Friday, October 29, 2010

Market Update October 29th

The market did not do much today. I was expecting the GDP report to cause a strong move but it basically triangulated all day. On the bullish side, the market respected the level I watch for trend change and there are couple of technical set ups that point higher. First, we have a smaller inverse Head and Shoulders set up that points to 1204 and an small Ascending Triangle targeting 1190. In addition, the market did not test yesterday's low at all so it points to a bullish bias. The one negative I see is that the MACD started to roll over on the 30 minute time frame so we should see a strong move either way early next week. My Elliott Wave count remains the same and it will be validated if we get the trust up or negated if the 1172 low is taken out.

I traded short for a brief moment today but I got stopped at break even. So for the week, I had 4 successful day trades, 2 break evens and 0 loss trades with a return of +3% of the total portfolio. I will be holding cash overnight in the meantime until I see a set up I feel comfortable with.

Thursday, October 28, 2010

Market Update - October 28th

The market gapped up as I was hoping and I shorted as planned. The market respected the 1180-81 level and I went long in the last hour to take advantage of the obvious. So it was a fruitful day for me and I am all cash again. Since the trend is up and the wave structure seems to point to yet another gap tomorrow, I will probably short again depending on how strong it is. On the chart, I see a potential for a W3 so if it's something over 1%, I'll short it but very carefully as W4 sometimes do not correct much in strong gaps.

I think 1200 might be challenged tomorrow.. we'll see.

Wednesday, October 27, 2010

Elliott Wave Update - October 27th

Today's market action invalidated my count yesterday but indexes closed towards the upper range of the day and above 1179 so the uptrend is still intact. I used today's initial gap down to go long and booked some profit at the Fib 38 retrace. I also shorted at 1179 in the final hour but got stopped at break even and now I am all cash again. I've see some Triangulating counts and Ending Diagonal bullish counts that call for a new high soon. My own prediction is that we will get to 1207 if we don't see any closes under 1180 (the level changes everyday). So tomorrow I will short at a a bullish gap or long at a bearish gap for intraday trades.

Tuesday, October 26, 2010

Elliott Wave Update - October 26th

The market continues to trend up and it set itself up for possibly new highs in the next couple of days. The dollar strength has done much to stop the rally so I think the real catalyst is the QE announcement in November. Until then, traders are positioning themselves for the implications for more money in the system. I am continue to watch the level for support, until the market closes under it, I will go long (like I did today) at this number or short on bullish gaps. This strategy has worked very well and I get much better sleep.. but as soon as the trend turns south, I will hold leveraged shorts overnight.

Morning Post: Market bounced off the level I was watching. I traded long and now there is an inverse Head and Shoulders that targets 1210.

Monday, October 25, 2010

Elliott Wave Update - October 25th

The market gapped up as expected and I shorted a tad early at 1192 but I closed all shorts at the end of the day with a 6 point gain so not a bad day. I think the market is not done going up. I will be looking for higher highs to short (or test of the level I watch to go long) and as long as 1178.5 does not get closed under, I will not stay overnight short or long for that matter. I'll add a chart soon.

Sunday, October 24, 2010

Elliott Wave Update - October 22nd

The market triangulated most of the session on Friday and it points to a burst higher on Monday on a 5 wave. The number I am watching as a top is 1193 but I'll re-short as close to it as long as the impulse is less than 1%. I imagine people using the G-20 gathering as an excuse to push the market higher. Also, we have a lot of companies announcing this week which should put a positive bias to the trend. However, the end of the week should get interesting as we are approaching elections and the announcement of Q2. My guess is that the pullback will come around that time and we will see 1200 or 1219 by then. And once we get a decent correction to the 50 MA? I will be going long as everything points to a bull market as this point. Never mind how the economy sucks, as long as there is "depreciation" of the dollar as Geitner himself over the weekend, assets will go up.

Thursday, October 21, 2010

Elliott Wave Update - October 21st

I think there is a potential strong move either way tomorrow. There is increased volatility and the support levels have been broken several times so maybe the top might be very close. But as long as we close over 1175, there is a chance for more upside. I am holding short overnight because I am leaning towards a reversal but if we test 1175 and doesn't go down hard then I will use 1175 as the spot to go long again. I was hoping we would get to 1167 today for the inverse Head and Shoulder set up but it stopped a few points short of it.

As far as the EW count, there are two ways at looking at the current wave. We either have a bullish W3 tomorrow morning or a bearish W3 sell off, looking at the chart it looks like we will get a violent move. Once this new wave reveals itself, there will be more clarity on the rest of the structure. And btw, there is a potential Broadening top set up so I will be posting the trendlines on that soon.

Wednesday, October 20, 2010

Elliott Wave Update - October 20th

I tried uploading a chart but I guess the system is down for maintenance. Basically, there is the possibility of a double top but also a possible inverse Head and Shoulders pattern. I went long after 1170 and took profit in the 1180 area and shorted at 1181. I expect a pullback tomorrow to 1173 but I might not cover if the market goes below that level. The next level of support would be around 1167 which would create a right shoulder of an inverse H$S if it holds. If the market bounces off these support levels, we'll probably see 1200 by December 1st and if not then I expect the market to Fib correct to the 1095-1130 area with the 50/200 day average providing strong support (currently at 1121). I should also add that the golden cross on the S&P is imminent so odds are we're in the beginning of a bull run if the 50/200 hold.

Elliott Wave Update - October 19th

The market sold off and closed below the level I've been watching and it remains to be see early tomorrow morning if this is an ABC of a W4 to move to a higher high or this is the start of the roll over process. I will short as close to 1170 as possible and use that level as the stop limit and go long on trades above this level. All intermediate trend lines are still bullish so I am assuming this could be just a pullback and not a full blow sell off.

Monday, October 18, 2010

Elliott Wave Update - September 18th

The market keeps going up in the channel so I am assuming higher highs as long at this keeps going. Futures point to a down day tomorrow but then again it was down almost 10 points last night so it's irrelevant. The market might take a breather but I don't think any significant sell of will come before the Benankes's QE announcement. The number I am watching now is 1170, I will trade short under it or stay long above it. Right now I have FXI positions and today I tried improving my short positions but I lost 3 points so now my cost average is 1115.

Friday, October 15, 2010

Elliott Wave Update - October 15th

The market managed to stay in the rising trendline despite the bad news on consumer sentiment and the sell off in banking shares. This close turns the intermediate term bullish so we will most likely be in a uptrend for weeks to come. I personally find hard to believe we could get to 1250 on this leg without a pullback, which is the target for the inverse Head and Shoulders but who knows. Either way, I will be prepared for both upside and downside.

I am not going to fight the trend, as long as the market stays over the magic number I will be taking long positions and shorting only at extremes. I traded FXI in and out couple of times and I shorted at the open as well. So I was able to better by short SDS position and add some money thru FXI. I am staying in cash for the weekend and jump in on Monday.

Thursday, October 14, 2010

Elliott Wave Update - October 14th

So the market tested the 1160's level but bounced back despite more bad economic news. It seems to me like the market wants to keep going up and the Fed is doing a great job at devaluating the dollar so I think the market will repeat the wave from Feb-April. This means we will probably see 1200 within couple of weeks or maybe even 1219. There is the foreclosure mess on the horizon and maybe sellers will grab on to that as the catalyst to sell after this wave is done. But for now, I think Art Cashing is right on his comments and there is no point in fighting the trend. As long as the market does not impulse down and break 1163, the market will continue in rally mode.

On the Elliott Wave count, I see a possible gap up tomorrow or an impulsive wave up in a 3W within the channel I drew on the chart. I've seen some counts that call these sub-minuette waves part of a W3 Minute wave. There is also the possibility that the market topped and last few minutes today was a W2 and setting up for a W3 sell off. But the MACD and the RSI support higher moves so I am going with the bullish option.

Wednesday, October 13, 2010

Elliott Wave Update - October 13th

So the market over shot the Rising Wedge (or Ending Diagonal) and I am not so sure the market will break to the downside. If we don't have a big sell off to a level under 1160 tomorrow, we'll probably see a sideways move to consolidate to move on to the next target which is the gap at 1200. Given the fact that the trend is bullish short and intermediate term and we have elections coming plus the QE announcement, we'll probably rally couple of more weeks only to see a vicious sell off (after all the retail people buy into the rally). I was able to better my short position by 8 points by not staying overnight short to 1114, I probably re-shorted too early today but it's ok. At least the picture seems to be more clear now. Any move below 1160 and I will use that level as a stop limit.

It's been an interesting one and a half months for sure and in a way I am glad I got stuck in a short position because I've learned from one mistake I will never repeat again. That is to trade with the moving average always in mind.

Tuesday, October 12, 2010

The Elliott Wave Theory of Fractals

As most people who frequent this blog might have noticed, I avoid long term counts because I don't think the Fractal concept can be applied to Elliott Wave Principle as reflected in stock prices in the long term. For me, the Elliott Wave Principle is a way to predict investor sentiment at different periods of time. And while the concept of fractals applies to investor sentiment at the multi-year level, it is impossible to assign prices to these levels because the theory in its orthodox form ignores inflation and other factors such as GDP growth and global money flows that can distort prices. It's similar to the RSI in the sense that a market can be oversold or overbought at the minute, hourly, daily, monthly, etc. but prices are never the same when same levels are reached during an extended period of time. So for instance, the RSI on the monthly can be at 70 (an overbought level) and the stock market can indicate 1000 today but it doesn't mean that it will be 1000 in 5 years time when it reaches 70 again. Same with the Elliott Wave Principle, markets might peak on a Wave 5 of some degree and then correct but the inflation and fundamental factors will be reflected in price. Therefore, using this theory for short term trades is useful but in long term it's questionable at best.

As examples of when Elliott Wave Theory fails as an investment tool, I'll show two examples. That of Zimbabwe in 2007 where then market went up 12,000% because of monetary policy that led to hyperinflation and the ultra bearish predictions of Robert Pretcher from Elliott Wave International.

In the Zimbabwe case, inflation that was created by loose monetary policy that led to a complete debasement of the currency.This devaluation was reflected in the stock market in nominal terms as well as other assets in that economy. And had Elliott Wave Theory been applied to that market, the waves would have gotten stuck in a forever "W3" wave.

Another great example and one that many EW followers are familiar with are the predictions of DOW 400 by Pretcher from EWI. Essentially, by failing to factor in inflation and fundamental changes in the economy such as GDP growth, the "cycle wave" Pretcher is waiting for will never materialize. In 1980's, after predicting the stock market was going to rise. Pretcher called for the DOW to enter into a cycle correction assuming the fractal theory of Elliott Wave. Pretcher then called for the DOW to plunge 100-400 when the DOW was at 3,600. The reality however was the complete opposite. Because of the economic fundamentals at the time and inflation, the market kept going up four fold. And now, 20 years later we are seeing the same calls for a DOW 400 but because of the factors mentioned, these predictions will never come true.

Here is an article I found from 1993 and the thinking of Pretcher, who is arguably the authority on orthodox Elliott Wave Theory:

More Upside to Come?

The market ended up selling off in the morning but did not touch the level I was watching to change the trend. And instead it went to the upside and in the process confirm a new short term bullish (and intermediate if the weekly close is above today's level) trend. I never imagined, actually I don't think anyone imagined the reversal on August 31st would lead to a massive rally without a single proper Fib pullback. And given the similarities of this rally to the one in February I posted a chart today to highlight the similarities of these rallies. The rally from February last about two and a half months and became oversold on the RSI around this level (1170). But that rally kept going into oversold territory for another month until we got to 1219. Right now there are similarities in shape, time and resistance levels. And given the fact the weekly RSI is not even oversold and the DOW has made a golden cross, it points to the pattern repeating itself and if that is the case it will mean we will be going up for few more weeks. I posted on the day the market hit 1041 that we were probably going to see a reversal and if we did to watch out for the Head and Shoulders projection to 1250 on my August 31st post. And while I never thought we could get to 1250 in one shot, the probabilities are now high that it will happen. With that said, the rising wedge seems to be about complete and a collapse in prices is expected when these patterns end. However, if the market gets out of the rising wedge pattern and corrects sideways we will see probably see 1219 in a few weeks time.

I am still day trading my short position to better my cost average and won't go overnight short until we either break 1156 in an impulsive manner or we get to the very end of the rising wedge. We will probably have a gap up tomorrow so I will be looking into 1175 as a level to enter.

Monday, October 11, 2010

Elliott Wave Update - October 11th

Today was the lowest volume day this year and there wasn't much movement to speak of with the exception of the last hour of trading. The Euro has started falling and it might be headed into a pullback so the market should see a top around here. On the charts we have the Rising Wedge (or Ending Diagonal) which could see another high before breaking. The trend is neutral and any rally or sell off beyond the current support/resistance levels will solidify a new trend. The MACD on the hourly has rolled over and the level I am watching is 1153, any trend changing sell off has to go under than level in a impulsive manner so we'll see if we get that in the next few days or maybe even tomorrow? the last hour has a bearish 3W set up.

Friday, October 8, 2010

Elliott Wave Update - October 8th

So today we had news that under normal market conditions would have caused a major sell off but instead we rallied. It should have been obvious a few weeks ago how the market could keep going up under such bad economic conditions but now we have the clear answer. The markets have been pricing in Quantitative Easing 2.0 but now that everyone aware of the real reason we are rallying (as opposed to lessening double dip concerns), there is a chance most of the QE is priced in. The market is now in a rising wedge which usually marks the end of a 5th wave of some degree so we'll see if the madness continues Monday or we wake up to a sell off.

I personally think what China signals over the IMF meeting this weekend will have a big impact on the dollar. If China stays put on their policy then the dollar will probably stop falling. The Remimbi is essentially pegged to the US dollar and when the dollar falls, so does the Remimbi which in turn make Chinese exports even more competitive around the world. So central banks will probably prevent the dollar from losing more value. However, if China signals they will be flexible allow the currency to appreciate then the dollar will probably continue to fall and the market will continue to go up regardless of good or bad news.

I was able to day trade SDS today to better my position a few points. My cost average now is 1106 so I am hoping to we'll get a retrace soon so I cover all shorts. This QE business is going to cause another imbalance to the markets and I'm afraid we're in for a few surprises in the next few months.. and that's in addition to the Foreclosure mess that will probably result in more bank loses and Bank Bailout 2.0

QE Rally

I think this is the first time I've seen an article on QE rally centered on the notion that the markets will go up regardless of what the economy does. It's not that the "double dip" concerns were fading that fueled the markets, it's been the devaluation of the dollar.

Basically, the market seems to be expecting a Zimbawe like market where the GDP was cut in half but the markets rallied because of the worthless Zimbabwean Dollar.

This whole thing is going to end bad..

Thursday, October 7, 2010

Austrian Business Cycle and Deflation

This is an interesting read on the Austrian Business Cycle. With the exception of Japan, every Central Bank monetary expansion has led to the erosion of purchasing power, devaluation and inflation. The following article explains how Japan's economy went into deflation despite QE.

Elliott Wave Update - October 7th

So Trichet spoke and they are signaling the EU is not just going sit there and take the brunt of the US dollar's devaluation. And while they are not moving interest rates, their support for a "strong" dollar means that they will if things get out of hand. In a way all eyes will be on what China is willing to do this weekend, the fact China has the remimbi in a semi-peg to the dollar it makes Chinese exports even more competitive in the world and defeats the Obama's administration goal of increasing exports to increase jobs. So I think the market will be reacting more to what goes on with the currency than the actual number of jobs tomorrow (which are probably going to be pretty bad).

And as far as the EW count goes, we have a set up for a sell off tomorrow (on a W3) or a spike for one last rally before rolling over. I bought back my SDS position today at 1163 for a 3 point gain and I am using 1164 as the stop tomorrow. If there is a final leg, then the next resistance will be 1173. On the downside, the magic number is 1148.50. We need to close below 1148.50 to start confirming the change in trend.

Wednesday, October 6, 2010

Elliott Wave Update - October 6th

It seems like the market is positioning itself to another high. This rally has stretched the boundaries of an EW count that makes sense, so I will put what I think looks right once I get a better idea of what is going on. There is no point in drawing up different counts (that would be as good as flipping a coin) if unsure. But going back to the real reason of what we are going up, as long as there is the perception that the US has embarked on a deliberate strategy to devalue the currency and in the process create inflation, the rally will continue. What really matters this week (more than the job numbers) is what Trichet, the EU Central Bank President has to say about the Euro's appreciation. If he signals the EU is not worried, the market will continue to climb at the same rate as the Euro. Obviously, we will get a retrace at some point but right now the issue of monetary policy trumps economic recovery, jobs, etc. And I am sure in the end we'll find an EW that makes sense but at this moment the count is really in the hands of Benanke and co.

Tuesday, October 5, 2010

Elliott Wave Update - October 5th

What a day! just when everything was set up for a sell off, we got a nice surprise from Japan. The Elliott Wave count is out at this point and the reversal signals that were clearly given yesterday by the market have been neutralized but having the 1157 peak breached and more importantly closing at 1160. The issue at hand is that now Central Banks around the world are going to flood their economies with liquidity and thus create inflation in the future. By doing this, profits are going up in nominal terms and commodities will continue to go up so the market is pricing this and NOT an economic recovery. Actually, we'll probably have a recession and we'll see the stock market go up just to keep up with inflation. So I think we're in for a "bull" market even if the economy remains in the dumps.

My strategy is to cover short positions at the retrace (whenever that happens) and go long on commodities, gold and stocks.

Monday, October 4, 2010

Elliott Wave Update - October 4th

The short trend reversal is now confirmed as long as we don't get any more closes over 1140. The intermediate trend (multi-week trend) was confirmed bearish on Friday so the change of trend in the short term (multi-day) is a good sign for shorts like myself. What remains to be seen is what percentage of the rally from 1040 will this new Minute wave retrace to. If we get a retrace without much impulse that holds in the 1090's area, my guess is that we'll see a rally to 1250.

I am personally bearish on the economy as there is nothing fundamental that will increase profits for companies, which is the core driver of stock prices. However, if we get clear inflationary signals or policies then we might get a big market rally. My reasoning is that the market will keep pace with inflation, so even if we got a "real" earnings growth of say 2-3% in the S&P 500 but a 6-7% inflation then we would get a nominal increase of 9-10% in the index. It's really just a matter of time before this happens, question is really when. The fact that commodities, gold or most of anything priced at the international level have been going up does not really mean that these things have "gone up". What's really happening is that the US dollar is losing purchasing power and thus these perceived gains in prices are really a reflection of the devaluation of the US Dollar. Most Americans have not seen hyper inflation before so purchasing power is mostly a concept. But anyone who has been to Brazil, Russia or even Mexico will understand what I am talking about. Case in point, Zimbabwe in 2007. The country's economy essentially collapsed yet in nominal terms was the best performing stock market in 2007.. and this is the very reason the DOW will never go to 400 and why Elliott Wave International bearish count will never come to fruition.

Friday, October 1, 2010

Elliott Wave Update - October 1st

The market failed to confirm the short term reversal. However, in looking at weekly candlesticks the market is now confirmed at a top. Looking at Elliott Wave and Technical analysis the market remains unclear until support or resistance are taken out. The bullish scenario would be that we're consolidating gains and getting ready for another high but after a relentless month of gains, the odds don't favor much upside. I don't think the RSI on the 30 minutes has been once oversold in over a month, that's an oddity in itself so hopefully we'll get a clear answer Monday or early next week. I remain leveraged short.