I Know What You Are Thinking

UPDATE 11:25am EDT: As usual when presented with two possible option (close gap or gap down) the market chose the one that screwed the most people:

Let’s just observer the irrational exuberance exhibited towards the close yesterday. Which was of course followed up by a nice gap down, shaking out the mouth breathers. Which then was followed by a counter fake to the upside, and now we’ll probably get more head bobbing than an Amsterdam streetwalker after midnight.

I know what you are thinking:

We are heavily overbought and need to consolidate. But then again – the tape has been relentless in the past two weeks. How do I know this is when it finally breaks into 2 to the downside?

Rats – I feel your pain but there’s really no reliable way of knowing – no matter what anyone tells you. And taking short positions must be especially tough psychologically if you have been burned most recently betting on the downside. The best reasoning I can suggest you guys is that every day the market pushes up the more likely it is that we’ll get our eagerly anticipated consolidation. Simple law of probabilities.

Mr. NYMO is in heavily overbought territory and that in part also gives me a certain level of confidence to start taking on short positions right here.

There is a certain Zen pilosophy to trading the markets. You have to know when to stay out. But you also have to know when to strke. How the hell do you know? Well, often you don’t – but the best you can do is to not trade when the tape does not ‘feel right’ and when the odds seem to be stacked against you. Which is what I have been suggesting most recently – again, in my world capital preservation is my primary directive. However, there comes the time when you must let reason and not fear guide your trading.

Right now today I see a market that’s been rallying 156 SPX points (24%) in roughly two weeks. The ‘odds’ are on the short side, but of course that doesn’t mean we cannot bust higher. So, what do we do? We pick rips to sell short positions (or buy puts) and we know where our line in the sand is. That’s pretty much it – you have been briefed.

UPDATE 11:54am EDT: Chrys and Mickmock suggested in the previous thread that there still may a case to be made for a medium term bearish scenario. The underlying idea is that we may be in an ending diagonal as outlined in 37:2 in our bible:

It’s a theoretical possibility – yes. But here’s one big strike against it. In psalm 88:2 Cain spoke to Abel:

In the contracting variety, wave 3 is always shorter than wave 1, wave 4 is always shorter than wave 2, and wave 5 is always shoerter than wave 3.

I know what you’re thinking 😉 Maybe it’s not an ending contracting diagonal – but frankly – although we can count waves ’till the cows come home the question arises as to how realistic this count is. The latest push up IMNSHO is very bullish and the breadth numbers confirm that. So, forgive me if I don’t offer this scenario as one of my top contenders – as of today the probabilities are not in its favor.

That said – it’s not impossible of course and a push below 700 would give this additional credence. Yes, that would be a tad late, but at this point we are either in the late stages of Primary {1} and most likely in the beginning stages of Primary {2}, and these transition periods are always a bit tough on us Elliotticians – as many possibilities are on the table until certain resistance/support zones have been breached.