Spring Forward

I had to look no further than the Slope to find my muse for today’s title – Spring Forward (Tim’s was ‘Fall Back‘). Just in case you are a ‘furreigner’ and live abroad – over here a handy rule for remembering how to set your clock for Daylight Saving Time (no, there is no ‘s’ at the end of Saving) and then back again is the expression:

Spring foward – fall back!

So, in spring you set your clock one hour forward, and in fall you set it one hour back – simple. A handy little mental reminder for memory impaired knuckledgraggers like myself. But there is another change in the air, one that is also guided by seasonality and repeating cycles: Urania, one of the nine muses, will soon bestow us with a new economic cycle in our financial markets – according to our current EWT count this will be Primary wave {2} of Cycle wave c.

Tim was just taking a stroll down memory lane, reminiscing about his experiences playing Cassandra (yes, I’m full of mythology today) over at the Slope and calling for a major bear market way before it was en vogue. I can only imagine how he must have felt taking flak back in 2005. I myself got kicked off a popular trading blog (which shall remain nameless) not even so long ago – back in July 2008 – for warning anyone who wanted to listen that the Dow Jones would trade below 10,000 by the end of the year.

Well, now I’m telling you guys that we will see the Dow trading at 9,000 again by the end of the summer, and maybe – just maybe – we might even revisit the 10,000 mark. Yes, you heard it here first (and maybe on the Slope – damn you T.K.). Markets never move in one direction for very long – even though the last few months might have felt that way.

Minor 3 of Intermediate (5) started like clockwork at the beginning of January. It’s been downhill since then and the first nine weeks of 2009 gave us eight downers and only one week closing in positive territory. That’s further confirmation that this is a third wave – there was little opportunity to jump in if you didn’t catch it at the top. Remember 944, when we bought those June puts? That feels like ages ago now.

The circle is where we are right now – actually we’re a bit further down in that we are close to completing Intermediate (5) of Primary wave {1} of Cycle c. It might be worthwhile to refresh your minds with the time intervals at each degree of the wave cycle:

• Grand Supercycle: Centuries
• SuperCycle: Decades
• Cycle: Decades/Years
• Primary: Years/Months
• Intermediate: Months/Weeks
• Minor: Weeks/Days
• Minute: Days/Hours
• Minuette: Hours/Minutes

The the last trading day of Cycle wave b was October 11th, 2007 with a peak at 14,198.10. Since then Primary wave {1} of Cycle wave c has lasted 515 days and shaved 7,571.16 points off the Dow Jones index. That’s 53.3% – a massive loss in accumulated wealth indeed. Many long rooted pillars of our financial system like Bear Stearns, Lehmann Bros, Citibank, or AIG have either tumbled and disappeared since then or are financially insolvent and on the brink of extinction – requiring recurring infusions of tax payer bailouts to the tune of hundreds of billions to artificially maintain a shadow of their former self.

Of course we Elliotticians saw this catastrophe coming years ago – back when nobody wanted to listen. I personally attempted to save several of my friends from losing their shirts in the market and told them to pull out repeatedly. Of course, none of them listened. Like many others they had been seduced by a Supercycle bull market that had lasted decades and bestowed us with a seemingly never ending cycle of growth and prosperity. It actually ended back in 2000, but due to the devaluation of the Dollar we seemingly eclipsed that mark in October 2007. Go here for an inflation adjusted chart or see shadowstats.com.

So, besides bringing the noobs up to speed, why am I telling you rats all that? Do we really care about those ‘galactic cycles’ when trading on a daily, weekly, or monthly basis? Yes we do – because in a few weeks the nature of the market will begin to change. Initial cautious bullishness will quickly lead to euphoria and calls declaring the bear market as done and dead. I doubt that Primary wave {2} will last 500 days – after all this is a consolidation wave as part of a larger degree motive wave (see graphic above or in the sidebar on your right). But at minimum it will be measured in months and the characteristics of our daily trading reality will shift back to a climate resembling 2007. The pundits and politicians will exploit a market recovery as a sign that ‘the stimulus plan is working’ and that we are on the road to recovery. Do not be seduced and plan your trades accordingly, no matter at which degree of the wave cycle. The old buy and hold paradigm will only serve you well if your investment window is measured in months or weeks – not in years.

For us traders this presents us with an opportunity to play the long side, nothing else. As an added benefit we might actually see the options market become …. well … an option again. Volatility will eventually breach below 30 again, and that will change how options are priced and also decrease some of those nasty bid/ask spreads. A few months down the line, as we reach the peak of Intermediate (A) of Primary wave {2} we’ll be able to load up very cheaply at the top and ride Intermediate (B) down for a few hundred Dow points. As usual, it’ll be all about the right timing and I’ll be here to steer you rats along with my wave counts.

Let’s now divert our attention to the present – here’s what I see in store for us for the next two weeks:

Blue: We completed {v} of 3 and are pushing towards the 750 region. There is some resistance in between around 720 based on a prior diagonal, which was touched three times. We peak at the 38.2% fib line and then descend into 5 of (5) – completing Primary {1}.

Orange: That is my preferred count as the fib relations and the wave patterns would be almost perfect in this scenario. We drop a bit more and bottom in the 650 zone. Then we push into 4 of (5) which completes roughly around 730 but we could push a bit higher and test 750, as in the blue scenario. There’s also a similar bump in the road around the 700 line as we touch that prior diagonal mentioned in the blue scenario. After that we drop into 5 of (5) and complete Primary {1} around 610.

Here’s a larger perspective which shows you where I draw some of those support/resistance lines from. Also note the green channel, which at this point is highly speculative, but I wanted to throw it out. Let me quote from our EWT Bible, psalm 87:1:

Wave 5 often ends when meeting or slightly exceeding a line drawn from the end of wave 3 that is parallel to the line connecting the ends of waves 2 and 4.

Now, obviously we have not even completed wave 4 of (5) just yet, but we have a good idea of where it’ll take us. This, in combination with prior intermediate wave relationships gives us an idea of where the bottom of Primary {1} will be. What I also like about those two targets is that in both, the orange and blue scenarios, 5 of (5) would measure about 61.8% of Intermediate 3 of (5). This would be a very fitting end to what has been an almost perfect Primary degree motive wave.

Finally, there’s the psychologically sensitive 600 mark – if we get close to that I strongly believe that the bulls will make a stand there.

The NYSE McClellan Oscillator also supports the notion that a bounce is in the works, even if it’s just for a few days.

The longer term NYSE Bullish Percent Index is clearly in oversold territory, but there’s sufficient space left to afford a completion of 5 of (5).

Finally, the spread between the 30-year T-Bond yield ($TYX) and the Moody’s BAA Corporate Bond yield was roughly around -4.5 on February 15 and has actually increased to -4.85. This also supports my current wave count as it has been a fairly reliable long term indicator throughout 2008. Once we see this spread decreasing it will be an early warning sign that we are nearing the end of the current Primary wave cycle.

I saved this chart on Friday so that I wouldn’t forget to talk about it today. This is a chart of the crack spread, which is the spread between the U.S. Oil and Gasoline funds. In other words – it’s the profit margin for refiners. What you see is a clumsy attempt to put some EWT labels on the last few quarter of price action. I wouldn’t bet big money on this, but it seems to me that we are completing an a-b-c consolidation and that we might push to the upside here very soon. Either that, or we drop a lot further as part of a large b-wave to the downside. I’m not sure where the cut off point would be but take note and maybe correlate this with your own count in the crude market. I personally do not trade crude and do not want to suggest a pertinent count.

I think the way to play this is to watch for a two day rally to the upside and then go long refiners. This would give us at least some confidence that the c-wave is complete and that we might enjoy a long motive to the upside. Of course it’s also possible that we are embarking on a 5th wave as part of the current push up – but in terms of picking trades that would not matter as 5th waves in commodities often extend quite a bit.

Gold seems to be at a great spot for a reload in puts or short positions. As I stated on Thursday – if we breach 960 I might get nervous as I don’t expect a strong retracement at this point. I will keep you rats abreast of any changes in my precious metal trades – but at this point I expect further downside in both Gold and Silver very soon.

That’s all I got for tonight – see you on the other side, ladies and leeches!

Cheers,

Mole