Red Shoots

I’m feeling the burn a little bit lately as I haven’t taken one day off in weeks. So please forgive me if I’m going to mostly communicate in charts this evening as I need at least a few hours of R&R before we embark on another week of market turbulence.

I offer three perspectives for the coming week:

Soilent Blue: We completed Minor A of Intermediate (X) on Friday and are ready to scare out some hobby bears by whipping the tape into a Minor B consolidation. Approximate target is the area around 897 – 900 – the former being the 38.2% fib of this leg down and 900 of course being a magic mark of the bulltarts.

Soilent Orange: We continue to subdivide Minute {iii} of Minor A and the next stop and logical bounce candidate is the 23.6% fib line of the existing leg of Primary wave {2} which started on March 6th.

Soilent Green: A.k.a. the ‘bears are screwed scenario’. We completed Intermediate (X) of {2} on Friday or might do so anywhere between here and 830 – this is followed by resurrection of bear hunting season which will put a monster squeeze on anyone daring to have played the short side. In my opinion the uncle point for Soilent Green is the 900 mark – if we breach it with confidence (not just a fake out test) then I would strongly suggest to start reversing gears or at least start hedging yourself against some further upside.

I full appreciate that in particular the green scenario does not instill much confidence in playing the downside and in a way that exactly is the intent. Let’s always remember that we are most likely still in Intermediate {2} and thus surprises will come from the long end of the price scale. Last weekend I offered a comprehensive review of how much time we have spent in Intermediate {2} in comparison with Intermediate {1}. The conclusions I drew obviously continue to be valid a mere seven days later, thus my current assumption remains that we might counter correct the aggressive rally we have ‘enjoyed’ since early March but that further upside is most likely lurking ahead. When it will occur is not clear at this point as there are eleven different corrective possibilities in EWT, and it will take a bit more time before we can narrow things down. In the interim I recommend to keep your exposure limited or trade the tape with a short term perspective. I will continue to do my best to offer intra-week analysis and highlight possible inflection points which either lead to a continuation or a breach of the current higher degree trend. A good example are the short term channels, trend lines, and fibonacci lines I have been feeding to you rats all last week. The idea is to use those inflection points to wager your bets as the risk/benefit ratio at those moments is at a minimum. Whatever you do – don’t attempt to chase the tape if you fail to cease the moment at the proper time. A counter rally can come out of nowhere and can wipe out days of downside progress – unless you picked a fortuituos entry you will most likley get taken to the cleaners, especially as an option trader.

However, having said that there are three scenarios on the table right now which point towards the possibility that we might be in for a considerable medium leg down – one of them would even get us close to testing the March 6th lows. I was debating with myself if I should talk about all that today but all three of them will require us to breach through the 830 mark and until that’s on the horizon let’s not exhaust ourselves with long term bearish scenarios. I will offer them in due time and if you are delta negative anywhere ahead of 850 you will be well positioned to play a more meaningful drop to the downside.

Favoring the orange scenario is the CBOE Put/Call Ratio Index, which curiously is actually dropping – it should be moving the other way in ‘normal circumstances’. Whenever I see the P/C ratio move in the same direction as equities I usually expect lower prices – it’s not guaranteed but is worthwhile noting. Once we see a rise towards 1.0 or higher then a temporary bottom may be in. So, this is a glimmer of hope for the bears and I will keep a keen eye on this one. A continuation of lower readings in combination with lower prices might point towards an acceleration and a possible breach of the coveted 830 mark (i.e. the 38.2% fib line of the current leg of Primary {2}).

I find this chart extremely intriguing but cannot offer a clear reading on it just yet. Seeing the 10-day MA and 20-day MA basically flatline and on top of each other is an interesting phenomenon. I would be open to possible interpretations. What I do see has been highlighted on the chart and most likely does not bear further explanation. Again, another potential purveyor of bearish news.

Possible good news for you bulls – or temporary bulls: The medium term McClellan oscillator has dipped into ‘bounce territory’ which currently appears to be the -50 to -40 zone. This could present us at least with a short term consolidation as outlined by Soilent Blue.

The longer term NYSE Bullish Percent Index has not budged much from its extreme readings we saw last weekend. On a more general (and again long term) note there is plenty of downside potential to go around once equities are ready to descend into Primary {3}. For now we might maybe get a retracement down to the 50 or 40 mark, allowing the bulls to reload and push the Dow towards 10,000 and the S&P500 past 1000.

I would like to introduce you rats to the NYSE summation index which we should keep an eye on in the weeks ahead. Here’s a quick primer from stockcharts.com:

The Summation Index is a proxy that tells the swing trader whether money is flowing into or out of the market. When the Summation Index is in a strong uptrend, it indicates that the bulls are stronger than the bears. In a downtrend, it communicates just the opposite.

In a bull market, the Summation Index will typically vary between 0 and 2000, with a reading of 1000 being considered neutral. Readings above 2000 are indicative of very powerful bull market advances. Readings between 1000 and 0 point to the bear being ready to go on the prowl. And finally, -if the reading reaches -1000, then a reversal in the bear market may be nearby.

During bear market rallies the 1000 mark usually makes the bears salivate although I’m sure we will see much higher readings before Primary {2} is behind us. What I find interesting however is that we touched the -1000 mark right at the March 6th lows – and we were actually way below that during the ‘Wild West’ days of 2008.

In any case – note that we reached the 1200 mark last weekend and even after last week’s drop we are still above the 1000 mark. There apparently is a lot more room to consolidate the current Primary degree rally.

Gold has slowly crawled its way back to the 940 mark and it seems to be painting some kind of bearish wedge. In my not so humble opinion if there is any remaining chance for a medium term bearish scenario in Gold then I believe the 940 – 955 region will be its catalyst as it represents important Fibonacci resistance lines. However, as of now I continue my neutral stance when it comes to our favorite precious metal. I might try my luck with a tiny GLD bear spread on Monday but would not hesitate to toss it to the curb if we push any higher.

The Dollar might be bottoming here (green scenario) or it might just be a wave 4 consolidation before a final drop towards 80. Right now we only traced out about 70% of the length of the previous down leg, and as much as I would like to see a rally right here I only give it a 40% probability. If we wind up pushing towards 80 it would complete an apparent a-b-c correction. Whether or not that is will be the extent of this large degree drop or if we see five waves to the downside remains to be seen.

Fujisan already mentioned that the Monday after expiration is one of the most liquid trading days of the cycle. It is also the best day to get an option as close as possible to theoretical value, and it’s a great day to get involved if you missed establishing positions the following week. It’s one of the more intense days and everybody is at work. Traders are less at edge. It’s a good day to establish new positions – as there is no front month expiration risk. So, if we do get a rally to the upside – don’t freak out right away and look at ways to use it. The road map I posted should offer sufficient guidance as to when to hop on and off the train and when to just sit and enjoy the ride.

Cheers,

Mole