Hello Beautiful!

I just got out of a seminar and am going to make this one very quick today. I think the key question among you rats was where we were in our wave count and what will happen next. Let me get right to our favorite SPX chart:

Today’s breadth in the S&P500 was extremely bearish – closing at 40.5:1 declining vs. advancing issues. The result was that we found ourselves dropping to 805 without one single positive hourly candle. The strength of this move reaffirms our suspicion that intermediate wave (5) is indeed playing out. I was a bit surprised to not even see 865 or 880, however a minimum required retracement of 23.6% was satisfied last Friday. There is a possibility that the triangle scenario is still in play, which would somehow require that we drop further from here to about 760 or 750 and then rally rapidly. This would paint some an a,b,c from the the 944 top and reaching quasi equality with the first move to 820, thus the triangle would still be valid and we would be tracing out wave E to the upside.

However, based on the sheer momentum the blue and orange scenarios are losing their luster very quickly and after today I can give them each only a  ca. 20% probability. Which leaves me with 60% for a minor wave 3 of intermediate wave (5) scenario. We will get final confirmation for intermediate (5) when we breach the bottom of wave B, which bottomed at around 741.02. Until then the orange and blue scenario do remain in play but at with much diminished probabilities.

Another hint towards intermediate (5) can be found when consulting the EWT rule book:

A triangle never has more than one complex subwave, in which case it is always a zigzag combination or a triangle.

I have highlighted our ‘complex sub wave’ on the chart above – it’s quite clear that this was the meat of the whipsaw and I can count either a wedge here or a ‘double three’ (abc-x-abc). What this means is that the expectation for a complex sub wave has already been satisfied and that we should not see a complex D wave if the triangle situation is still valid.

As most of you know – I have bought back the short puts leg of my hedges and am now back in ‘deltra negative’ mode. So, this is not just an academic exercise for me, my money is on the line. My plan is to carefully watch for sudden whipsaw rallies that might indicate that something else is going on. We should not reach the 820 level again, and if we do I would re-hedge into a bull put spread.

However, my expectation at this stage is that we keep dropping and eventually breach the 741.02 low on the SPX. Until we see a counter move that questions the current downtrend we remain delta negative and hope to ride this bear all the way to the bottom.

In other news: The Dollar is on fire as expected and Gold/Silver is still a stubborn pain in the butt. But there’s nothing to add on either front as the Dollar is on course and Gold/Silver have not breached any thresholds that would question our bearish outlook.

That’s all I got for tonight – see you all tomorrow bright and early.

Cheers!

This entry was posted on Tuesday, January 20th, 2009 at 7:39 pm and is filed under Market Outlook. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.