I are) and you see a situation forming where the futures and yields are pushing up ahead of the opening bell, then you might want to get ready to grab a hedge position to soften the blow (e.g. IWM, SPY, QQQQ calls). This will give you some profits to enjoy while you start closing out the short positions you don’t want to hang on to. In the case of Berk and I that’s a lot of negative delta to close out, so we plan to sacrifice a few chicken tonight to sway the market Gods to our favor. Be aware that we might see a fake-out as well – the market might push up, we back up the truck on some index calls, and then we bounce off the 38.2% line and trace back down to new lows. Hey, who said options trading is easy? Unfortunately there is not perfect answer right now and if we see a meek pre-market action to the up side tomorrow you might want to hold off with loading up on those calls until we do breach that line with confidence. After all, we are not that far away.
But enough with the doom & gloom – chances are we drop like a rock tomorrow and party like that until the weekend. But now you’re armed with a baseline of what to do when, so adjust your trading according to your personal risk/capital/exposure levels.
I am not one of the random speculators out there that is willing to believe that the market is being “held up” by any particular stock. Or that their is one particular “shoe” that is waiting to drop, but I do think the action of FRE and FNM actually are on everybody’s minds. While in some instances, this would be an argument against a particular wave pattern, I feel that the due to extreme herd mentality surrounding these issues, they are worth observing. The orange lines on the chart represent an equality Elliott often speaks about in corrective moves.
The green channel is also used to identify corrective patterns in EWT. I have drawn it using the first two highs of the pattern, and basing off of the wave B low. Remember, we draw channels differently depending upon a corrective or impulsive move. Last thing of note of the chart is the small scale fractal 1-2 which bears considerable similarities to this chart.
Here is the $INDU chart. Not much new, the retest remains in place, anemic volume remains the norm, and today’s breadth was modest at best. e, anemic volume remains the norm, and today’s breadth was modest at best. While everything continues to support our view that a wave 3 is beginning to unfold throughout multiple timeframe, my personal “line in the sand” is 11,100 in $INDU.
Lowest volume trading day of the year!!
The $VIX is giving a nice retest of the break-out level I had been watching closely. I will be continue to eye this for another confirmation that the trend is accelerating lower. Either way, the fact that the $VIX close down 2% while the market barely kept its head above water is classic bullish optimism.
Here’s my view of the $COMPQ. I have outlined two previous spinning top-ish candles that the $COMPQ displayed in the first move down. My view is that we are in the second (right-most) box, and that we should speed lower. The alternate view is that we are close to finishing an impulsive move to the downside, and should be prepared for a rally if indicators begin to point up. The great thing about the location of these two candles is that they are accompanied by a gap lower. I mentioned to Mole on Friday that the $COMPQ has a nasty habit of gapping away from it’s second wave peaks. Finally, the 13EMA is about to cross the 30EMA to the downside, which has led to some serious declines the previous 3 out of 3 times it has occurred. I do not use this as a trading signal, rather to watch the short and intermediate term trend.
$COMPQ daily "road map"
Let me close out by throwing up another chart I believe the mass public (at least those with some financial exposure) have seen frequently here of late, the $BKX. Yes, I will finally toss the spotlight over to the current star of the world stage, the banking index. Notice the orange trendline, and the 5 closes $BKX has had at or very near this level. This index is sandwiched between a support level about to break, and both the 13 and 30EMAs. Today’s high also represents the 61.8 retracement level of the move since the top in either April or May, the first of our typical targets. Volume has been “seasonly” decreasing, and we are about to have “good seasonal patterns” also. What I see from the chart is a nice BB squeeze with the index positioned for a bearish break-out, to be easily confirmed with any volume.
Remember, patience is a virtue, and an absolute requirement for trading. Confirmation is king, and he will be making his rounds soon enough!!
What a difference one weekend can make. Friday turned into a major bear squeeze and anyone getting scared out their short positions probably kicked themselves by about lunch time today as the tape painted a complete u-turn on all averages, the S&P even dropping as much as to returning all gains since last Wednesday.
Market suffering from bad breadth.
As expected the market suffered from pretty foul breadth today, as no amount of Listerine was able to wash away the stench of a complete lack of buying interest (see ratios above). What’s interesting and a bit encouraging is that the NDX was leading the pack with a 31.7:1 decl/adv ratio today; and the Dow was completely flat-lining with not a single of its thirty stocks in the black.
A line in the sand has been drawn.
Let’s focus on the S&P tonight, as it’s painting an almost perfect short term Elliot Wave pattern and since it tells the story for the other main indexes. The S&P futures chart above shows us that a ‘line in the sand’ for the bearish case has emerged around the 1294 area. For the $INDU that line hovers around 11,625 and for the $COMPQ it traces the area around 2,415. Should we push back up in the coming days and challenge or perhaps even breach this line, it would greatly diminish our chances that this is our wave 3 of 3 scenario. Implicitly this would also mean that we would most likely push up higher and re-test 1320 or even 1350 on the SPX again.
SPX in the process of painting a clean EW motive wave.
However, today’s tape made no single attempt at challenging that resistance line and immediately proceeded to the ground floor via the express elevator. I was previously mentioning how the S&P traced out an almost perfect Elliot Wave today: Looking at the chart above its a rare occasion to see the SPX paint an almost perfect motive wave; only to be interrupted from completing its 5th down by the closing bell (how rude – how about some overtime?). We usually don’t see such clarity at such short time intervals and that alone gives additional credence to where we are heading, which is down. In any case, the inability to continue Fridays challenge of our support line makes a strong case for a continued bearish trend and we expect to soon revisit the prior July 15 lows on all averages.
Treasuries pointing the way forward?
But it wasn’t just the equities that took a heavy beating today – almost everything was going South today: Sweet crude and Gold were both down as were the 10-year Treasuries yields, falling to 3.79%, matching levels from early May and July. Despite the headlines in the news indicating that the equities managed to drag down the treasuries today, it was actually the other way around, as the early morning action in the treasuries gave us an inkling of were the rest of the market would be heading today. In that context I came across the following quote today on Bloomberg:
“I’m bullish on Treasuries now because of the economic situation,” said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s biggest bank. “The housing market is sluggish and the financial institutions in the U.S. have many, many problems. There is no fuel for the economy.”
Bando-san is spot on with his analysis – as the market is extremely cash starved right now. But what’s even more important is that the treasuries are hanging by a thread, as apparent form the chart above. We are in the process of dropping through an important resistance zone and our next stop should be somewhere around 35.75 – there’s not much to hold them up unless banks suddenly start lending again. If today is any indication as to the correlation between the treasuries and the equities market, this adds another piece to the puzzle for both our short and long term bearish outlook.
Gold bugs at the beach this week.
It wasn’t a big surprise to us that Gold didn’t move much in either direction, although those folks over in the ‘market/gold correlation camp’ have to explain to me why Gold was down while the market took a beating. Those poor Gold bugs who I (almost) pity, are currently consoling themselves by rationalizing the action of the last few days as ‘base building’. However, I expect a push towards the 855 level to soon put an end to this consolidation period, followed promptly by another rapid drop back down to below 800 and then some. I think we should call this period in Gold as its ‘Rodney Dangerfield Phase’ as the precious metal ‘justcan’t get no respect’. It’s even possible that we might see an immediate drop from right here – I would give both scenarios a 50/50 chance right now.
The only regret Berk and I have about last Friday is that we didn’t load up on even more index puts when the markets started topping out. Today, those puts were paying us handsomely as we had loaded up on FOTM options which are now accruing negative delta on the double. That makes exactly the point I have been driving at all last week: Forget about day trading at this point – yes, the market is still whippy – but this is not the time to focus on short term gains. This is the time to leverage bullish retracements as buying opportunities for strongly defensible short positions. Those puts we bought on Friday have stops sitting above that mighty ‘line in the sand’ – if we breach that one the jig is up anyway. But unless this happens we’re sitting on some mighty strong resistance here. Shame on you if you did not take advantage of that – it took a bit of courage – I give you that; but in the end everyone following our postings should have been very familiar with that long standing vertical resistance/support line and should have recognized the apparent inability of the market to breach it. I think even Jeff Kohler over at OA and Tim Knight on the Slope of Hope have had postings to that effect.
The market will always do its best to scare you out of even your best positions. That’s where a solid trading system comes in, something that Jeff over at OA has put a lot of work into conveying to his community. We won’t try to emulate his example and would like to refer to his blog for excellent insights on how to structure your trades and to pick entry/exit signals which are defensible and have the highest probability to bank some coin. Our approach may be more long term, but the general idea is the same.
Finally, the economic calendar this week is packed – we have a bunch of market reports coming out, at least one every day this week. One that keeps me awake at night are the FOMC minutes – it seems no matter how bad the news are the Feds are always good for at least 150 points on the Dow. Whatever happens – I suggest to keep cool and use the occasional spike up to ‘build your case’.
Cheers – and may the market have mercy on your account tomorrow.
Let me start out by saying that Friday’s action could have been better, but it could have been a whole lot worse. The markets pushed up in the larger retracement that we had expected, though not preferred. The $COMPQ moved up into the range of the previous 4th wave, filling the gap of 2417 in $COMPQ. This is a good sign my friends, a good sign. We also have retested the break-out of the up-sloping trendline, but have not been able to get back above it at this point. Another indication that the larger decline should be quickly accelerating.
While certainly not my favorite scenario, today’s action certainly has some strong points for the bears. One is the filled gap I discussed earlier this week, there remains only 1 upside target in the $COMPQ if it is to remain below it’s 8/15 high, and that is the range between 2430 and 2445, which represents the 38.2% and 23.6% retracement levels. As previously noted, the $COMPQ prefers to spike its targets, so the upper level is where I will be watching closely for a reversal. The blue lines are common EWT targets for wave 2 retracements as far a pattern standpoint, as well as the fibonacci retracements.
Second is the volume. What volume you ask? That is my point, “What volume?” Don’t tell me it is a seasonality, that is a load of crap. Just look at last year in August. On the $DJI that is the highest volume August on record. Today was about tied for the lowest volume day of the year…with yesterday. And one of the lowest volume days since 12/24/07. Speaking of that date, Christmas Eve represents a great fractal perspective. Of the larger first wave, termed (1) in the proper Elliott nomenclature, 12/24 is in the same place we suspect this market is in right now. That is, a 1-2, i-ii. Our location is very similar, except inside wave (3) rather than (1). When you combine the placement, as well as the large scale volume contraction, the markets appear quite ready to fall from near-current levels. The bulls will tell you otherwise, and I cannot say that the breadth today was not overwhelmingly bullish. I can only tell you that this 200 point move up in the $INDU, was met with no fear and made by no volume.
A nice picture of the retest…
The third point is my favorite. Yes, you guessed it, the $VIX. This little bugger is fantastic for marking reversals. It is not screaming as loud as Mole’s first born that was auctioned off at a poker game, but it is clearing its throat. I suggest you take a nice look at this, even take a picture of this chart, because it comes in handy. The red circles are confirmed sell signals, the most accurate of the $VIX signals, while the purple circles are unconfirmed sell signals. Notice there are not very many purple circles. The green circles are confirmed buy signals, while the teal circles are unconfirmed buy signals. There are more unconfirmed buy signals than anything else on the chart, and the total buy signals (confirmed or not) out number the total sells by nearly 2.5:1. Just ignore the large red lines right now, as they remain on the chart for overlay purposes. Horizontal lines are important S/R points, and the lower channel is what I refer to as the “bull-market” range.
That said…I leave you this weekend with a beautiful fractal relationship in both the $INDU and the $VIX, as well as being .25 points from pushing outside the 2.0 BB, which would be the first inclination a sell signal is brewing. We do not need a sell signal to start this leg down, but it would be the ultimate in confirmation. If and when this does happen, I will go over the requirements for confirming the $VIX signals. I also leave you with a stong advance on no volume, and a push up into our reversal range, as well as a retest of the break-out line. All things considered, we should have an intersting next week or two. Stay posted as we will certainly keep on top of this.
Tonight’s post is dedicated to Tim Knight – fellow bear and ‘friend of the blog’ – who also happens to run our favorite blog called Slope of Hope. Well, who am I kidding – most people reading this probably came directly from his site, as Tim generously allows us to place links to our measly web presence. At the rare chance that you haven’t heard of Tim – go visit his blog (after you finish reading this of course )
Now, there’s a second reason for tonight’s theme, as it aptly describes the general context of where we currently are in the market as well as where we are heading. It has been said that markets ‘slide on a slippery slope of hope’ and ‘climb upon the bricks comprising the wall of worry’. There is a lot of truth in this expression, as history shows over and over again that the human capacity for denial appears to be almost infinite. Maybe this chart will demonstrate the point I am trying to make:
Where is the fear in this market?
So, it’s 2005 and you are sitting in your local watering hole sipping on your favorite glass of lager. Some bloke walks in, buys you a beer, and then starts telling you that he’s got psychic powers and that he can tell you the future up to three years in advance. Just ask and he’ll tell you anything. Of course you don’t believe a word he’s saying but hey, it’s free beer so you play along. ‘Okay, how’s the economy in 2008 and where are the markets heading?’ He responds: ‘We’re in a recession and banks are going out of business one after the other. The Feds are bailing out some of the biggest investment banks to the tune of billions; are printing money like there is no tomorrow, and Freddy Mac and Fanny May are insolvent and are about to get nationalized. Oh, and something called the VIX is below 20′. ‘Yeah right’ you think to yourself – ‘I like free beer but this guy is out of his mind.’ Then you ask him what he’s smoking there…
Seriously, would you have believed that guy a few years ago? Well, I probably would have, but I’m a sucker for tall tales as well as an evil speculator, so to me 2008 would been something to look forward to. After all – when there’s blood in the streets – buy property. But it’s not surprising that most of my contemporaries wouldn’t share my sentiment. Because people want to believe that tomorrow is going to be better than yesterday and that a ‘golden future’ awaits them. If you tell them that we’re heading for doom and gloom they will most likely hate you for it, which is why in the days of kings and queens the ‘bearer of bad news’ was also often the recipient of an untimely demise. Nobody likes a party pooper – especially when it comes to money and the financial markets.
So, where are we? Let’s start with the S&P this time:
Bottom floor, please!
The S&P didn’t put up much of a fight today – although it managed to climb a 1/4 of a percent the breadth at closing was a feeble 1.03:1 – basically on par. As I have pointed out on previous occasions, each consolidation rally (if we can call the last two days a rally at all) is now exhibiting diminishing breadth ratio and volume percentage. Which is exactly what happens in a Minor 3 wave of Intermediate 3 – rapid and accelerating drops interrupted only by short and anemic retracements.
A bit more detail for the EWT nerds.
The hourly chart shows the retracement of the past few days in more detail. It’s a bit premature to count those short term waves accurately but it looks like as if we have been tracing out a 1,2,1,2 pattern at this point, which means that ‘wave 3 circle’ is about to paint it’s 3rd leg down. But there’s of course the chance that we might push a bit more higher, which would be healthy for the bearish case – after all nothing goes down in a straight line. 1287 -1290 would be a possibility here. For the trip down, Berk was so kind to donate a chart with some targets:
Some preliminary targets for the SPX.
Moving on to the Dow – which again was pretty anemic today:
The index that tried to rally, but couldn't.
The breadth in the $INDU (shown below) was 1.14:1 – and it’s possible that we might see a bit more consolidation here. If that happens my target is 11,550, which is the 50% fib line from its prior wave.
The Dow cash index in more detail.
On to the Nasdaq – remember how it was leading the market in the past few weeks? Well, as the saying goes: the higher they climb the deeper they fall:
Nasaq leading in every direction.
I’m skipping the futures tonight and am only showing the cash index ($COMPQ). We measure the $NDX breadth however, which closed at a breadth of 1.94:1 negative – it seems that Nasdaq wants to lead in every direction.
Gold ready to roll over.
Gold made some progress in the consolidation department today and touched my first target of 940, which led me to bulk up on some GLD puts. Yes, it’s entirely possible that we’ll see 960 tomorrow but I’d be surprised to see a push higher than that. As many of you have learned the hard way – the real action in Gold happens mostly overnight as its futures are now traded almost 24×7. Check out this link:
What you will see on the bottom on the main chart is something called ‘New York Globex’ and ‘NY Globex’. These two didn’t exist until a few months ago and were added without much fanfare sometime in April, if I recall it correctly. By pure coincidence this also was the very day that a huge Gold take down occurred – overnight of course. Coincidence? Yeah – probably In any case, we ‘mortals’ don’t get to trade during those owl hours, so when it comes to Gold and its related ETFs such as GDX or GLD you have to make your bet between 8:20am EDT to 1:30 EDT (which is when COMEX Gold closes for the day). My risk assessment here was that puts at this point are defensible as I am expecting a large drop from here, plus I don’t expect a lot more ‘damage’ than 960.
That’s it for tonight -I can’t believe tomorrow is Friday already – time flies when you’re getting whipsawed. Don’t worry, plenty of fun straight ahead – but in order to partake, make sure to get yourself positioned during those up days.
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