Something potentially very ugly happened this morning – I am not sure if it’s coincidence or if this was yet another setup to punish the poor battered bears. Either this is very good – or very bad. The good news is that we’ll know very soon:
Alright – pick your poison:
Among all the whipsaw hoopla this morning some may have missed the fact that the SPX busted what I had previously counted as a first wave of a developing motive.
Now, thus far we are okay – assuming this is Soylent Blue. If it is not Blue and we breach 1120.95 then it may get very ugly for the bears – very ugly. Because the best way to count the recent drop would be as a second wave inside a third wave – to the upside. And although a third wave does not have to be the longest – it however can’t be the shortest. Which means that if we breach 1120.95 on the SPX the upside potential for Soylent Green has just been extended. Ouch!
What To Do – What To Do!
No reason to panic however – actually this might make for a great trade setup. Stay short until 1120.95 – if we breach it a bull call spread or even a bull call ladder with the second short leg above this year’s highs may be good medicine. If you have no clue what I’m talking about – then you might catch up on our ongoing series on EWP Option Strategies.
Nothing really has changed on the wave count. So as to not bore you to tears with the same old story I dispense with my usual wave update and will share with you my latest creation, which admittedly is not something completely different but a merely a different outlook on something that’s right under your noses every day. Besides, it makes for a damn good excuse to post a Monty Python sketch.
I’ll reserve the ‘unexpected’ for when it’s time to quote the Spanish Inquisition. Soon, my impatient steel rats – soon! Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
We’re definitely getting closer but I don’t think we’re there just yet. A drop right here and now would be juicy and today’s little sell off sure makes it look like this thing is about to roll over. So is it really downhill from here or are looks deceiving?
Whatever you do – stay away from her anal probe. Then again… could be fun!
I updated my ISEE chart today after we saw some rather bullish readings throughout the day. We closed at 240 which is getting interesting – but we did see a similar spike like that plus outside the BB a few weeks ago and it was completely faded. So, I’m holding out for higher readings here. A push above 280 would get me a lot more excited. But this is a good start for sure – retail trader are ‘buying the dip’ – and in a majority of the cases they are left holding the bag. For proof just look at the chart above and parse for spikes outside the 2.0 BB. It rarely fails.
Looking at the ever mighty EUR/JPY chart for guidance is not so encouraging tonight. We basically burned off al ot of bearish momentum going sideways – the tape in equities was very clear about it’s purpose. One to lure in a few more bears and second to drop momo indicators enough to re-energize selling. Now, if we stay embedded down here we could actually see a real drop – but thus far it’s not happening just yet. The Dollar is closer to painting a low (it’s taking its merry time it seems) and a reversal in the EUR/USD may favor a drop in the EUR/JPY and perhaps the AUD/JPY – thus far they have roughly been moving in unison.
Today’s tape played out just like expected – it stopped where I thought it would yesterday (1120), then dropped today and bounced three handles above 1100. Not much of a drop really and it’s possible we’ll see another attempt at the 1100 line tomorrow. But I again don’t think that we’ll see a massive slide here just yet. Soylent Green is just too juicy of an opportunity right now. The Bollinger on the VIX is dropping along with the signal and we are slowly pushing toward the 20 mark. For the bears it’s death by a thousand paper cuts and every day is a bit more theta burned.
The uncle point for the Blue Plate Special is 1085 – I’m not taking it serious until we breach that line with some violence. Not a teeny weeny test of it – but a hot knife cutting through it with confidence (and hopefully matching Zero readings).
The uncle point for Soylent Green is a few handles above yesterday’s highs – a breach of that diagonal (which again proved to be spot on) would get things going to the upside in a jiffy. Target for that scenario is around 1160. A ramp to those levels would literally destroy any remaining teddy bears and the VIX would probably touch the 20 mark which would be extremely frustrating for anyone harboring illegal puts.
My momo charts are somewhat in limbo still but what I can tell you is that there seems to be sufficient room left for further upside in equities. That narrow summer tape is not helping to matters either which is why I remain suspicious. What I do know is that when it drops it’ll drop like a rock as the engine pushing this turd uphill has been running on vapor. Once that runs out I expect there to be nothing but air underneath. We all know what this is – and now it’s just a matter of waiting things out.
I have seen a distinct drop in participation in the comment section and I’m not surprised. I swear – I could run a contrarian trading indicator purely on Evil Speculator traffic pattern. It really starts getting interesting when the trolls start showing up and I actually had to manhandle a few in the past few days. Prechter bashing on other sites is also on the increase again – after everyone called him ‘the man’ on the way down. The snarkier the remarks the deeper the drop – so I’m looking forward to some real nasty stuff.
The patient bear will be amply rewarded. I am very much looking forward to fall – the season as well as the verb
Since it’s still the summer doldrums and many of you guys have mentally checked out I will afford myself a quick drive through update for Wednesday.
Here we go:
Basically the same picture as presented in yesterday’s update. Today looked like a bit of topping action and after an early morning spike (don’t we love those) we turned on a dime right at the 1120 mark as expected. We may see a drop towards the 1100 mark tomorrow but as of now I expect it to be contained. As of now it doesn’t feel like this thing is over and done with – lousy volume and distribution patterns notwithstanding. As ‘thespookyone’ put it a little while in the comment section: Breadth leads price right now (and trumps volume).
Soylent Blue? We should be so lucky! But trading on hope is a recipe for disaster. So, plan for Green and take Blue as a gift to the bears if it should present itself.
I know it’s summer and there are probably ten thousand more interesting things to do watch than this tape melting up like an ice-cream cone in Central Park. My personal favorites would be hot babes in bikinis at the beach, reruns of Star Trek – The New Generation reruns, any 3D movie in the theaters right now, or even paint drying on your deck – as long as you are in ample supply of German Hefeweizen even that can be fun.
All of the above provides a lot more thrill than watching the dreaded ‘summer tape’ – especially during the ‘summer of pain’, a wave scenario also known as the Soylent Sisters here at the Evil Lair. Of course if you have masochistic tendencies then I have a chart for you but let’s get you in the mood first:
There ya go – now let’s look at the Tuesday road map.
Quite frankly – it’s painful to look at even if you’re not sitting on short positions. But hey – I prepared you for something like this over a month ago – so no big surprises here at Evil Speculator. Unless of course you chose to ignore Mole’s bullish paranoia
So we are very close to the Soylent Green inflection point which we reached quicker than I cared for. I expect some kind of retracement at 1120 but don’t let that fool you – even if we push back to 1100 it’s quite possible that we reverse and push further up and breach for good.
I’m looking at the daily Zero right now and although many pundits expect this ramp up to stop right here and now I just don’t buy it. What I’m seeing on that chart is solidly bullish and unless I see a kiss of the zero mark on the daily Zero I will not load up on short positions. Besides – most of my long term momo charts suggest that we have plenty of space to run left – and this tape has not felt bearish for a minute in the past week. Yes, NYSE volume was miserable again today and there are bearish divergences on the MACD and other traditional momo charts. But heck – if the past year has taught me anything it’s that all these things mean jack if a narrow group of heavy market participants are running the tape via their PlayStation 2 joysticks.
I think 1120 may be a good spot for a quick one/two day trade to the short side but don’t go crazy and set a stop not too far away. That diagonal line, once breached, will serve as a trampoline for a strong push higher.
Now how about Soylent Blue, Mole? After all, it’s on the chart?
Well, I put it up because it’s a ‘possible alternate count’ – but quite frankly what I see on the daily Zero and the NYSE A/D chart does not bode well for Soylent Blue. That larger fractal on the A/D chart was shot to hell last week when we turned on a dime and shot higher – which incidentally was a big learning experience for yours truly. It’s tempting to look for extended patterns but this experience shows that the short term fractals (one week or less) are where the money is. Anything beyond that is mental masturbation.
The Dollar also decided to be naughty and painted new lows today. If you remember my last DXY update – I expected a turn around the 82.20 mark – which we got – but then the damn thing started dropping again. So, the next support zone is now around 81.30, which is the 1.328 multiple of wave A. It’s also right at the 50% retracement mark at 81.43. If we don’t get a strong bounce there – boy – things might turn ugly for ole’ bucky. But we are not there yet – and odds are still we’ll see a bottoming pattern near that cluster.
If you were long equities – congrats – take profits now and wait for a little drop in a day or two. At that point I’ll let you guys know how things look like on the momo front. If we don’t see signs of consolidation and real topping then it may we worthwhile to grab a few more long positions. The next two days will be key in signaling where this thing will go. But remember – those time cycles I keep mentioning have us push higher into early August – so don’t be rushing into short positions now.
That’s all for tonight. Stay strong and be frosty. Even this shall pass
I am sure that many of you reading my posts have had their share of bearish frustration in the past year or so. It’s tough to be a bear – especially in bear markets. Now, I know this may sound a bit counter intuitive but think about it. In bull markets you actually get pretty orderly retracements. Those insane counter spikes we’ve come to loathe in the past few years are not the norm in bull markets. Yes, instead you get long drawn out spurts of gradually climbing tape – but once conditions are ripe for a fall you know what to do: Which is to go short – take your lumbs after a small retracement – and then go back into hibernation.
Take bear markets on the other hand. First up a majority of the bears are usually way too early in getting positioned. Many aspiring grizzlies are foolish enough to step in front of a bus packed with bulls fuming on steroids and get dragged down a dark offroad track for a painful lesson in why not to fight the trend. When they finally get their day it’s often right after a short squeeze rally that forced many bearish participants into insolvence or at least inflicted enough psychological damage to not get positioned at obvious selling opportunities.
Then there are the trend chasers who after missing out on getting positioned (for reasons mentioned above) and then watch the tape descend into Hades without having any skin in the game. They will invariably hope for a bounce which never comes – or grab one too late which in many cases turns into yet another short squeeze rally, further depleting their capital.
Only a small minority of bearish participants have the skill and mental fortitude to actually make it through a secular bear market and a majority of the teddy bears are being killed in battle.
Yes, only unconventional ‘naughty bears’ will be left to tell the story. How do we do it? Simply – we are smarter and better equipped than those teddy bears. Plus we are a lot more evil and can smell a bear trap miles away.
Today I’m going to dispense with my usual flood of long term charts. Quite frankly – many of them are in complete limbo right now and won’t really help us much. So why look at them? Instead I am going to focus on one chart that has been exceptionally accurate in calling bear traps – and I think I have been able to squeeze even more charting goodness out of it. Take a look:
Some of you might have guessed it ahead of logging in – today we are going to go over the daily Zero chart with a fine toothed comb. The longer I look at this thing the more I see and I am starting to think that we may only have skimmed the surface here.
First up – in case you are a n00b or joined recently – the lower panel is what Zero subs have been looking at for the past few months now. A few months back I started to notice a particular fractal pattern which seemed to appear at the lows of downside market corrections. The pattern is basically a large spike down (when compared with prior signals) accompanied by dropping prices, then push up to the zero mark which is accompanied by even lower prices. A textbook divergence fractal and over and over again it showed up at the exact lows of bearish reversals. Something to take to the bank.
So far so good. When studying the signal in more detail however I also realized that there was a lot of data there which offered important clues from a sheer medium term trend perspective but was pretty hard to read. For instance – take a look at the period in late April on the bottom panel. Just by looking at those downward spikes it was quite clear there that we were dealing with a topping market and that a reversal was in the works. On the bullish side we seem to get distinct ‘bull period gun shot spikes’ which occur at the onset of extended rides up. Then there was the August through November period which bestowed us with three downside fake outs in succession (i.e. the bears thought that P2 had completed on every drop down) – however if you look at the Zero signal on the bottom it should have been clear to us that those tiny spikes down were not the onset of a new primary wave to the downside. Of course back then those spikes probably looked a lot bigger – keep in mind that the new signals were not present yet. It’s all relative after all and hindsight is always 20/20.
But still – we should have known better.
Why? Because when you remove all the noise what you get is a much clearer picture. And how do we do that? Well, there are many approaches but I chose to simply average the data out a bit via an 8-day SMA (I like fib numbers). Welcome to my new Zero panel, shown in the middle. All of a sudden a few things literally jumped out at me. The August – November patch is now clearly a whipsaw which was part of a wave up. The bottom of the February drop also shows some very weak momentum right when we get the green fractal on the bottom panel.
But there is more and it relates to the mental anguish Elliotticians find themselves right at the inflection points which occur at second waves of Minor degree and above – let me illustrate:
This is a simplified wave pattern and I have left out the labels at the most recent drop to the downside. Based on this wave pattern and knowing all the EWT rules – where do we go? Up or down?
Bearish pundits usually predict this scenario of course. Especially once momentum has taken a turn to the downside. Here the final wave turned out to be a third wave sub-division (a 2-of-2) which was followed by a steep drop. The stuff bearish dreams are made of.
Here those three waves were nothing but an a-b-c correction and it was followed by yet another motive to the upside. This is the sort of stuff bear traps are made of. Ouch!
Now, if you take another look at the middle panel of the Zero chart then you will see that this view was solidly bullish while we were still debating whether or not this was Soylent Blue or Clockwork Orange. Once the noise of the lower panel was removed the daily Zero pointed toward the upside and thus far it seems it was spot on.
The inverse situation was happening around May 17th – we again had been dropping and then stopped with a doji. Were we about to drop further or was this just a quick drop before another spike up? Well, despite a pretty hard run to the upside after the ‘Fat Finger Freddy’ news made the rounds the medium panel had us stubbornly in bearish territory. And it proved to be right.
Well, there are many more of this sort of clues on this chart and I challenge you all to start looking for them. The medium pane will be added to your daily Zero updates going forward. I hope this will give us an extra edge in determining the long term trend. Zero subscribers should rejoice – I think this is an important step forward in our quest for market domination.
Now that you understand some of the momentum stuff I am looking at my recent and mos stubborn suspicions about Soylent Blue may be more clear to you. Thus the wave count chart above does not require much explanation. We did breach the mid July highs which means we probably resolve up to that diagonal, which you may recall is long term resistance. From there it either deflates like a soufflé or we breach and push into Soylent Green. I don’t think that the latter is too unreasonable in terms of probabilities, stay frosty and you’ll be ready to get positioned for some late summer fun.
Alright, Evil Rat Academy is officially in session – and it’s again a good time as there is not much to do but to watch Soylent Blue inflict its monetary and psychological damage on the bears. But moping and complaining is not something we advocate here at the evil lair. So, let’s make this again this a productive day before we head into the weekend.
Since it’s Friday and I have no compunction about exploiting your prolific disposition towards cheap thrills I hope that the newly introduced (and now obligatory) female school uniform at Evil Lair Academy may help rise your interest a little – well, or something else…
Now it’s time for the fourth part in our ongoing EWI sponsored series on option strategies. The following post is excerpted from the Elliott Wave International (EWI) eBook, “How to Use the Elliott Wave Principle to Improve Your Options Trading Strategies — Vertical Spreads.” EWI has agreed to make the full eBook available for free to all Evil Speculator readers until the conclusion of this series. So go ahead and download it here if you want to study ahead – however I would appreciate it if we kept all discussions limited to the current chapter.
Last time you were introduced to two three legged beasts among option spread strategies – the bear put ladder and bull call ladder. If you missed that chapter then I strongly recommend you go back and study it before continuing here, otherwise you will most likely not be able to follow the following example. You can also pull up all prior installments of the the entire series via this link.
So, let’s now look at a real world example of a bull call ladder on the NDX (Nasdaq 100) futures:
Figure 18 is an Elliott wave-labeled chart of the NASDAQ 100 from October 2007 to March 2008. As you can see, we have completed Minor waves 1, 2, 3, 4, and 5 (red) of Intermediate wave (1) (blue). Within Minor wave 5, we see a familiar formation: a fifth-wave ending diagonal (the same pattern we saw in Figure 4 of the euro/U.S. dollar). As we already learned, ending diagonals are one of three patterns that precede a dramatic reversal. The other significant development is a gap up from March 17th to March 18th, after the culmina- tion of the ending diagonal. If we were doing an outright long futures trade, this area (in and around March 17) would represent the most promising entry point. Keep in mind, however, that during this part of the lesson, we are not going to simulate all trading possibilities. We’ll wait until we reach the proper juncture to do a bull call ladder or bear put ladder.
Based on what we know about ending diagonals, the next likely move will be up and sharp. The option strategy of choice is a bull call spread; this time, in the opposite direction of what we did on the euro. And the outside target is where the diagonal began, which is at 1,876.75, the end of Minor wave 4. Let’s see what happens.
Figure 19 shows that we did, in fact, make a swift reversal back to (and even beyond) where the diagonal began. The move unfolded as Minute waves 6 through 0 of Minor wave A (red) of Intermediate wave (2) (blue). Had we done a bull call spread, the trade would have been a success. Assume that we got the move, did the bull call spread and we got out. Now what?
Unless our wave count is totally wrong, Intermediate wave (2) is now under way. We have a countertrend move of small degree. We know that wave 2 always retraces less than 100% of wave 1, which would help to deal with uncapped risk situations. Ulti- mately, the setup is ideal for a bull call ladder. We want to earn some premium on the uncovered short call, but we also want a good amount of distance between our entry point and the second breakeven. Hopefully, in this case, our upper limit or breakeven will be in the area where wave (2) can never go. If we enter the bull call ladder too low relative to the expected move, our second breakeven will be within range of wave (2), and we could lose money. If we sold an out-of- the-money call much further up to avoid losing money, we wouldn’t get much premium for it at all. We have to find a compromise between these two objectives. So, we have to do the bull call ladder at least in the middle of the anticipated upward price move. The anticipation is, of course, for a Minor wave B down followed by Minor wave C up.
Figure 20 shows that Minor wave A within wave (2) has retraced .382 of Intermediate wave (1) at 1,894 (the exact .382 level was 1,893.25). This is important, because second waves do NOT make shallow retracements. They generally carve out much deeper ground, such as .500, .618, .786 and so on, as high as possible while staying below the start of wave one. So we’re going to plan for the C wave within wave (2), and we’re going to look for a much deeper retracement. I’ve added a Fibonacci table to the chart to identify the potential upside targets for Minor wave C. So, let’s move ahead.
I’ve labeled the ensuing price action Minor wave B. It made about a 50% retracement of wave A. We’ve also gapped up, which could be the start of wave C. But, we need to be cer- tain. There are a couple of guidelines we can use here to lead us forward. First, Minor waves A and B look to be forming a zigzag; this is a simple three-wave pattern labeled a-b-c in which the subdivisions are 5-3-5. And, in a zigzag, the most common relation- ship for wave C is that wave C equals wave A.
Another guideline is that wave C may also equal 1.618 times wave A. In this case, Minor wave C equals Minor wave A at 2,006.50. The .618 is 2,032 — very close. Minor wave C equals 1.618 times wave A at 2,145.50. So, we will eliminate the higher Fibonacci retracement level of .786 (at 2,130.50) and 1.618 times the length of wave A (at 2,145) and turn our eyes down to the 2,000-2,032 area for a likely target, because we have a Fibonacci cluster there.
Based on our analysis, we’re going to do a bull call ladder on April 16, 2008. Remember that I am using “closing” option prices specifically. On April 16, the futures price closed at 1,862.50. So, we’re going to buy a slightly in-the-money June 1850 call at 84 points. We’re going to sell an out-of-the-money June 2010 call at 18.50 points — right around the area where Minor wave C equals A, and close to the .618 retracement level. This is where we expect wave (2) to end. The June contract expires on June 20, 2008.
As you can see in Figure 22, there is also a short out-of-the-money June 2050 call at 11 points. The purpose of this second short call is to produce more income with manageable risk. The result is a second breakeven that is beyond the .786 retracement of 2,130.50. (.786 is about the maximum retracement for second waves, but it is possible for second waves to experience a 99% retracement.) So, the goal is to get a decent amount of premium that reduces the net debit, and create a high second breakeven level that provides a cushion against that uncovered short call, in case prices go past the 2,050 area where we’re exposed.
I have a net debit of 54.50 points. My maximum risk is still uncapped: Maximum risk on a down move is 54.50 points, on an up move it’s uncapped, and maximum reward is 105.50 points. The lower breakeven is 1,904.50. The upper breakeven is 2,155.50, which is based on the gain the strategy would make — between the buy call and first sell call — as prices move up, less the net debit. That breakeven is also beyond the .786 retracement of 2,130.50, an area where wave (2) is unlikely to go. Ideally, if it’s a fast-moving market and prices abruptly skyrocket or plunge, I would call my broker to exit at 2,010 or unwind at 1,780. But, if he can’t get me out, I still know that after 2,010, there are 145 more points of upward movement before the market reaches 2,155 — and that’s just breakeven. A move below 1,781.50, the low of Minor wave B, would negate the wave count, and I would look to close out the position.
Footnote: I selected these particular strikes based on the Elliott wave analysis and the market premiums that were available. In the end, after doing several calculations, they were the best I could do for this trade. Implied volatility is 24.6%.
In Figure 23, you can see that we did indeed move up in what looks like Minor wave C. And, on May 13, we hit our objective of 2,010. So, what do we do now? That’s easy: We get out. There is no other reason to stay in this trade anymore. It’s a high-risk trade, and when you read the options litera- ture, you’ll probably see a number of people who aren’t in favor of this type of strategy. Assuming we can get out and it’s not a fast-moving market, we close on May 13. These are the prices: I sold the June 1850 calls at 168.50 points and bought back the other June calls — one strike at 50.75 points and the other at 31.25 points. We had a net credit of 86.50. The implied volatility was 20.4%. And we had a net profit of 32.00 points, producing a return on investment of 59 percent. As always, the question remains: Did we capital- ize on the opportunity at hand? The next chart has the answer.
Minor wave C of Intermediate wave (2) finally peaked at 2,062.75, very near the previously cited .618 level of 2,032 and then prices turned down. So, as others in the trading world might say to us, “You got lucky on that one.” However, we know that along with a little luck, we also had some good Elliott wave analysis to help us.
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.