Tipping Point

It’ll have to be relative brief tonight, ladies and leeches, as I’m running late and have not stopped a second this weekend.

Bottomline: We are at a tipping point and although the market is clearly in an oversold condition, the wave pattern suggest that more downside potential may be forthcoming.

As expected the last day of expiration week resulted in an EOD snap back rally as we were miles away from max pain. Based on what I’m seeing in my wave pattern there is plenty of downside potential left as indicated on the chart. However, if we push past the yellow zone I would recommend closing open short positions and waiting on the sidelines until perhaps past 857 before dipping into longs. Intermediate wave (2) is nearing its conclusion and thus we remain vigilant rats as we don’t have the luxury of a crystal ball that tells us when the bottom of this wave has been painted. The only way to know for sure is after the fact, when our Elliott Wave rules allow us to discard the probability of a further drop.

With that said, I do see a reasonable chance for a turn and if it happens it should happen fairly soon. If we see a congestion around the Friday close early Monday I can see myself dipping into a small amount of our favorite puts with carefully managed stops (inside the yellow region above). The good news is that risk can be relatively easy managed, so we are in a good spot right now.

You all know that I love my stochastics as they rarely disappoint me. And what my short term stochs (one week basis) are telling me is that we went from overbought to oversold in a jiffy last Friday. This also supports my view that short positions here can be easily managed.

Now, let’s take a look at the weekly Dow Jones chart – I am enthused by the downswing in the stochastics and am hoping for a repeat of the March tape that presented us with the bottom of intermediate (1) of primary {1} of cycle wave c.

However, I am also keeping a keen eye on th NYSE Bullish Percent Index, which is in heavily overbought territory right now. Can we go lower here? Absolutely – we did so last October. But wishful thinking is one of the deadly sins in trading and this indicator warns me to stay very nimble and not to get complacent. I would not recommend running more than 5 short positions at this point as there is a looming threat of a slingshot rally. We will see it soon – perhaps even by the end of this week.

I must point out however that nothing has changed in the credit market – without posting various charts let me summarize that there has been no improvement in any of my favorite indicators (TED spread slightly rose, Moody’s BAA/TYX yield spread has remained at historic levels, IRX yield practically at zero). The one chart that actually is a direct represenation of the continued credit freeze is the Baltic Dry Index, which despite being called an index actually shows the actual average shipping charges for a container of basic materials. Nothing really has changed and we do need to see this to start pointing up on the double, not down, otherwise I cannot fathom the possibility of a multi-week rally as anticipated for intermediate wave (4) of primary {1}.

As 2sweeties graciously has added a Gold RT calculator I couldn’t resist adding tomorrow’s daily RTs to my chart. Unfortunately I cannot use Prophet in TOS for the Comex Gold contract (GC) but luckily I still do have an OptionsXpress account which allows me to chart GC. Their drawing tool is a complete pain btw – don’t try this at home – it got pretty ugly and there was a lot of German cursing.

I think the chart makes it pretty clear what action to take here. We are way way overbought right now and I actually dipped into some puts on Friday. Although I am still expecting a drop to the 650 area I will have no compunction about cutting my puts if Gold keeps pushing deeper into 800 territory over night or tomorrow morning.

Here’s the wave pattern for some context – I’m not sure what to make of that long push up right now. The triangle we saw last week got pretty ugly and I think this has turned into an a,b,c correction. But just like in the averages we are at a tipping point here – Monday/Tuesday should present us with much needed clarification. One thought is that the 9/11 – 10/10 wave maybe was the X in a double zigzag – again there are a lot of options at this point.

Should we see a continued trend to the upside I will have to re-evaluate my wave count. We should never get married to our own ideas and a renewed push to the upside will give us reason to believe that the trend might have changed and that Gold will take another whack at the four digit mark.

Let’s finish up with the Dollar tonight – we haven’t looked at that for a while. As predicted a few weeks ago, the current uptrend was not done by far and we are currently completing what seems to be a 5th wave to the upside. My target is a minimum of 90 – let’s not forget that fifth waves in commodities and currencies often get extended, so I would not be surprised to see 92 or even higher.

However, the COT report tells us that long spec are starting to abandon the Dollar, which is worrisome and confirms my current view that the Dollar should start tanking big time once wave 5 is complete. It is also my view that a sinking Dollar will most likely present us with higher crude prices as most OPEC members are nostalgic about those $140 crude days.

In that context – word has it that a major economic war is about to unfold – here’s a snippet of an extremely interesting article one of our readers shared with us this weekend:

In a stunning new development, the Dubai Multi-Commodities Center is now putting the finishing touches on the formation of an exchange traded fund for silver with a launch likely next month as demand for silver has surged in the past six months.  What may be happening here is that the OPEC nations, and possibly also Russia, are setting up a counterbalance against the collapse of oil prices.  You may recall from past issues that we discussed at length how we thought that sovereign wealth funds in oil-rich nations were tweaking gold and silver upward every time oil was smashed by the Illuminist manipulators.  The message was, you leave oil alone, or we will send gold and silver to the moon and expose your destruction of the US economy by killing the canaries in the coal mines, thus ringing the gold and silver alarm bells loud and clear.

You guys know that I’m not a fundamental trader by far, but I have to admit that this article is quite intriguing and I’m curious as to what the impact of this new silver ETF will be.

That’s it for tonight – Berk and I will follow tomorrow once we have a better idea which way the pendulum is going to swing. Keep it clean my legion of leeching steel rats, and don’t let your personal biases influence your trading. The market will show us the way, as usual.

Cheers!