Decision Time!

Yes, I am aware the presidential election is over, but we are nearing an important fork in the road that will reveal the direction of the market for the weeks to come. As you might suspect, the choice is between bearish (my favorite) or bullish (my second favorite).

Berk and I have been trading fairly lightly in the past week as the wave count offered various possible scenarios as to the medium term direction of the market. Monday we recognized exhaustion in various trend indicators and entered into a few short positions, which we rode through yesterday’s rally. Our fortitude was of course rewarded today, although today’s tape (despite offering no surprises) was a bit annoying.

Anyway, at this point I think we can simmer it down to two main probabilities – not too much has changed since my last forecast on Monday. Scenario A means that we still tracing out the dreaded triangle, which would indicate that we are completing {d} of minor 4 of intermediate (3). Scenario B means that we are already in minor B of intermediate (4), which of course is an extended bullish consolidation. In short term the direction is down as we should descent a bit further tomorrow. As I mentioned on Monday, the point of the reversal will give us some indication as to which of the two scenarios is unfolding. If we break earlier (the orange line) and breach through the upper border of the triangle (about 970 on the SPX) then there is a very good chance that we are tracing out Scenario B. If we continue downward (blue line) and bounce off the lower triangle border (about 880-890, plus there is  a weekly long retracement level around 886) then I would give more credence to Scenario A. Right now, my dear steel rats, the probabilities on both scenarios are about equal.

We of course knew that the market was insanely exuberant on Tuesday as that rally was running on fumes. First money was clearly moving back into bonds, as 10 year T-Note yields were plummeting. Today, this trend happily continued, which in part helped drive equities lower. Note that we are below the psychological 3.7% line again. This is good for the bears.

Then there was the McClellan Oscillator painting record highs – it’s come down a little today, but we are still officially in overbought territory. My medium stochastics on all averages have however burned down into the 20s today, which is also giving credence to the little bounce I expect sometime tomorrow. Obviously, if you are an avid user of stochastics, you know that the indicator can crawl around below the 20 mark for quite a while, which is exactly what happened during the large drop in the first half of October. But you can interpret all those indicators in various ways right now as conditions have been extreme on both spectrums in the past few weeks. So, I am very careful to read too much into them, but they do help me to point to high probability entries and exits.

There is however one indicator that has been very reliable when it comes to determining the medium term trend and it’s the spread between the Moody’s BAA Corporate yield and the 30-year T-Bond yield. Well, it has been widening again and is back at 5.35%, which supports the bearish case.

The one big fly in the bear soup however is the chart above which also reveals the ‘mystery indicator’ I teased you leeches with the other day. It’s a plain old weekly stochastic (5,3,5), and as is apparent by connecting all recent lows with bottom crossovers it’s extremely accurate in predicting turning points (on the tops as well I might add). For some reason I rarely see traders use the stochastic on a weekly chart, don’t ask me why. I personally spend much of my time experimenting with charts and indicators (yes, I need to get a life), and I am almost fanatic in my never-ending quest of finding the ‘holy grail’ of all indicators. Perhaps truth is in simplicity however – and unless my trusted stochastics is wrong this once then it might just be that we bears will be greatly disappointed. For the signal right now is clearly pointing upwards and we would need to see this line swing downwards in a very short order to assure us Scenario A presented above.

So, yes – I’m admit that I’m a bit torn right now – not sure which side will win out here. There is a lot of evidence supporting the bearish case, but that weekly stochastic is rarely wrong. Well, I hope this time around it is – would be fun to get one more slide to the downside, wouldn’t it? 😉

This is all I have for my disciples today – it’s been a long day for me and I actually planned to make this a lot shorter. Yeah, that never works out it seems – LOL. Berk and I will keep you guys in the loop tomorrow as we still have various puts in the run which we plan to close out shortly. Let’s however not forget that we are getting the Non-Farm Payroll Report on Friday, which should be very ugly. Thus, being the vultures that we are, Berk and I would prefer to hold our puts into Friday morning, but depending on what transpires tomorrow we might have to cut and re-entry.

Cheers!

P.S.: If you are not too tired after reading all this, please go over to Karl Denninger’s place and peruse his latest post on who exactly responsible for the mess we’re in – it’s a must-read it.