Target Reached

Okay, so I missed the target by $1.23 – can you find it in your heart to forgive me? 😉

Before I turn into a pumpkin let’s revisit our wave count and get our bearings straight so everyone is on point for Tuesday’s session. I also have a brand new toy for my stainless steel rats – come and get it!
[amprotect=nonmember] Updated wave count and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
[/amprotect] [amprotect=1,9,5,2] The 1130 mark turned out to be strong resistance, just as expected. We pretty much turned on a dime and never looked back. NYSE A/D ratio closed solidly bearish at 0.7 (D/A 1.43) and the SPX managed to wipe out four days of upside progress. Not bad for government work as they say – and although our puts still look a bit shell shocked it’s a consoliation to see that this tape can’t keep running on cough syrup and hot air alone.

Technically we have now satisfied the requirements for an a-b-c flat correction – if Minute {c} of Minor 2 ended at 1131.23 today then it is the 138.2% multiple of wave {a}. As long as we don’t breach Monday’s highs Minor 2 can be counted as a completed. We like order in our universe after all. However the market is a cruel Mistress and might just throw us all another curve ball.

First of all the readings on the Zero Lite were miserable today – up to the point where I was surprised to see the tape drop this far at all without much of an intervention. Then we also stopped right at a support line which goes back nine month now (more on that on the chart below). So, there is a chance that the 1130 mark was simply so overhyped that it was too much of a gift to refuse for our market making brethren. And that would mean today’s drop may turn out to be a bear trap. The key in avoiding this trap and finding ourselves at the 1140 or even 1150 mark will be a breach of that magic diagonal line above. Let’s zoom out a little so you can get a better look:

Yes, that line – exactly. It’s one that is hard to ignore as we keep touching it over and over again. Obviously market participants seem to respect it and so should we. A breach of this line is the first step towards continuing downward – obviously. But it needs to happen pretty soon lest the bulls find their composure and drive this thing up again.

If/once that happens a breach of the 1040.78 mark will be where the rubber meets the road and a loose target for Minor 3 is the 900 mark. However, a lot can happen in the interim – sorry to say. For instance – this flat could be only a first leg of a double or three pattern and we could continue to basically trade sideways in wide swings for a few more weeks. Not unreasonable to assume and if you think you’re sick of the 1040 to 1170 range now – ask me again in a few weeks if that transpires. Sadly, a more complex scenario would also knock a bit more theta off our long term puts. Can’t be helped – after all I don’t have a crystal ball. Working on it though! 😉

Before I run – here’s someone I want you to meet:

Let me introduce you to my latest evil creation – my new McClellan:VIX ratio chart. In case you are unfamiliar with the McClellan – it’s a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. It is primarily used for short and intermediate term trading.

So what I’m basically doing here is to adjust the McClellan for volatility and then smooth it with a moving average, which appears to normalize the data quite nicely. I was able to find distinct support/resistance lines which accompany Primary degree waves and can be used to (again) pick market tops and bottoms. Green lines vertical time lines mark bullish turning points and red lines the bearish ones. It seems that this indicator is more reliable on the long side, at least during bear market rallies.

Also interesting the expanding triangle pattern during Primary wave 2. Which leads me to another thought: If we are truly in Primary {3} then the current pattern will be broken – and we should continue down from here. And if we are still in Primary {2} then it’s quite possible that we will push all the way back to the 2.4 mark and above again. Food for thought.

Technically we still have plenty of room to run up on many of my momentum charts. This new is one is just one of many. But every pattern is eventually broken and if Primary {3} is to happen then many of these momentum indicators that proved to be spot on in the past year will get overwhelmed and dragged toward the downside. Of course when that will happen is next to impossible to predict. A breach of the May lows would be a good start for sure. As bearish as the past two months may have felt – thus far we really haven’t gone anywhere yet.

Cheers,

Mole