Pesky Poligon Party

Friday’s tape failed to award us a resolution of the pesky triangle I talked about the night before. We bounced around all day in spasmotic fashion (disclaimer – word coined by Tim “The Dark” Knight). So, tonight’s forecast will be rather painless as really nothing much has changed since. So, set your brains to cruise control and let’s take a look at our trusted SPX chart:

To make it worth your while I have again labeled our journey ahead – no matter which path the market will decide to take tomorrow. Always remember Yogi Bera’s famous quote: If you find yourself at a fork in the road – take it! 🙂

So we still have got 2 1/2 scenarios in play. The green one remains my least favorite as things have slowed down on the bearish end of the stick. Although I am fairly sure we drop tomorrow the odds still indicate that we won’t make it past 770 – the point where the green and orange scenarios depart. So again – don’t be tempted to un-hedge yourself if you are still holding those June puts we grabbed beginning of January. They are extremely motivated to continue banking you coin, so don’t disappoint them by cutting off your legs (or any other of your vital limbs that is). Let’s stick with the plan, shall we?

Elliott Wave Role Call:

Green Scenario: Intermediate (5) down – we still need to breach 740 for this one to remain valid [the prior intermediate (3) wave low]. I’ve made it clear that I’m extremely hesitant to un-hedge myself before we hit that mark.

Orange Scenario: Intermediate (4) triangle – E wave up – remains my all time favorite. We first drop out of this pesky triangle, then stall and rally back up just to irate some of the hobby bears. Then we skydive into the abyss from our drop zone at around 920.

Blue Scenario: Intermediate (4) flat – C wave up – remains a strong contender, especially if we breach the triangle to the upside tomorrow. This would lead us to the Mount Everest of all sell the rip opportunities at an alpine altitude of 1020-1040 – bring your oxygen masks. If this happens I plan to pawn my own gold fillings to load up on massive amounts of SPY puts.

Trust me rats, I’m as impatient as the next guy and would love nothing more than being able to cash out of those June puts. However, all good things take time and your mission, should you choose to accept it, is to leverage each market gyration to your maximum benefit. So far we’ve done a good job of anticipating where things will lead. But as you all know – the path is only clear in hindsight, which often leaves us to question our actions after the fact. Why didn’t I buy a ton of puts back in June? Why didn’t I unload end of November? Usually the answer is either greed or fear or outright ignorance of medium to long term market trends. It’s just too easy to pull the trigger just to make yourself feel good that very day. Regrets usually kick in when you realize you just cut your legs off. BTW, that happened to me with TLT on Friday – cut it too early and could have made double the profits (or more).

I have to say, this one has me scratching my head a little. The CBOE Put/Call ratio has again dropped to levels we usually only see after a large and prolonged drop (i.e. more outstanding calls than puts). Something similar occurred briefly in December as part of the ‘end of year slope of hope extravaganca’ – short term investors looked back at 2008 and decided that things could not possibly get any worse and thus only go up from here. As a result the CPC fell to lows we have not seen since the end of December 2007, right at the latest bull market top. Little do they know what this supercycle has in store for them – (un)fortunately we do and thus we continue to trade in the direction of the long term trend, which is down.

Although I can explain away the mindless end of year exuberance of our mouthbreathing trading cousins I have no idea why the CPC has dropped so low again right now. However, this does open the possibility that we are indeed in intermediate (5) [the green scenario], so let’s remain open minded and nimble.

The more medium term McClellan oscillator has coiled up a bit around -30, which is only halfway in oversold territory. So, there is definitely a lot more downside potential available here – perhaps even more than just to SPX 740.

Similar story on the long term NYSE Bullish Percent Index. There’s downside potential galore – we are neutral at best.

The good ole buck has legs – as predicted we are in wave 3 of 3 and continue to push to the upside. Too bad I don’t have the nerves to become a currency trader – could have made a fortune. I do expect a little correction coming up here fairly soon. The Friday candle looks a bit ominous – perhaps we see a drop to about 84 right here.

The recent Dollar rally did not manage to impress Gold the least bit, which took me a bit by surprise on Friday when I bought puts at around 876. So, the old wave count is out of the window for now and I cannot offer much except that we’ll probably push a bit higher here as the next resistance area is the 940 spot. Too little potential to justify calls and I also don’t like to sink my money into anything that remains uncertain in respect to the wave count. Gold has pulled a lot of fast ones on me lately and perhaps this is indeed the big pop all those gold bugs have been waiting for. Or, it’s yet another bull trap – wouldn’t be the first time. A lot of folks are long Gold right now, which also makes me very cautious. As usual, when something is supposedly ‘obvious’ – it’s often ‘obviously wrong’. So, until further notice I will turn into a precious metal voyeur and just ‘watch’ 🙂

Last but not least – remember that spread between the 30-year T-Bond yield ($TYX) and Moody’s BAA Corporate Bond Yield I used to talk about? Well, it has dropped from -5.3 in mid January to about -4.95, which although still extremely negative by historic levels points towards a bullish correction on the horizon. This is more of a medium term indicator for me but the easing of this spread in combination with the current CPC/NYMO/BPNYA levels supports the orange wave count as it usually precedes an upside in equities.

There you have it – this should adequately prepare you for another turbulent week in the 2009 bear market. If nothing else it I can promise you that it will be nerve rattling, annoying, volatile, and emotional for the average trader out there. Not for us I hope – I believe this should give you sufficient ammunition to counter whatever the market Gods decide to throw at us.

UPDATE 9:32pm EST: Just was reminded that there’ll be an FOMC meeting this week – sheeeeshh…

Maybe the ‘dramatic announcement’ will be booster rockets that get us to 920 or higher. BTW, what do they mean by ‘dramatic’ – perhaps Bernanke is going to sing? I can’t wait….

Stay nimble and don’t get too exposed – but also remember the old aphorism: Buy the rumor – sell the news 😉

Cheers!