Saturday, August 29, 2009

XRT overhead resistance

Retailers facing pretty much the same Confluence of Death as everyone else...



Notice the responsiveness to fibonacci retracements, particularly the 61.8% level.


Friday, August 28, 2009

XLF Ending Diagonal

It appears we are tracing out the final few sub-waves on our primary count for the financial sector.

This final fifth of the fifth looks like it might want to form an ending diagonal, which should be expected at the end of a huge rally like this. ED's represent one last fit of delusion. They form whenever the trade has become one-sided -- in this case, more and more people are buying and fewer are selling, forcing the channel lines to contract. They typically end with blow-off moves that overshoot the leading boundary.

Personally I always like when diagonals and triangles are formed by trend lines or fib fans -- they seem more important and frankly their formation is easier for me to anticipate because I've already got the lines drawn. If you look at the second chart below, you'll see that the Minute v ending diagonal would be formed by trend lines that originate at the end points of the previous two Intermediate waves, which would be kinda cool.





My alternate count remains that this is merely Minor 1 of (C). Expect a retrace to $13.75 before exploding back up. If that plays out I'd project the end of (C) of {2} to be around $17.50.

But most importantly -- both counts suggest a significant retrace is imminent. That's actionable information! At the very least, mid-term puts on XLF seem like a good idea at this point. I've begun acquiring a few and will add on subsequent rips. I'm also partially hedged with FAS since I expect additional upside -- and I don't expect Primary 2 to end with a whimper.

Wednesday, August 26, 2009

Confluence of Death

These charts are self-explanatory...




Supersized short play

According to the wave count I laid out for MCD a few weeks ago, we should be close to completing a contracting triangle that will finish off Primary Wave B as well as a massive 2-year diamond top pattern. Primary C will then commence taking MCD down to at least $40 and in all likelihood substantially lower (T2 = $30, T3 = $10.50).

On the chart below I project MCD turning at around $58.50, which would allow (E) to be a 61.8% retracement of (D) and also fill the large overhead gap from July. But there is no reason this has to happen - it is already at the point where the minimum requirements are met, meaning Primary B could end at any time. The highest this rally can go is $60.88. Any higher means this wave count is invalidated and something else is going on.

As I've said numerous times I hate triangles and I never try to position myself early -- too many whipsaws and fakeouts. So I will be watching this one closely for a high probability short entry. Let me know if you've got ideas or recommendations on month/strikes.



Possible Bleed-Off set up

Another example here if you're not familiar with this set up on the Chicken Oscillator.

Please note this set up is not confirmed until the STCO issues a bullish crossover. Until that happens there is risk of more downside.

Also, just FYI I am not preparing to enter any new long trades based on this signal -- this is just an FYI of what may play out later today or tomorrow.

Saturday, August 22, 2009

Ratio charts

One thing I like to do occasionally is to price things in $USD or $GOLD. It gives you a different perspective - sometimes one that is clearer because it dampens the effects of the dollar's fluctuations. Or something. Anyway, it's a valid tool in TA.

This chart of $SPX shows a significant resistance zone is fast approaching.



Same story for IYR. But look at the far left of the chart -- notice how it coiled underneath the line for a few weeks then gapped above. Shortly thereafter it put in its lifetime top.



Of course, the catch with ratio charts is that there are multiple ways to move the trend because there are two variables at play. So you technically you can't bank on the real price of $SPX dropping if it turns away from the resistance zone on this chart -- a strengthening $USD and a flat $SPX would produce the same result.

Cheers.

Friday, August 21, 2009

And now... the end is near...

...and so we face... the final curtain...

But how near? I can't say exactly but we are nearing a significant correction of some sort, perhaps Primary Wave 3 down (or C if you prefer), or perhaps something else altogether.

Bullish sentiment is hitting extreme levels not seen since the 2007 top as evidenced by this chart of the Put to Call Ratio.



If you're unfamiliar with $CPC, it is a decent gauge of investor sentiment. When it goes up investors are buying more puts, when it goes down they're buying more calls. As you can see over the past few days there has been a dramatic surge in call buying. Perhaps everyone is expecting higher prices because Bernanke has "saved the world".

As a contrarian this makes me absolutely giddy and terrified at the same time. I am not willing to say that the top is in yet, but good God, this is insane. In any case I'm glad I got rid of those XLF calls today.

Lots to examine and carefully consider over the weekend.

I'll let Frank sing us out. Have a good weekend.



Good enough for government work

The minimum requirements for our wave count on $BKX have been satisfied and it is likely that I will be exiting my long position (XLF Sept $15 calls) before today's close.

This chart shows what I think is a conservative count for the last few squiggles of this fifth wave. We could certainly go much higher from here but I'm happy with this trade and I want to avoid the trappings of Wave 2 psychology.

I'm really happy with how the Chicken Oscillator delivered throughout this rally. Aside from one whipsaw in the midst of that 4th wave triangle (which I think had more to do with my mistake at reading it properly) it performed brilliantly, giving a crystal clear buy signal at the bottom of 2. As I type $BKX is up 33% since then!



Tuesday, August 18, 2009

Apple's monthly close will be important

A doji candlestick is a sign that the market can't make a decision. But the Chicken Oscillator says a decision must be made. The monthly close this month will determine what the C.O. does on the next candlestick - i.e. crossover or backtest. As you can see, the C.O. signals are valid on all time frames and ones that occur on monthly charts are important.



$BKX triangle?

This is why I hate fourth waves and especially fourth wave triangles. Yesterday I was ready to write off my primary count on the banking index. Today I'm not so sure.



The triangle subwaves are a little longer than normal but still seem to be consistent in their relation to one another - roughly 78.6%.

XLF, on the other hand, is clearly not tracing out a triangle as it set a new low at the point I have labeled "c" in the chart above. This divergence between $BKX and XLF should be expected in the fourth wave, because they also diverged in the second wave.

A couple of weeks ago I wrote:
One thing to note is the divergence between $BKX and XLF in the second wave position -- $BKX had a very deep retracement, while XLF moved sideways. Based on the principle of alternation, the two should diverge again with banks moving sideways and XLF dropping sharply. However I would not be at all surprised to see them both move sideways (oh yay, could we have another triangle please?!?!) because they both have support from key fibonacci fans nearby.


So maybe that is what is playing out here - a triangle on the banking index, and a slightly sharper double ZZ or whatever on XLF. Or perhaps, as Alphahorn has pointed out, the fifth wave truncated and we head down from here.

Either way, I hate bloody triangles and I refuse to trade them, so I'm out until this pattern resolves. Additionally, if we do get a 5th wave up, it could very well be the end of Primary 2. Potentially being this close, the risk is too high for my taste to play much to the long side so for the most part I plan to fade it. Whether it's the end of P2 or something else, there will still be a correction so the R/R will be good either way.

UPDATE:

grednfer wanted to see my fib fans, so here you go mate. The yellow fan runs from the Feb 2007 high to the March 2009 low. The green fan runs from the July 2007 low to the March 2009 low.

Normally I would have chosen the yellow fan as a logical target for the end of Minor 5. However, if this is also the end of P2 I would expect some overthrow. P2 should end in a final burst of delusion, one would think.



UPDATE #2:

raised_by_wolves wanted to see the latest readings on the C.O., so here you go mate.

This is the time frame I've shown in my previous postings on $BKX. It shows the wave signatures of the Minute degree waves. As you can see it's stuck in mid-range chop at the moment.

Quick review on C.O. wave signatures:

1 is a breach
2 is a backtest
3 gets pinned
4 is a false break
5 reverses the false break



This is a longer time frame that exhibits the wave signatures of the Minor degree waves.



Monday, August 17, 2009

$TRAN trying to hold that channel line

No surprise that bulls are trying to hold the 33-yr channel line on $TRAN, it's the exact LOD so far. A close below or even a breach is a very significant event in my book.

Friday, August 14, 2009

Looking for banks to top in low $50's

My primary count for $BKX continues to looks good. I know there were a lot of people who were trying to short banks today and frankly I cannot imagine why when the overall wave structure is this clear. We have a 1, 2, 3, and what looks like a completed 4. So what's missing?

I'll be looking for $BKX to top around $50 or so. There should be a meaningful correction that immediately follows the end of the fifth wave, but as of now we cannot be sure of what degree. As I've mentioned before I believe this would be satisfactory for the end of Primary 2, but it certainly isn't required to be. More discussion of that to follow in the coming days.



Compare the wave structure on $BKX above to this idealized Elliott Wave (courtesy of Elliott Wave International). Pretty darn close.



Also, XLF managed to defend the magic fib fan line it claimed yesterday. That's a weekly close, too. Good sign for the short term bullish case.



If all goes as planned I will be exiting FAS late next week and begin scaling into short positions, primarily September puts on XLF and some individual banks. Unlike the indexes the wave structure on banks is clear, and that knowledge provides an advantage and opportunity that must be seized.

Thursday, August 13, 2009

Banks look on track

My previous forecast on the banking sector appears to be on track.

My downside target for this 4th wave was hit almost exactly and we've rallied about six percent since then. I think 4 is complete but it's a little unclear at this time - the intra-day waves are choppy and messy, a sign that they could be corrective, so it's possible we may head back down a bit or consolidate sideways. But I have a good entry on FAS and will continue to hold for now.



Look how the Chicken Oscillator helps you navigate the wave structure by giving nice wave signatures that I've talked about before. The long term oscillator shows the wave signatures for this entire rally, while the short term oscillator shows smaller degree waves - and it also seems to confirm that the 5th wave has begun.



Also, note that XLF managed to close above one of our magic fib fans, which is now important support.

Wednesday, August 12, 2009

Like a thief in the night?

You know things are messed up when you can see a count that calls for substantial upside, like the one I pondered shortly before the FOMC announcement, and another count that calls for the Apocalypse to begin at 6 a.m. PST tomorrow.

To be clear, I don't give the chart below more than a 10% chance of being right - but it's a good reminder that we need to check our heads every day to make sure we aren't swept away by the psychology of the second wave.

What would piss me off the most is that I saw this count as it unfolded and even allowed myself a congratulatory booyaka! as Minor A completed on schedule. How is it that we see something unfold like we planned, then just disregard it? Stupid.

Like I said, I consider the odds still quite low for this to be the end of Primary 2. Bulls will continue to get the benefit of the doubt until bears prove otherwise. No sense in trying to call the exact top of a major, major trend change - trust me, there will be plenty of time to jump on the bear bus when 2 is over.

One thing I will be watching closely however is whether this 33-year Great Bull channel on $TRAN gets violated. In my view that line is a very real, physical representation of the bulls' entire argument -- which is that Great Bull is ongoing and nothing significant happened these last two years. Lose the line, lose the argument. It's just a hunch but perhaps that will signify that sanity is returning to the market and the Great Bear is reawakening.

Anyhoo, lending some credence to this count would be the fact that Minor C = 59.28% of Minor A (fyi for any noobs out there, 0.618 is an important fibonacci relationship and a common relationship b/w A and C). Also, Intermediate Y (the rally off the July low) would be 60.00% of Intermediate W (March low to May high). Finally, the time length of Intermediate W was 42 days. Intermediate X was 42 days. Intermediate Y was 25 days. 42 x 0.618 = 25.96.

Minor A was an impulse. Minor B retraced 23.6% which is satisfactory. Minor C would be an ending diagonal.



EDIT: I see that Dan beat me to the punch with a similar post on the Dow, although his count has one more tiny pop higher left to go. I like Dan's stuff a lot - he delves into the psychology and philosophy of Elliott probably more than any other blogger. Check out his site if you haven't already (but shhh, don't tell anyone at home base that I'm pimping other sites!).

Minor B complete?

I can't be sure about this count yet, but I feel like there's at least a decent shot that Minor B is already complete. As I mentioned previously it's important for bulls to hold the Point of Recognition gap.

We also may have put in the first "1" wave (of unknown degree at this time) of Minor C.

Caution is the order of the day until the structure is clearer.

Monday, August 10, 2009

Banks not done yet

Last week I pointed out that banks and financials appeared to be in the midst of third wave - "lagging", if you will, the broader markets which seemed to be in a fifth. Here are a few charts that make it abundantly clear, at least to me.

Here's $BKX intra-day. I simply see no other way to count this except as an extended third wave.



I took a crack at labeling the subwaves on XLF. Frankly I'm not sure the minutia even matters. The general idea is the same - three clearly defined moves thus far, not five. As a side note, look at how almost all the second waves are sideways corrections while the fours are sharp, the opposite of what we'd normally expect.




One thing to note is the divergence between $BKX and XLF in the second wave position -- $BKX had a very deep retracement, while XLF moved sideways. Based on the principle of alternation, the two should diverge again with banks moving sideways and XLF dropping sharply. However I would not be at all surprised to see them both move sideways (oh yay, could we have another triangle please?!?!) because they both have support from key fibonacci fans nearby.

So where does this put us in the grand scheme of things? As I've mentioned before, I believe banks are tracing out an ABC zig zag for Primary 2, much simpler and clearer than the double or triple ZZ (depending on who you ask) that the broader markets seem to be tracing.

Therefore we should expect five waves of equal degree to the ones we got in the initial rally off the March low. See the notes on the chart below. Personally I still think $59 is a good final target for $BKX.

Saturday, August 8, 2009

I'm Lovin' It!

No, not the food at McDonald's -- but rather the Diamond Top pattern that's been two years in the making on MCD.

Bulkowski gives the pattern a decent ranking (#7 out of 21) but also notes that pullbacks occur frequently after the pattern breaks (the classic shakeout) so use some caution.




If a pullback does occur, this may be the wave count that is unfolding.

Friday, August 7, 2009

Meh

Hey, remember those cheat wave scenarios I was warning about?

Anyhoo, I'm still not that impressed with today's EOD sell off. The $TRAN chart below shows the LTCO still pinned after yet another classic bleed-off of the STCO that played out today (see this example of the Bleed-Off set up for more info)

On a hummingbird chart the C.O. looks slightly more enticing and I think I can count 5 waves unfolding down on 1 minute bars. It could very well be the beginning of a larger move. But being conservative and chickenly has served me well thus far, and I saw no need to change that this afternoon.

Don't pay too much attention to the Wave labels on this chart -- there are a number of things that could be playing out here per my previous post and I'm not married to any of them. I will point out however that this puts $TRAN in a much better position to defend the 30-yr channel line that I believe is significant.

Thursday, August 6, 2009

Serial killer on the loose?

Damn. That's the third one this week, chief. Another oscillator, methodically and meticulously bled off just like before. Looks like we've got a serial killer on our hands - one with horns on his head and a ring in his nose.

I can't believe these guys have once again bled off the Short Term Chicken Oscillator! (See here or here for more info on this set up).

The chart below of $TRAN shows that the STCO has already lost a lot of blood but price barely dipped. Not particularly encouraging for bears hungry for a big meal right now after a month-long famine. I will point out however that all hope is not lost for the bears. Note that the long term oscillator has crossed over, which is a sign of weakness, but it remains pinned well inside overbought territory. We need a good drop on Friday to pry it loose.

What we're waiting to see is where the LTCO goes from here. If it crosses back over, the bulls will have played the same funny prank they've done numerous times throughout this rally - apparently it never gets old. If however we get a backtest, that will be just the short signal we're waiting for.

In another market, I might have jumped in earlier on the STCO signals - if you did, congratulations for being a balls-out bear and I hope you banked some coin. Me? I'm a chicken. A dumb little bird can get trampled pretty bad in a bull stampede. Best to wait until the coast is clear. All the more so with the bulls on a month-long parade.



I've given a lot of thought to figuring out who it is that keeps bleeding off the STCO like this. It's obviously someone who's inherently evil, probably obsessed with blood, and compelled by uncontrollable desires to ritualistically commit the same crime in the exact same way. I think I've found our suspect.

Wednesday, August 5, 2009

I gotta start trading currencies

I look at currencies maybe once a month. Maybe that's a mistake. Because there's no other way to describe these C.O. readings besides sick!

I mean even if you just took the signals and then set a trailing stop, that's pretty sweet coin.

Please note that I haven't taken an in-depth look at this pair on multiple time frames, so I wouldn't necessarily presume that it's headed down based on the current C.O. readings. I'd have to do a more thorough analysis for that. And I don't even have a forex account -- yet.

Bullish Dilemmas

Bulls charge ahead without thinking. It's their nature. That's why they're called bulls.

Most of the time they end up OK. I mean, with the FED and Goldman Sachs on your team it's hard to lose these days, right? And after all, the most basic wave structure is 5 up, but only 3 down - nature's way of ensuring progress and growth.

But sometimes the bull's bull-headed bullishness creates serious dilemmas. Like obliterating the 13 month EMA last week. Or the one we find ourselves in today.

I'll use $TRAN as an example, but it really applies to the broader market as well.

The first chart shows my preferred count, which is that Minor A of Intermediate C of Primary 2 completed on Monday and we find ourselves in the midst of a B-wave correction (spare me the critiques about why this is Z of a triple zig zag or 4 of P1, etc, etc. I don't care about minutiae. This is clearly a 3 wave move thus far off the March low and I'm calling it A-B-C for simplicity).

I like this scenario b/c it's well proportioned, has a decent channel and would make sense with the overbought readings on every indicator. Note the 2-4 line violation and failed backtest today.



If this count is correct, we would expect a B-wave correction to retrace about 38.2% which also just so happens to be the spot of the previous 4 of one lesser degree. Double bonus!

Now, here's the problem. See that purple line? It's the channel line for the entire 30+ year Great Bull. I have a hard time imagining that the bulls are just going to give it up that easily. It's too important.

In my view a channel is more than just a pair of parallel lines -- it represents an era in history, be it 30 years or 30 seconds. The channel defines the limits of that era. When you're in the channel, the era is ongoing - in this case, an era of unprecedented prosperity, growth and optimism - the most powerful bull market in history.

And that's why I think it's such a big deal - by reclaiming this channel line, the bulls are essentially making the case that the Great Bull is still ongoing. They are saying that in the grand scheme of things, it's as if nothing has happened. There was no 18-month death plunge. By golly we're still in the same channel we've been in for 3 decades, aren't we? So everything's fine! In fact, we're at the bottom boundary right now -- what a great time to buy, because soon we'll be headed to the upper boundary!

Defending this line is essential in defending their argument.

Who knows? Maybe I'm wrong about this. I mean, I'll admit I'm getting pretty philosophical about something as silly as a little purple line on a chart. Maybe we'll retrace without any problem, violate that line on the way down, then violate it again on our merry way back up.

The thing is we know for a fact that it's important. It's marked some pretty significant turning points (including when I first pointed it out to you rats back in early May and recommended a short that banked 13%, and then said it would keep us range bound for weeks - oh yeah, I'm going to keep patting myself on the back for that one for a long time, bitches!). So it's just hard to imagine that it will be disrespected so flippantly this time.

All of this makes me wonder if A will continue to push a little more to the upside to allow sufficient room for a B-wave retracement without violation of the channel line.

Or even another stupid scenario like this:



There's even a fib fan line (from the 2008 high to the March low) that would form a nice triangle boundary.



Whatever happens in the short term, I'll just say it one more time: intermediate trend remains up, and bulls remain firmly in control until the bears draw a line in the sand and say "By God, no more!" I haven't heard that yet, have you?

Tuesday, August 4, 2009

XLF approaching speed bump

XLF stopped just shy of one of our magic fib fans (here's a wider view if you'd like to see where they're drawn from).

Before you get all short crazy, ask yourself: does it look like we are completing a 5th wave of Minor A, or does it look more like we're in the midst of an extended third wave of Minor A? Just raising that as a possibility and perhaps someone with more insight will help us clarify.

Daily


Intra-day. Bulls would love a repeat performance of July 16 and I wouldn't be surprised if they tried.

Still Pinned

Yes, the trend is getting tired and yes it looks like we're wedging a little, but that doesn't mean much at this point.

Monday, August 3, 2009

Oscillator divergence plays out

Update on my Sunday post...

The divergence played out as expected, issuing a long signal (for scalpers) at around 985 on the /ES in the wee hours of the morn.

I still see no reason to be short at this point. My short term account remains in cash, long term still long. Booorrrrrinnnggggg.

Sunday, August 2, 2009

Oscillators appear to be diverging once again

I did not re-buy those SPY puts as I pondered I might on Friday. Here's one of the reasons why.

We appear to have a divergence setting up between the Short Term & Long Term Chicken Oscillator. The STCO is bleeding off while the LTCO remains pinned in overbought territory. This is a set up I've mentioned a number of times including this recent post.

Many times I see this occur during a sideways consolidation as price is preparing to make another lurch higher. It doesn't mean there's not some downside to come on Monday - it just means I'm on guard for classic cheat waves to the upside until I see the long term oscillator get un-stuck. When that happens, the signal will be clear and the risk of entry will be more suitable for my taste. I never mind being late to a party - or anywhere else for that matter since I live in LA.

Here's what it looks like on the /ES.