The Road Ahead

The first 18 weeks of 2009 have been tough for many traders, and negotiating the increasing amount of daily gyrations, overnight traps, snap backs, and blatant manipulations felt a bit like this:

If you were a bear until March and made it all the way to level 19 – congratulate yourself – I think this tape has been vastly more difficult than most of 2008 as liquidity is rapidly drying up and the ‘game’ has been reduced to sudden drive by shootings sponsored by a small group of fast liquidity providers – i.e. the likes of Getco, Goldman, RenTech, Citadel, Highbridge, etc. As a result we find ourselves melting higher and higher on fumes in grossly overbought conditions. But as Elliotticians we need to remember that this is exactly how a Primary wave bear market rally should unfold. The quants and funds of the world have been taking a huge hit this quarter as they were short the market and were dumbfounded by such a violent and rapid retracement.

Fortunately we Elliotticians saw the signs early on and started to reduce positions way ahead of 666, despite expecting a low around the 620 mark. I personally have not lost any money this quarter and even added a nice little gain despite sitting out 90% of this move to the upside. This should be a learning experience for all the trolls who tried to label this a purely ‘bearish blog’. Frankly, I have to admit I am quite a promiscuous whore when it comes to market direction. Give me a trend and I suck on it.

Let’s start with our more short/medium term outlook and then throw a wider net from there:

Last Thursday I was fairly confident that we would be completing Minute {c} of Minor 4 around the 800 mark. But we were presented with a rude awakening when the tape busted through the 861.73 – the Wednesday peak – in early trading. According to EWT rules this disqualified the short term bearish scenario and ‘something else & bullish’ was going on. Thus, as soon as that mark was crossed by a single tick I dropped my index puts and exchanged them for a moderate amount of SPY calls. That and a nice futures play in the NQ enabled me to turn a painful down day (in index and GLD puts) into an humbling but profitable up day.

As I’ve pointed out in the past: I might come across as conservative at times and not make a move when others are jumping all over the place. But when I am faced with an clear and present inflection point I don’t hesitate for a second – for doing so only will make your decision harder and your trade less profitable. No matter how smart you are and how pretty and accurate your charts are – if are unable to pull the trigger at the right time as a trader you better find yourself another line of work and that fast.

Here is what I see ahead for this coming week:

Orange: We are completing Minor 5 of Intermediate (A) of Primary {2}. As you know already my big line in the sand is the 881 – 885 region in the SPX as that is the 23.6% fib mark of Primary wave {2}. It is very much possible that this will be the final road block for Intermediate (A) – I do however allow an ‘irrational exuberance buffer’ leading to the psychologically sensitive 900 mark. The bulltarts love round numbers and enjoy drawing lines with straight rulers – so let’s not underestimate the avarice of our mouth breathing comrades at our own detriment. This scenario would be disqualified if we breach below 845.35 tomorrow or maybe Tuesday.

Blue: We enjoyed a more complex {b} wave and should almost immediately descend into Minute {c} of Minor 4 of Intermediate (A) of Primary {2}. As last week our target is around 796 to 810. A little reminder – not only is 796 exactly 38.2% of the current Intermediate (A) of {2} wave, but it also marks almost exactly where {c} of 4 would be 1.618 times the length of {a}. This scenario will be disqualified if we breach 875.63 – the April 17th high – tomorrow or on Tuesday.

My trusted weekly stochastic has not changed much – we remain overbought but have been so for the last three weeks, and if you know how to read stochastics you also know that being overbought is not an action item – a breach beneath the 80% line is the event to look out for.

As anticipated we finished the first week lower after six consecutive weeks up but our chagrin is was only by a measly -2.04 points on the SPX, the DJI closed down only -52.65 for the week. This is not exactly what we had in mind for our ‘down week’, especially after six long pushes up. Some might interpret this as way too shallow for a retracement but it does count as a down week, and that’s how it works. So absent a clear statistical probability we need to keep an eye on momentum indicators and of course price, the ultimate indicator, for hints of where we are heading.

Elliott Wave Theory defines eleven different types of consolidation patterns and at this still rather early stage in this primary wave it’s very difficult to make any presumption as to which way things will play out. However, this doesn’t stop me from offering a rough outline of what might be ahead. Although I mostly count the SPX when it comes to the longer term picture I often also turn to the senior among our four food groups – the Dow Jones.

The chart above depicts the simplest scenario of what we might see play out in the coming weeks and months – a straight a-b-c consolidation, also known as a zigzag (psalm 42:1 in our EWT bible). If we drop into Intermediate (B) from around here – or perhaps 900 – the next major support zone offering a sufficient level of consolidation is the 7,500 mark, which is a nice round defense line for the bulltarts plus the 38.2% fib of Intermediate (A). A bit further down we hae the 50% fib at 7,328 and the 61.8% fib at 7,126. Smack middle between those two is an important mark which might not be immediately apparent but was all the rage last November and again in late February, shortly before our final lows for the year: the 7,197.49 mark – a.k.a. the very bottom of Cycle wave a which occurred on October 10th, 2002.

Either way the 7,500 to 7,100 range should provide some support which then could present us with (C) of {2} to the upside. A rough final target for Primary wave {2} of Cycle wave c is the 9000 – 95000 range for the following reason;

• 9,000 is a nice round number and will be extremely important as a symbolic target the bulls will want to conquer. 9,000 also would be the point where (C) would equal the length of (A) [our current wave] assuming that we drop to 7,500, the 38.2%fib line described in the previous paragraph. If we get there later this summer market sentiment should approach that of the top of Cycle wave b in October 2007 – don’t be suprised to see a flood of headlines declaring the bear market as dead and a new bull market on the horizon.
• 9,250 would be 1.618 times the length of the current wave (A).
• 9,500 is roughly where we touch the lower boundary of a long term channel which last year I named the PPTPL – the PPT Panic Line. It’s not unreasonable that the bulls might drive the tape all the way to this point and maybe a little bit further.

Of course all this is purely mental masturbation as we might see something completely different, like a flat, or a triangle or a combination of threes. We shall see. But what’s fairly clear at this point is that Intermediate (A) of {2} is its final stages and that we should see the onset of a very meaningful correction in a matter of days and not weeks.

I find the unfolding pattern on the NYSE New-Highs-New-Lows index quite fascinating. See, for me it’s always about recognizing patterns, simple ones and of course the fractal kind – the latter being a lot more difficult to read. But what I’m seeing right now in those three moving averages (50/20/10) is quite reminiscent of the pattern we saw previously during topping market conditions. Food for thought indeed.

Gold is also at an ‘interesting’ stage. To my chagrin our favorite precious metal decided to push its theta burning powers to a whole new level last week and we now find ourselves slightly above a prior diagonal resistance line and at the 38.2% fib of the current down wave. Frankly, I’m a bit miffed about myself because I should have known – want to know why?

I had totally forgotten that we are approaching a roll over and certain primary dealers in cohorts with the bullion banks have had a recent habit of luring in the goldbugs prior to expiration of the front month futures contract and then smashing them a day or two before expiration. The whole idea here is to discourage Gold traders from rolling into the next front or major contract.  Well, ZGJ9 and GCJ9 both expire at the end of Tuesday.

So here we are – right at the futures (and underlying options) expiry – plus we are near a fairly significant resistance line. It should be VERY interesting to observe what will happen next – as you know I’m still holding my GLD puts (which are currently at a loss). BTW, just for the record – I will have to put up some kind of ‘mole are you crazy to short Gold’ comment counter – but I went through the same exercise last year – same old.

The Dollar’s gyrations have been a bit erratic as of late and I don’t have a high confidence as to either direction – at this point I would need to see either a break above 88 or a breach below 83 to make any attempts of projecting its future trajectory. All I know is that it’s not helping my Gold cause right now. We are back at the 23.6% fib line and a close below that might be a first hint of where we’re heading.

That’s all for now – I might follow up a bit later tonight (or tomorrow morning) with some exciting stuff. I leave you with this:

And on a more lighter note:

Cheers,

Mole