Same Difference

It’s that time of the week again when we take a stern look at our tea leafs and attempt our luck at the losing battle we fondly refer to as predicting market probabilities. As we all know: “Prediction Is Very Difficult. Especially about the Future”. Well, that hasn’t stopped me so far 😉

Ain’t she a beauty! Can someone please explain this chart to me? Just kidding… it’s really not that difficult – so you instant gratification leeches just bear with me. There are two scenarios I think are most valid at this point. The first one is what I basically the triple correction I been pimping for a few weeks now:

1. A zigzag that started on the 11/21 and ended on 11/28.
2. Followed by a flat, in which we find ourselves right now, and in which we are about to complete wave {b} of B of (4).
3. Followed by a motive up to the price correction zone of between 1000 – 1040.
4. Followed by a high altitude skydive into the abyss.

There is also much talk about a triangle for which I have added a competing count in orange (or whatever that Prophet color is). I have also drawn yellow boxes around the counts where you see the original one in black and the one for the triangle in that orange color. Anyway, based on the triangle scenario we are in the last leg of C of (4), followed by a drop into D, a rally into E, and then the big plunge back into the abyss.

For the foreseeable future it really doesn’t matter as you can see that the path traveled is identical until the separation point, which is clear from the chart. I think that risk will be fairly easily managed once we arrive that level: If we are starting to drop around 900-920 the more skittish rats among you might want to wait until we cleared the lower boundary of the triangle.

Of course if we keep busting higher it’ll scare the pants off most bears out there and that would be exactly where I would back up the proverbial truck. Frankly, I’m personally not married to any of the two paths – may the better bull trap win 🙂

One caveat however – as you can gather both scenarios require that we rally from here. If we actually start dropping below the Friday low all of that is out of the window and Berk’s count might be what we’re dealing with. I actually give his count an equal probability, so go back to the Thursday update if you want to remind yourself of his projections.

The Dollar got pounded last week and seems to be completing an A-B-C correction. And guess what follows a correction – another leg up – most likely. Unless we keep dropping from here, which would change our count.

There are two things that grabbed me about this chart. First up we are of course in deeply overbought territory – and let’s not forget that the Bullish Percent Index is a long term indicator. I could also show you the McClellan (more medium term), but why bother? The second observation on this chart are the levels of extreme conditions we are now dealing with. It is said that bear market have the most violent bull rallies and I think this comparison chart between the BPNYA and the SPX shows that quite nicely.

BTW, this gives additional credence to Berk’s scenario of an immediate drop. However, we don’t have much further to go in what I outlined above and believe it possible that the thin pre-X-Mas tape makes a few more points to the upside possible.

This is Moody’s BAA Corporate Bond Yield which is right now around 8.75 – has actually pulled back a little in November.

And this the 30-year T-Bond yield, which has completely fallen apart, just like the TNX. Now, let’s do some math:

• Take the $TYX yield, which is pretty much at 3.06%.
• And deduct from it the BAA yiled, which is 8.75%.
• And you get a yield spread of -5.69%.

Ladies and leeches – 5.69% is record territory and I have never seen it that high. This spells big trouble for the mouth breathers going forward. Unless the $TYX is making a b-line to the upside 2009 there won’t be any sustained rallies and vapid corrections will be all we get. Hey, I don’t mind vapid corrections, just for the record.

Yes, the credit market is still broken and it won’t fix itself – I alert the media!!

Okay, short term T-Bills are basically the safest way to store your assets right now – and investors are willing to endure a negative yield just to get in. Scary stuff which the equities market seems to completely ignore. Why are we rallying again?

Whenever an internal count is becoming unclear I always take a step back and try to reach a conclusion by merely counting waves. A count of 9, 13, or 17 with few overlaps (motive + extensions), for instance is likely motive, while a count of 7, 11 or 15 is likely corrective. Right now I am counting 6 major waves in Gold and they are overlapping heavily, leading me to believe that we get 3 more counts to the downside.

Until we clear the 740 mark I would however be cautious – Gold has been acting strange as of late and is completely detached from it’s little brother Silver. As a matter of fact – Silver is at a very interesting spot right now and short positions should be very defensible. If it pops higher by any reasonable margin then something else is going on. I’m playing with the thought going short Silver on Monday – but I won’t touch Gold with a 10 foot pole right now.

That’s all I got for today, my steel rats. I have already slaved non-stop since the Friday close and some nice cosmetic Zero improvments are on the way (nothing has fundamentally changed – no worries). I have also completed the case study and beefed up the tutorial which can both be found on the Zero page. No worries, it will be accessible again later tonight. There is even an Excel sheet you can download that contains all of the signaled trades of the past 15 trading days (correlated with a marked chart in the case study) – if you want you can use that for your own purposes – took me a while to put that together. As a matter of fact I first did the entire case study by hand and when I was done I thought – hey, why the heck am I not using Excel for that? Silly me…

Back to more evil deeds – have more coding to do – see you leeches tomorrow morning.