Bear Squeeze Deluxe Please!

Finally we’re getting somewhere – while the rest of the trading world seems to be mired in mesh of confusion, Herr Mole had a little eureka moment towards the close. Before we get started, here’s a bit of background music, as this is how I feel today – on the money – spot on – in sync with the market’s every move. Yeah, I know the video is a bit gay, but just focus on the babe in the bikini.

Many folks were surprised by the push up during the final hour of trading. Not me – it became pretty clear that we were going sideways before a big EOD move. It was either to the upside or downside, with different implications. The market Gods decided on up and it bestowed us with new dynamics going forward – I personally think it’s good news.

The chart above shows the larger wave count scenarios. The blue lines & labels pertain to Berk’s favorite, which assumes that wave 5 started on November 5th – the orange lines & labels support the triangle pattern which I have been pimping since mid October. Both scenarios are equally possible right now and to better understand the reasons why lets zoom into the yellow area marked above.

The aggressive push to 917 on the SPX was way too long to be counted as a corrective subwave of lesser degree pertaining to the previous motive wave down. Also, as it breached the low of the previous motive wave down ending on November 7th there are three possibilities:

1. 20% – It is subminuette b of minuette (c) of minute {d}, and we are now in c towards the downside, thus completing {d} of the triangle scenario.
2. 40% – It is minuette (a) of minute {e} to the upside, thus the final leg of the triangle. Equality should get us to about 929, which is a retracement level.
3. 40% – It is minuette (i) of minute {iii} and we are now tracing out a series of 1,2s to the downside. This indicates we are already in minor wave 5 of intermediate (3), which remains Berk’s favorite path.

I’m giving 1 only 20% due to the strong NYSE volume and breadth we witnessed today. Let’s compare yesterday with today:

Monday

Tuesday

Actually the $INDU today changed after the close to 29:1 (Berk sent me those grabs), but at any rate it’s apparent that market breadth was strongly on the negative side, despite the late day rally. This gives more credence to the notion that the we continue to go lower from here on, which in my mind again lowers the probability that we drop by a few more points (completing {d}) just to then rally afterward into wave {e}. The momentum from here should either be strongly down or straight up. I could be wrong on this as there are various ways to interpret this, but it’s academic anyway and we would know by tomorrow morning.

Okay, a few more charts to put things into context – I have nothing on the bond market as today was Veteran’s Day:

Medium term the McClellan could swing either way as it’s exactly at zero.

More longer term we are slightly in bullish territory bordering neutral as well – or is this the ‘new overbought’ based on the previous extremes? 😉

The weekly stochastic is swinging to the upside which also indicates that we need to complete this triangle asap. Some might be tempted to interpret this as a sign that we are rallying straight up from here, but it’s been pointing up for a week now and we have been dropping, so let’s not forget that this is a very slow indicator.

This also ties into what Elliott used to say about triangles: When a triangle occurs in the fourth wave position, wave five is sometimes swift and travles approximately the distance of the widest part of the triangle. Elliott used the word thrust in referring to this swift, short motive wave following a triangle. The thrust down is usually an impulse but can be an ending triangle. In powerful markets, there is no thrust, but instead a prolonged fifth wave. I think we can confidentially say we are in a powerful market right now, so I do expect a long 5th wave to the downside. I think after tomorrow’s tape Berk will be able to suggest some downside targets.

I have nothing to add to Gold tonight, it’s at the lower boundary of the triangle I talked about on Sunday, but as it’s currently moving alongside equities (and alongside crude I might add) tomorrow’s tape in equities will give us clarification as to when we break towards the downside in Gold as well.

As a final comment – crude traded below 59 today and I expect it to find a bottom around 55 as this is dangerously close to most OPEC member’s cost of production. The timing of a bottom in crude might also tie into the completion of intermediate wave (3), as a rise in crude should benefit equities. It’s humorous how this once inverse correlation now has reverted.

I hope that all the above will give you a sound prospective going into tomorrow – behind all the waves and the chaotic moves there is a pattern developing and every day now brings us closer to a resolution. Berk and I will provide regular updates in our intra-day postings, which will include what direction we think is most likely as well as which trades we are taking if any.

May the Trading Gods have mercy on your ass(ets)!

Cheers!

UPDATE: Everyone – I made a correction on the SPX zoom in chart as one comment was misleading. Again, the logic of why I think wave {d} is complete is a bit counter-intuitive but I can best explain it that sentiment was ‘too strongly bearish’ to entertain a down-up move. Either we stay bearish and continue (wave 5 down), or the bearish sentiment was already maxed out and will lead to a counter trend move ({e} up). The idea is that it’s too strong a sentiment to not lead to a fast conclusion out of the chop zone.

Arguably this can be debated to death, but it’s not that big of a deal anyway as most of us are sitting in cash right now waiting for an entry. Tomorrow morning’s or even tonight’s tape should bring swift conclusion.