Alright, ladies and leeches – we have a lot of material to go through tonight, so let’s dig right in:
Before we cover what’s ahead of us, let’s take a stroll down memory lane: to when the SPX was still trading around 1,280 and the VIX was hovering slightly above 20 – aaah, the good ole’ days. The date is July 23rd 2008 – EvilSpeculator doesn’t exist yet but I was already churning out hard core EWT analysis like a mad monkey. The image above is one of the charts I posted on OptionAddict that day – which incidentally caused a bunch of people to complain and I was eventually told to take my sorry ass and my charts elsewhere (btw, I’m not blaming Jeff here – he actually offered me to post in a separate section).
So, let’s see what actually transpired in the weeks and months after. Well, I hate to rub it in, but I was spot on, even nailed the target of (2) by about a ten point margin. Also was right about the abyss scenario I kept pimping back then. Now, I’m not posting this to gloat (maybe a little) but rather to make an important observation, and thus I expect that all of you glu sniffing steel rats pay full attention just this once. Because what I am proposing tonight is that we need to change the way we approach the market for the foreseeable future.
Fact is, we all didn’t see the forest for the trees. Why you ask?
Because had I grabbed only $4000 worth of Dec 110 SPY puts that day it would have been worth $66,650.- on November 20th. Now, remember that the VIX was pretty low back then and we weren’t at the top of wave (2) just yet. Therefore, it gets a lot worse. How about if I would have bought those same options three weeks later when wave (2) actually peaked?
Had I grabbed $4000.- worth of Dec 110 SPY puts that day I would be sitting on roughly $102,000 right now. And had I bought $20,000 worth I’d be half a Millionaire right now.
I know – coulda – woulda – shoulda. But the sad fact is that the market did exactly what I expected it to do. And although I made fine profits in the last few months it was emotionally taxing and a boatload of work, especiall considering all the interventionals, the drama, the sharp counter rallies, etc. I got into literally hundreds of trades and also paid a nice chunk of commissions.
Now, something tells me that I wasn’t alone in screwing this up. I actually would wager that everyone reading this has been in the same camp – jumping in and out of the crazy tape of the past few months and having relatively modest profits to show for.
BTW, for the record – I doubled my account in the last six months, which is okay. At some point I was up 300% but then came that notorious short sale ban on September 18th, which got me back to where I started. Doubled my account again since then, so I should be satisifed with my trading performance. Maybe, but when I look at those numbers above I just want to puke.
There’s this thing about me – I’m might not be a genius, but I always learn from my mistakes. And knowing what I know now, and also knowing that the PPT is basically out of bullets, except maybe for their relentless use of their printing presses, I would like propose the following.
Screw the daily drama and let’s focus on the big picture!
Now, let’s talk about the future and how I see it:
I’m going to spare you the usual market overview – not going to talk about the NYMO, the Bullish Percent, the TNX, and all that other jazz. We all know this market is heavily overbought and that the breadth was super bullish last week. We had five consecutive up days and this has not happened for a quite a while. We are all salivating at the chance of shorting this market, but I’m not going to touch on that. This is what I’d like to reserve for the intra-day updates which we’ll post in the coming days.
If you look at the chart above you’ll see type of tape I am expecting for the coming months. When it comes to corrective waves there are two primary elements that need to be satisfied:
The price correction is something Elliotticians usually nail pretty accurately because the rules are well defined. I’m not saying we always get it right but we usually get close enough. What’s important to understand right now is that a wave 4 typically ends within the price range of subwave four of 3. I know you’re all scratching your greasy skulls right now, so I’ll just throw it out there: Our price target for intermediate wave (4) is between 1000 and 1040 on the SPX. Could overshoot – yeah – but if we breach 1060 I’d have to re-assess the entire wave pattern.
Now the time correction gets a bit more complicated, after all there are eleven different corrective patterns and combinations in Elliott wave analysis. But we do know that wave (2) was what we call a sharp correction. I mean, it was not complicated at all – went straight up and was done without much of a fuss. I’d call that a sharp correction. The guidelines of wave formation in EWT tell us that we often find alternations within an impulse wave. If wave two of an impulse is a sharp correction, expect four to be a sideways correction, and vice versa.
So, let’s think about this: We already pushed up like crazy last week and are more than half way through our price correction. I frankly have doubts that we’ll now just paint a nice b wave and be done with (4) just in time to unpack our X-Mas presents. Probably not – what we’ll see most likely is a complex sideways pattern not dissimilar to what I’ve draw on the chart. There are dozens of scenarios that could play out, and I’m sure everyone has their favorite. But let’s settle on the fact that it won’t be a quick one and it it’ll probably drive us nuts all the way through winter.
The Evil Plan
Hence, what I’m suggesting is two-fold.
Let’s play the swings of course as they are probably large enough to make it worth our while. After all the VIX has settled down a bit and with some good luck we get it into the 40 range once we hit 950 on the SPX. So we could pop into calls as well and hopefully not get squashed by the dropping shoe of vega. And perhaps our brand spanking zero indicator can help us call the turning points. More about this further below.
Most of you are aware what will follow wave (4) – a nasty last drop to the downside which should put us closer to 600 on the SPX. That would be a 400 point drop and the profit potential boggles the mind. Thus, I propose that we start bulking up on July or August puts once we start approaching the 1000 range (wave c of (4) to the upside). The risk at this point is very manageable and even if we overshoot we will sit on about six months of time value and will be able to shrug off any monkey business. I plan on plunking 20% to 40% of my assets into those long term options. Then I’ll just forget about them and expect to be smiling big time come July. If you think 2008 was bad – 2009 is going to be brutal for the economy and we need to position ourselves properly ahead of time.
Now, before I return to my pillow fight against the Swedish Mud Wrestling Team I would like to point everyone to a new market trend indicator I posted last week while most of you were passing out on tryptophan. I call it the zero and it’s my very own evil creation.
There’s also a handy little widget on the right sidebar which should get you there from any of our daily posts. The page reloads itself every five minutes, which is more than enough to keep you up to date (it’s a medium term trend indicator and it’s configured for a hourly chart). There’s also a handy tutorial, which I strongly recommend you take a look at before you send silly questions my way. I think I’ve covered the gist of it but if have left anything out please let me know.
The zero is going to be freely available until early January. Call it a large scale acid test – if it can continue calling the trend reversals as it has in the past few weeks, then I will be available on a monthly subscription basis after the free test period. The fee will be fairly modest and should pay for itself within a single trade, so even you bum leeches should be able to afford it.
Of course I don’t have to to explain what it could mean for us if the indicator continues to nail those trend reversals. Could be the antidote to many whipsaws we had to trade through – and we all know that volatility is not going to subside much in the months to come.
Well, for now it’s all yours, so kick the tires while you can.
Sharpest bull rallies happen during bear markets – there, I had to spell it out for you leeches. Seriously, do they actually read their own headlines or has the U.S. educational system been eroded down to the point when even people in the industry have lost all sense of history?
If I was long right now, or would have somehow clung to my stocks during the October crash, this headline would be the straw that broke my camel’s back. Seriously, whoever sees this and does not take advantage of this lovely Christmas present they’ve just been handed needs to check themselves in for a frontal lobotomy (which incidentally instantly qualifies you for a gig as an MSNBC anchor person – bring your own suit).
I spoke with someone at the gym today, who’s pretty loaded and has a few hundred grant running in the market. Three months ago I told that guy to get out of the market as it was about to get pretty ugly. Of course he didn’t. A month ago I told him that the market would drop to about 7200 and then rally like crazy. Guess what he did – he waited all the way to the bottom and then sold his equities last week. Lost over 50% of what he had just a few months ago. Was this guy listening to anything I was saying?
Now, I asked him today, how something like this can actually happen. How do you see your portfolio go down by 5%, 10%, 15%, and even 20% and still hang on to what you are holding? What is the underlying thought process? I can tell you what it is – it’s one of those cognitive biases – in particular the notorious disposition effect. Traders and investors alike have a tendency to ride out their losses and to cut their winners short – pretty much the opposite of what you should be doing. Well, this reconfirms my general outlook that the majority of investors out there are sheep waiting for a shearing.
When it really comes down to it – it’s a reptilian brain ego thing. Hey, I just lost 30% in GOOG, I can’t cut it now. It’ll come back – I know it – after all, how low can this thing go? This is exactly the kind of shit that those fucking brokers tell their clients when panic sets in and they call in to close out. Well, pal – guess what – it can go all the way baby – all the way!!
This is something people just don’t seem to get into their greedy hapless little pea brains. Something moves against you 5% – 10% – you dump the damn thing. Spit on it while you do. Why not take your perfectly good leftover money and put it into something that actually is going up? It’s not like winning and losing is some kind of ‘taking turns’ game. Your lovely FNM shares you’ve held for a decade just dropped 10%? Kick them to the curb without any further thought or compunction.
But nooooo, those wankers don’t just want to make their money back with some other high flying stock. It’s got to be this one – now it’s personal after all. How dare this damn thing dare to go against my superior stock market analysis? Impossible – well, I’ll show this fucking stock who’s boss!
Unbelievable… some people really need a trip to the cleaners and back before they learn. Some never do – those are the ones who wind up losing it all. And then go on blaming the market for it. Guess what – the market does what it does – it goes up and down. Just because it’s been going up for a few years doesn’t mean it’ll continue to do so. Life’s short – grow a brain.
UPDATE 10:01am EST: Morning my evil rats & leeches – as you can see I have been keeping myself busy during Turkey Day – no tryptophan poisoning for me. Alright, first order of business are the retracement levels. No, the widget has not been removed or broken – it’s smart enought to figure out that 2sweeties didn’t post an update as he’s on vacation. So, I guess I’ll have to jump in here. Remember, we didn’t have a down day for 4 days, which means the short RLs remains the same. I have added the new long RLs – just in case we actually get a drop today.
Here are the calculations – feel free to double check (as if anyone ever does – lazy butts!!).
To go long:
To go short:
There you have it. I will follow up soon with some additional info about our brand new zero indicator. If you haven’t seen it in action yet, take a peek to your right – I have added a new widget. Let me know what you guys think – but be gentle, it’s just a start of us spearheading an extension of our trading system.
UPDATE 10:48am EST: Crude just tanked by $2.-. Berk and I love C and JPM, but are too chicken to grab it on a day like this – I know we’ll live to regret that.
Otherwise, sluggish day…
But be careful, sluggish days can turn into rockers
UPDATE 11:21am EST: I have to admit I’m a bit disappointed right now. The TNX has been tanking in the past few days while equities were rallying. But none of your damn leeches have been asking the key question which is why ?
Well, just so happens that Bernanke and pals over the last two days clandestinely rolled out some $1.3 trillion in new so-called alphabet soup ‘facilities’, including buying agencies and consumer debt. BTW, is that even legal? AFAIK, they can lend against it but not purchase it. Red – if you’re around – can you clear that up? Anyway, the smashing of the TNX along with agency spreads came of this as there are massive amounts of new treasury being issues. Nothing like selling the future of your children and grandchildren during Thanksgiving – how appropriate!
Well, just another example of why you need to understand the reasons for these types of correlations. When they break there usually is a reason why.
UPDATE 11:35am EST: Wow, crude now down 3 bucks today. Guess all correlations are off the table now – LOL Yen moving with market now, crude now dropping while we rally, and TNX completely shot to hell. Ladies and leeches – be careful out there – don’t think the market cannot continue rallying here.
UPDATE 12:45pm EST: Real quick before the close – I’m thinking of playing a 60-day short turtle soup on DLTR. Here are the rules:
The contract must make a new 20-day high (we also use the 60 day for a 2nd signal if we missed the 20).
The previous 20-day high must have occurred at least four trading sessions earlier.
After the market raises above the previous 20-day high, place an entry buy stop 5-10 ticks below the prior 20-day high. This buy stop will be good for today only.
If the trade is triggered, place an initial good-until-cancelled sell stop one tick aove today’s high.
The contract must make a new 20-day low (we also use the 60 day for a 2nd signal if we missed the 20).
The previous 20-day low must have occurred at least four trading sessions earlier.
After the market falls below the previous 20-day low, place an entry buy stop 5-10 ticks above the prior 20-day low. This buy stop will be good for today only.
If the trade is triggered, place an initial good-until-cancelled sell stop one tick under today’s low.
Berk and I will post in more depth about trend trading in the months to come. This is an example of a ‘failed’ trend trade – which means we expect the trend signal to fail.
This week completely sucked so far, but starting this Friday I promise you we are going to kick ass. I saw the light today and am completely jazzed right now – mentally at least one light year away from where I found myself yesterday. I’m going to completely rape this market – mark my words.
Alright, this is how feel tonight – hide your children, make sure the pets are outside hearing range, and crank this sucker up:
We are going to have some fun, my fellow rates – good stuff ahead.
Guess, none of that matters anymore as we’re still hovering at 846 rallied to 849 right now. Here are the RLs for you guys:
UPDATE 11:50am EST: Call it what you will but the uptrend is continuing, obviously. I would be very cautious about jumping into the short side as the next RL is around 906 (see chart above). Again, please note that the continued positive breadth indicates that we are in intermediate wave (4). However, it’s very interesting to note the velocity of this move. (4) is supposed to be a multi-month pattern – so, as it’s making so many head waves in the past few days this gives additional credence to the notion that we are in for a multi-week sideways pattern. How’s this – it might go to 906 – reverse – go to 799 or 763 – reverse – rinse – lather repeat. Could be fun to play if done right – Berk and I are on the case – more later.
UPDATE 12:50pm EST: Berk here. In checking an hourly chart, I am seeing 5 waves putting up their final touches on the rally from the bottom, and right into the resistance level specified on Monday. Making a strong case forming for a little short action here. There might be one last thrust towards 1200 in $NDX, but we will take it as it comes. I have also noted that the $SPX continues to lead the $NDX. Be advised.
$NDX - 5 up into resistance!
UPDATE 1:57pm EST: Sorry for the little outage we just had. My hosting company is complaining that we had too many database queries as soon as the server was up again – LOL Looks like we’re getting some serious traffic, might have to upgrade soon.
UPDATE 2:22pm EST: I set up a cache for the site – should be faster now. Let me know what you guys think.
UPDATE 3:27pm EST: We just touched 886 and bounced back a little, which is strange as it’s actually a long RL. Question here is now – are we getting 906? Again, look above for the daily RL chart.
UPDATE T minus 7: I would strongly discourage everyone from holding positions over Turkey Day. We are in limbo right now and although this market remains extremely overbought it can continue its rally on Friday. You have been warned.
UPDATE Closing Bell: Happy Thanksgiving Everyone! I’ll be here on Friday with an intra-day update. Until then – try not to overdose on tryptophan.
As I mentioned today I’m not going to post any market forecasts for the remainder of the week for the following reasons:
I’m completely worn out and so is Berk. Six months of trading a hyper volatile market that’s also being manipulated almost on a daily basis have been taking their emotional toll. I need a few days where I climb back into my inner shell and reconnect with my evil self. It seems that most of us have mentally adjusted to this crazy market and this has produced a constant uneasiness which I am capable of dealing with for reasonable periods of time. However, I also know when the moment for a mental refill has arrived – and that time has come.
The market has reached record levels of volatility at this point and most indicators I usually rely on are being ignored by irrational exuberance on the parts of the perma-bulls. You can probably chalk some of that up to a low volume holiday market, which today was getting banged harder than a $20 bunk bunny. It’s not that I am lost in my wave pattern or the general market outlook – we are most likely already in intermediate wave (4) to the upside. But after three days of extremely overbought conditions today’s tape shows me that I might have better chances taking a flight out to Vegas and trying my luck over at the Sands (and the girls are prettier).
Let’s face it – the option market completely sucks right now and thus Berk and I have decided to focus on a new futures trading system we are developing. Have been paper trading it so far with very favorable result, even in this stinking tape. The coming weeks are going to be pretty tough for option traders as the VIX is still sky high and call option premiums will be crushed by diminishing vega.
On top of this the market makers are completely impossible right now. I grabbed some deep ITM SPY puts today and watched the option spread remain unchanged despite the SPX dropping by 5 points. Tried the same with DIA puts a few minutes later with almost identical results – made a measly $5 despite a noticable move in my favor. I’m not a genius but know when I’m being gipped. Thus, it’s time to consider a renewed approach to trading this market – it’s either that or wait things out until the end of January when we are nearing the top of intermediate (4).
Based on the previous point I am now starting to believe that the usual EWT reports we are posting are useful, but don’t seem to be helping most members execute successful trades. Let me be clear on that: We will continue posting EWT reports, but I don’t see why mechanically posting reports is going to help anyone if the market is in a transitory or exceptional state. My motto has always been less is more, and this is all we need to know tonight:
We are most likely in wave (4) to the upside – which means the market is going to remain bullish for at least two months now.
If, despite all evidence to the contrary, we are actually still in 5 of (3) then we are in some ugly ending diagonal. Problem is that we would not have sufficient evidence to justify dipping into defensible put or short positions until the best time to leverage the ensuing down wave has passed. After all, it could just be a downside correction of minor 1 of (4). I don’t want to trade tape that can put me into a short squeeze like the one we found ourselves in the past two days.
It’s a holiday week and volume is fleeting which in turn almost guarantees monkey business.
What seems to work well in the past two weeks is to simply forget the wave pattern (for right now), and place trades according to 2sweeties’ retracement levels. I am usually not a short term trader, but this is not the time to load up on large amounts of puts or calls, so what’s left is to leverage the daily moves and there are plenty of those.
What also seems to be working is simple futures day trading according to pivots and your favorite momentum indicators. I for one do very well with my stochastics – Berk loves those MACDs and MAs.
The definition of insanity is to keep repeating the same thing over and over again and to expect different results — Albert Einstein.
Once we have progressed sufficiently into wave (4) we will continue to explore longer term trades that exploit the unfolding Elliott Wave pattern, but at minimum on a minor degree level. Which means we will place trades with the expectation of holding them for at least 2 weeks (unless we get stopped out), thus cancelling out the daily noise (think weekly candles). Until we get to that point we will post shorter but to the point market forecasts. I will keep posting those retracement level charts in the morning and will chime in when I see something of interest. You all know I can’t help myself. But expect our reports to be rather brief and to the point in the coming weeks, especially as the year comes to a close. I will probably give you guys an extended weekend forecast, and then post one or two charts during the week.
Hope all the above makes sense to you. As a matter of fact, I would very much appreciate your input in all this – what your own thought process is right now and how you are faring in this market.
Finally, a big up to all you stainless steel rats for posting close to 260 comments on an intra-day update today. That’s excellent for a holiday week and I’m enthused by the sheer determination and hard work I’m seeing here. Now, if could just funnel all that energy into one of my evil schemes…
UPDATE: Someone asked a question about the long term nature of this bear market and here’s the big picture with some comments:
Bear in mind that the a and b cycle waves would be below the 2000 top if you factor in inflation or if you measure the Dow in ounces of Gold.
UPDATE 2: I was not kidding about the record volatility – as a matter of fact it’s unprecedented. Take a load of this:
UPDATE 10:09am EST: Here are the retracement levels for today. TNX is down but the mouth breathers don’t seem to care. Obviously the consumer numbers were cooked, but it’s all one big kabooki theater at this point. Frankly, I’m looking for an exit – should we get one I’ll cash out and walk away until next Monday.
UPDATE 10:31am EST: Curiously, AAPL is behaving today – actually making profits on that one – bless its soul. CF and GS are not so kind unfortunately. Anyway, don’t even try to make sense out of this tape – there’s a battle going on. If are holding puts and are not willing to cut here (like yours truly) get yourself a SPY/DIA hedge and let the idiots figure out a direction. Right now we’re at a pivot and buyers/sellers are fighting for the VWAP.
UPDATE 11:33am EST: Lots of movement but we’re not going anywhere. I thought expiration week was over.
UPDATE 3:00pm EST: I am quiet today because I’m mostly watching. Got into cash about 2 hours ago and took a loss on my puts as I saw the MMs play evil bid/ask games with all of them despite the market dropping steadily. I’m starting to follow the futures as trading the options market feels like a task of Sisyphus lately and making buck in this environment is harder than ever. As I’m writing this the ES just rallied 20 points which kind of vindicates my earlier decision to bow out.
Tape of today – this is what you call chopped hamburger meat.
I will probably take a step back for this week as I desperately need some time off, and there probably won’t be any market updates until Sunday night. Will follow up with quick thoughts and comment cleaners.
Disclaimer: The information provided on this website, while timely, colorful, and accurate, is not to be taken as financial, legal, tax, psychological or any type of advise. The purpose of this website is to track the progressions of human herd psychology as it is reflected through several financial markets. Any commentary on this page, however useful it may be, is used for illustration, and to inspire thought provoking discussion, and not to be taken as specific trade recommendations. We are not endorsing any site or service, nor are we promoting choice examples as real-life trades. If it sounds sarcastic, it probably is and if it offends you, just don't read it. There are tremendous inherent risks in attempting to trade any market using any vehicle, particularly if it is leverage. Please contact your broker to explain all risks involved in the vehicle you will be trading and any questions you may have. Please consult with your own financial advisor before you tempt fate by following our evil speculation.