Not Much Longer Now

Well, maybe. The next two days will be crucial in arriving at a possible resolution of the current whipsaw we have endured for over two months now:

I mean, look at this ugly beast – its simple atrocious. And I haven’t even set this chart into candlestick mode, which would show some very nasty wicks. Of course swingtraders have been loving this but the rest of us rats are worn out to the max and the primary question on our mind is:

Will we get ouf this damn 800 range anytime soon?

I feel your pain and relief might be on the way. On Wednesday the green scenario looked like the winner and many of us were ready to mount the bear and ride it into the abyss (which is the stainless steel version of riding a horse into the sunset – hehe). Fortunately my spidey-paranoia sense kicked in and we were fortunate enough to avoid a bear trap before we all got caught on the receiving end of the stick without lubricant. The sudden spike up has weakened the short term bearish case but has not invalidated it. At this very point in the tape we face three 1/2 possible scenarios (again – I’m sorry):

• Green – Minute wave {iii} of Minor 3 of Intermediate (5): This scenario is about to become extinct as a push higher would alter the wave count to the blue scenario. The line in the sand is 877.95 – we breach this January 28 high we’re singing the blues.
• Blue A – Minute wave {c} of Minor 2 of Intermediate (5): This one assumes that we have not completed wave 2 of (5) yet and that we are tracing out a flat. This might get us all the way to 925.67, which would constitute 165% of the length of its {a} wave. My money however would be on the ‘magic’ 920 line.
• Blue B – Minor wave C of Intermediate (4): That was the original scenario I was tracing out back in October. It’s kind of interesting in that we could reverse around the same level as in the Blue A scenario, or depending on the level of irrational exuberance we might just bust higher into 1020.
• Orange – Minute wave {b} of Minor D of Intermediate (4): Yes, it’s that damn triangle again – and that would would also have us drop fairly soon (but maybe a bit later than the green one) and then reverse yet one more time to complete its wave E. I’m not sure how realistic this one is, but it’s a possibility. As you can see on the chart, the area around 770 – 790 will be the separation point. If we bounce from there a triangle it is.

You might have noticed that all three of my scenarios expect that the November 21 lows will be breached.

As it stands primary wave {1} of cycle c still appears to be incomplete and according to EWT rules in conjunction with our current higher degree wave count we need to complete a fifth wave to the downside before we are ready to embark on a multi-month corrective wave (i.e. {2} of c).

The current CBOE Put/Call Ratio readings are puzzling to me. Traditionally a touch below the 0.8 level almost guarantees a plunge to the downside, but I have marked three cases in orange where it didn’t happen – and the number of occurrences of such ‘anomalies’ seems to be on the rise. I have also marked two occasions when we touched 0.7 and strangely enough one time we kept pushing higher and the 2nd time we plunged. How the current reading can be interpreted in regards to where equities might swing next should be examined in context. I’m not going to clutter up the post by showing charts of the McClellan and Bullish Percent Index – but in summary both are in slightly bullish territory right now but are not overbought according to recent readings.

This is something to bear in mind when thinking that it may be impossible for us to see even further upside after last week’s rally. It seems that both, the medium and long term trend indicator leaves plenty of room for one of the two blue scenarios (see above).

Last Sunday I said:

Yet another reason why I think we’re due for a little bounce is that the spread between the 30-Year T-Bond yield and Moody’s BAA Corporate Yield has dropped from -4.9 to -4.3 as of January 28th.

Well, the bounce wasn’t that little after all but as of February 4th that spread has increased to -4.57 again. Not a huge increase, but worth noting and if we see this spread continue to expand it might be a harbinger of bearish tape to come.

Gold has been testing my patience – and it’s not the first time. As you know I’m sitting on some GLD puts which are busy burning my theta – grrrrrr. I intend to hold them as long as we stay below 930. Worth noting however is that Gold has not been mirroring Silver‘s bullishness of the past few days. A disconnecting between the two is usually a bearish signal, but I won’t pop the champagne unless I see 840 breached for good. Since I bought my puts at 920 I’m however in fairly good shape thus far.

Nothing much to report on the Dollar – it’s stalled a teeny bit but has not breached its bullish pattern. However, since we’re talking currencies, last but not least here’s my chart of the week:

The Yen has been beaten like a dead mule in the past week and is now outside the 2.0 Bollinger band. I think the chart and markings are fairly clear – almost every time we pushed outside the 2.0 BB in the past year we got an almost instant reversal. Now I usually don’t trade currencies but you all know that I do follow the Yen in correlation with the ES futures during NYSE hours (which is usually inverse). With everything else that’s going on right now and the highly anticipated news reports ahead of us on Monday and Tuesday I leave it up to your own imagination how a sudden slingshot rally in the Yen might be interpreted (and acted upon) by our mouth breathing colleagues. I personally will keep a keen eye on the Yen as I expect any fireworks in the currency markets to carry over into equities.

That’s all I’ve got for tonight, rats. The next few days will be critical and perhaps fortunes will be made and lost. I personally hope we’ll all be in the first camp. If nothing else you can be assured that I will be around to monitor the situation in excruciating detail. May the trading Gods have mercy on your portfolio 😉

Cheers!