Weekend Update 7/31/10

Before we get to the market, I'd like to share some thinking from Tom Bethell.  Mr. Bethell writes a monthly opinion column in a magazine to which I subscribe, and his observations are always very astute.  Those of you who were around during the Reagan presidency (I was) may remember the history.  In 1981 during his first year at the helm Reagan was successful in getting Congress to enact major tax cut legislation.  However, there was a problem with those cuts: they didn't take effect until 1983.  The result was an economic slump in 1982 as people delayed economic decisions and activities for a year pending the lower tax rates (which included significant capital gains rate cuts).  Roll forward to now, when we have significant tax rate increases coming in 2011 when the Bush tax cuts expire.  Might we now be seeing the reverse of what happened in the early '80's?  i.e. economic decisions and activities accelerated into 2010 to avoid higher taxes in 2011?  And if so, what does that say about the anemic economic recovery we've been witnessing this year, and, more importantly, what's the impact going forward into 2011?  Not an optimistic line of thinking.

To the markets.  There are two main possibilities that I see at this point which were discussed in daily posts this week - designated Doors #1 and #2.
Door #1 is the preferred count and assumes a major long term low on Jul 5 at ES 1002.75 with the action since then a series of waves 1 and 2's.  The action since Jul 20, especially the action this week since the Tuesday morning highs, has been a little difficult to read from an Elliott standpoint.  On review, a 5 wave count can be seen in the rally sequence from 7/20 through 7/27, and although it is a little bit awkward it fits all Elliott rules.  The selling from Tuesday morning into yesterday's (Friday) lows is choppy and overlapping and thus very much corrective in nature, although it is possible to make a 5 wave count out of it as will be seen later.  More likely is a double zig zag as can be seen on the Door #1 hourly chart below.

DOOR #1 - Daily ES

DOOR #1 - Hourly ES

Door #2 assumes one more major selling trend is necessary to complete an intermediate term correction that started in late April.  This count has a B leg of a final A-B-C sequence ending at Tuesdays highs with the final C leg in progress.  The problem with this is the pattern since those highs. That pattern can be labeled with a 5 wave count, but it's awkward to say the least.  As mentioned earlier, it's quite choppy with a lot of overlaps and is much more corrective in nature.  This count would be invalidated if the ES trades above 1129.50 in the near future.  That level marks the high of Wave B (blue).

DOOR #2 - Daily ES

 

DOOR #2 - Hourly ES

One other possibility worth noting comes from Daneric (http://danericselliottwaves.blogspot.com/). 
This is the ultra-bear P3 scenario.  It see's a Major Wave 1 complete at the low's of May 25 with an irregular flat correction in progress since then.  Currently the market is tracing out a diagonal 5 wave C leg with the 4th wave done or close to done and a 5th wave yet to go.  That 5th wave would terminate at or just above the high of Jun 21 at ES 1129.50.  After that of course would come a powerful 3rd wave market collapse.

P3 BEAR MARKET SCENARIO - Daily ES

 

Still short ES at 1097.00 from Thursday afternoon.  If my preferred count is correct then this trade will likely be closed out at a loss on Monday around ES 1106 - 1108, which is where the down trend line from Tuesday's highs will be located.  Since the oscillator in the Trend/Osc system bottomed below 20 on Friday and has since moved above that level an ES hourly close above the down trend line becomes a buy signal.  Thus in that eventuality the short ES will be covered and a long ES position established. 

The Vindicator Buy/Sell line is supporting the near term bull case.  The Buy line crossed below the Sell line briefly on Thursday but had crossed back above it by the end of the day.  It continued to work it's way higher through the day Friday.  The message it's giving us is that through the selling from Tuesday into Friday morning buying pressure has exceeded selling pressure under the surface (except for a brief period on Thursday).  This is one of the reasons Door #1 has remained my preferred count.

Thursday 7/29/10 wrap up

Door #2 appears to be the winner (see yesterday's post) but the pattern from Tuesday's highs is not yet clearly impulsive so more info is necessary to be certain.

Sell signal on the trend/osc system today at 11 AM (CST) so the long ES position from 1075.50 was sold at 1091.50. Like earlier this month a little frustrated with the gain, could have been a lot better.  But a 16 point profit is still $800 to the good per contract and a damn sight better than a loss.  Market was pretty oversold when the sell was generated so waited on establishing a short position until the 30 minute V Stoch had bottomed and was approaching overbought territory.  Short ES position subsequently established at ES 1097.00 with a stop and reverse at 1115.00.  Probably should have waited to sell long position at that point as well.

Vindicator Buy/Sell lines are not giving a clear signal, although the Buy line did cross back above the Sell line in the afternoon, which casts some doubt on the bear case.  Meanwhile, the 30 Minute V Stoch topped in overbought territory and looked close to rolling over later in the day, which supports the bear case.

Thursday 7/29/10 update

Update 11:05 We are oversold very short term, looking to go short on a bounce.

Trend line is @ 1096.00 currently, if we have an hourly close below that level at 11:00 AM CST it will be a sell signal on the trend/osc system.

Wednesday 7/28/10 wrap up

The action yesterday and today is beginning to cut deeper and last longer than what could be expected of the anticipated 4th wave, although it is somewhat choppy and (not yet) clearly impulsive.  So we're back to the Door #1/ Door #2 scenario.
Door #1 is the preferred count.  It assumes a major intermediate term low at ES 1002.75 on Jul 6.  It looks like this on the daily ES chart:

DOOR #1 - ES DAILY

The problem with the possible Wave 4 can be seen on the ES hourly chart:

DOOR #1 - ES HOURLY

Door #2 is an alternate count which assumes one more down trend leg is necessary before we see an intermediate term low.

DOOR #2 - ES DAILY

On the hourly chart the rally from Jul 20 is counted as a diagonal C wave which concluded at yesterday's highs.  That point also marks the end of a B wave corrective rally from Jul 6 and starts a larger degree C wave sell off that should carry into the ES 990 area or lower.

DOOR #2 - ES HOURLY

Still holding long ES via the trendline/oscillator system.  The caution light came on today when the oscillator crossed below the 80 level.  If there is an hourly close below the lower trendline we will have a sell signal.  That trendline is currently (4:30 PM CST) at ES 1091 and will be at ES 1094.50 at 7 AM CST tomorrow.  Why do I mention ES 1094.50?  Because that is the high of wave 1 (black) in the preferred count and if the ES trades below that the preferred count is invalidated and will have to be either revised or discarded.

The Buy line in the Buy/Sell Vindicator has declined since yesterday's top but it did not diverge coming into that top, rather it confirmed it.  The V Stoch is waffling around in mid range and not really giving us a lot of info, except that it was more towards the oversold range at end of day.  So it's possible the ES may regain it's footing soon and resume it's rally.  Stay tuned, answers and direction should be apparent tomorrow.

Tuesday 7/27/10 wrap up

Looks like we saw the top of a minor wave 3 (black) today with wave 4 in progress.  Since wave 2 was a flat that lasted about a day then wave 4 should be either a zig-zag or triangle and last about the same time, which would mean wave 5 should start sometime tomorrow morning.   

Still holding long ES from 1075.50, stop and reverse has been moved to 1080.00.

Monday 7/26/10 wrap up

A little bit of back and forth on the ES today, but resolution was up in the end.  Market seems tired at times, yet it keeps on marching up, so maybe it's me that's tired. 
No change on Elliott count from Saturday's post:

Vindicator Buy/Sell treading water, 30 minute V Stoch is diverging against prices.  We should see some consolidation after 4 solid up days, the questions are: 1. will it be more than a consolidation, 2. when?

Saturday 7/24/10 update

Not much to say here, bulltards in control for now and I believe will stay in control for the intermediate term IMHO.  Preferred Elliott count on the ES hourly chart looks like this:

ES daily chart:

Still holding Wednesday's long ES from 1075.50 based on trendline/oscillator buy signal, don't see any wavering from that system so continuing to hold long.  Only adjustment will be to the S&R which will be moved up to 1070.00 on Sunday night's open.  The stop & reverse is disaster protection only, so it's level is placed well out of reach of any likely stop running games by the MM's.

It's been my hope to employ Vindicator information in two ways:
1) to help time entries and exits signaled by the trendline/oscillator system for more optimal executions;
2) to pyramid positions held via the trend/osc system and thereby boost returns.
The first idea was employed to time Wednesday's entry.  The buy signal off the trend/osc actually came at mid-day on Tuesday, but the 30 minute V Stoch was close to overbought at the time so the buy signal was put on hold pending readings on the V Stoch that were close to or in the oversold area.  That situation developed around mid-morning on Wednesday and precipitated an ES long entry.  However, Murphy (as in Murphy's Law) was at work at the time and although the market bounced around above the ES entry for the next little bit it eventually headed south  in the early afternoon.  The V Stoch was in the process of establishing a second oversold reading by the end of the day, but that double bottom preceded a nice move up.  All in all the use of the V Stoch in this instance didn't really improve the long entry but only because of an uncommon double bottom in the V Stoch.  The short track history of the V Stoch shows that a double bottom or top is rare, so this instance may be the exception that proves the rule.

The idea of pyramiding a base trend/osc position will be tried when conditions are favorable and that trade will be publicized and explained when it happens.
 

Thursday 7/22/10 wrap up

The probabilities for Door #1 (see yesterday's post) increased considerably today.  Current preferred Elliott count looks like this:

Still holding long ES from yesterday, no change in stop & reverse for now.  As long as we stay above lower trend line and above 80 on the oscillator long position will be held.

 The 30 minute V Stoch is approaching overbought territory.  Also, the Buy line on the Buy/Sell tailed away into the close, so I would expect to see some consolidation tomorrow.  A hard sell off is certainly possible but not likely IMHO.

Wednesday 7/21/10 wrap up

Well we have another Door #1 or Door #2 situation.  Door #1 is the preferred count, which says that the lows of July 6 marked the end of an intermediate term correction.  Since then the highs late last week were wave 1 and the lows yesterday ended wave 2 of a significant rally.  Today's selling has served to make that idea a little shaky, but there's still some distance to travel before it's off the boards completely.

DOOR #1

Door #2 says that the bear market that started in April is almost done but still needs one more down leg, which leg is currently unfolding.

DOOR #2

 
So typical Elliott Wave: the market will go up it if doesn't go down first.  You betcha.

Went long ES mid-morning @ 1075.50 based on the buy signal in the trendline/oscillator system that was discussed yesterday.  Had been waiting for a decent pullback to do the trade, this afternoon it looks like I didn't wait long enough.  Stops in this approach are set at either 1 ATR or the low preceding the entry, whichever is farther from entry.  Currently the 14 day ATR is @ 23.25 and the low preceding entry is 1050.75, so with entry @ 1075.50 the farthest point would be the preceding low, thus a stop & reverse was and is set @ 1050.75.

The 30 minute V Stoch  is forming a double bottom, hopefully the bullish implications of that will become reality.  Incidentally, the decision to execute the long ES was made this morning based on that first bottom formed in the V Stoch.

Tuesday 7/20/10 wrap up

A completed 5 wave sequence can be counted from last Thursday's highs to this mornings lows on the ES.  If the longer term analysis is correct, that would complete a wave 2 correction and mark the onset of a wave 3 rally.  The impulsive nature of today's run up off the lows lends credence to that hypothesis.

A sidebar: often an Elliott pattern is evident in the 24 hour ES chart that presents a clearer picture of the correct count than what is evident in the 6 1/2 hour SPX chart.  In last night's overnight trading a 4th wave triangle is pretty obvious, followed by an obvious 5th wave into this mornings lows.

Determining where to place the trendline in the trendline/oscillator system can sometimes be difficult.  The basic idea is to connect the highs (in a bear market) or lows (bull market) of the price bars making up the trend.  However, sometimes a trendline drawn that way appears to be either too shallow or too steep.  So there are other methods I've toyed with, one can be seen in the next chart. The gray line across the top third of the chart is a standard trendline.  It appears a little shallow and doesn't really reflect the slope of the sell off. The blue line connecting last Thursday's high and this morning's low is a regression line, which was used as a base to draw a secondary trendline parallel to it that connects with Friday's high.  When the oscillator moved above 20.0 today followed by the ES blowing through that secondary trendline I was prepared to go long on a pullback.   We never got a pullback that I felt was significant enough so the trade wasn't executed, but you get the idea.   

The 30 minute V Stoch rolled over towards the end of the day.  I'm planiing a long entry based on that indicator moving down towards buy territory.  Markets retrace 99.9% of the time, and in this situation I believe a retrace is worth waiting for.  But the market may force my hand, I'll reassess overnight and tomorow AM.

Monday 7/19/10 wrap up

Sell off this morning followed by rally most of the rest of the day and then another sell off into the close.  This morning's selling was swift and impulsive looking with a definite 5 count, the subsequent rally was choppy and overlapping, distinctly corrective.  The selling at the end of day also was swift and impulsive looking but 5 waves cannot be counted as of this writing.  On balance looks like near term trend is still down.   Most likely wave count looks like this:

Stayed in cash today, trendline/oscillator system is still in sell mode.  I'm watching the 30 minute V Stoch for entry, looking for an overbought reading there to initiate a short position.

 

Saturday 7/17/10 update

On the daily charts there are three main alternates medium term including the uber-bear "P3" scenario.  In the P3 scenario the price pattern from the late April highs is labeled as as series of Wave 1 - Wave 2's of decreasing degree, so that we would be teetering on the edge of a major 3rd of a 3rd of a 3rd wave right here, with that maybe having started yesterday. 
The other two scenarios look at the activity since late April as corrective to a longer term bull market, with the correction either done or close to done.  Here's the "close to done" count:

In this count we are in a final "C" (purple) of "C" (blue) leg of the correction that started in April.  However, that would mean that the rally up that completed late this week would have to be some sort of 3 wave affair by Elliott rules, but the hourly pattern is very difficult to count as an a-b-c.  It is instead very impulsive looking with 5 clear legs up.  So it's more likely that the "B" wave (purple) is not yet complete or that this count is altogether wrong.
Which brings us to the final alternate:

In this count the lows of July 6th completed the correction that started in April, with the rally into late this week being a wave 1 of a longer term bull market sequence, and the selling late this week being part or all of a wave 2 correction.  This is my preferred count, but the market being what it is it's only a preference, i.e. I'm not married to it. 
On an hourly chart the most likely wave count since July 6 looks like this:

For clarification, the 5th wave of the rally into the late week highs is counted as an ending diagonal.

On trading, the trendline/oscillator system generated a sell signal @ES 1068.25 at 11 AM (CST) on Friday. I've been planning to incorporate the Vindicator output into the trendline/oscillator system, and at that point on Friday the 30 minute V Stoch was at the lower end of it's range.  So instead of immediately liquidating the long ES's and switching to short ES a stop was placed 1 point below the low of the preceding hourly bar @ 1066.75 with the thought that a more favorable price could be had at a future spot.  However that stop was hit in short order so the long ES's were sold.  The long trade was entered on July 6th @ ES 1032, sold @ ES 1066.75 for a gain of 34.75 handles (@ $50/point).  Although this is nice it's not the most efficient trade that I've had from this system, both the entry and exit signals were a tad late.  Efficiency can be measured by the proportion of the run captured by the trade.  In this case the low at the start of the run was ES 1002.75 and the high was 1099.25, or 96.5 handles total.  An efficient trend trade should grab at least 2/3 of that span or about 64 points.  I'm hoping to utilize Vindicator signals to boost that efficiency on a more consistent basis.

On the Vindicator, the Sell line on the Buy/Sell Vindicator crossed above the buy line early Friday as would be expected, but the levels are not very strong in spite of the steady downward price spiral through the day.  In addition, the V Stoch bottomed and curled up by the end of the day indicating a possible retrace (or more) in the offing.

 
The plan is to short the ES on a retrace with the V Stoch as an aide in entering that short.  The market was pretty oversold at Friday close so a retrace is highly likely. Given the Elliott count and other factors, will probably set the trade up as a sell on stop with the stop being the low of the prior hourly bar.  The trendline/oscillator system is currently in sell mode with the oscillator on the verge of re-setting itself based on the down price action of the last couple days.  It's entirely possible that the wave 2 correction of the preferred count was complete at Friday's lows, in which case a retrace could turn into a rally and the trend/osc system could thereby generate a buy signal, in which case a whipsaw will have been avoided.  It's also possible that we'll just drop straight down from the open Sunday night, although the odds there are lower.  If that does happen it will be an opportunity missed from mid-day Friday and the trading plan will have to be revised.

One final note on the trendline/oscillator system.  Although it does have a proven track record, it does have a tendency to whipsaw at times.  The hope is to avoid those whipsaws by incorporating Vindicator signals into the trade plan.

Thursday 7/15/10 wrap up

Flirted with a sell signal on the trendline/oscillator system today, but in the end the market rallied away from its lows without a sell being generated.  So still holding long.

On Elliott Wave, looks like the pattern from yesterdays highs is a "flat" type correction (3-3-5) that ended at today's lows.  I've labeled that as a wave 4 for now and am more comfortable with this count than the one posted last night.

Wednesday 7/14/10 wrap up

This is my best guess on a current Elliott count, but it's not with a lot of confidence.  There are some who are reading the rally since 7/6 as a wave 2, of course that's possible.  I think it's a lower probability at this stage since we've retraced quite a bit of the preceding sell off and done it in an impulsive looking fashion.

Still holding long, prices still above lower trend line and oscillator still above 80.0.  Will not move the stop and reverse for the time being.

The Vindicator Buy/Sell  remains in buy mode with the Buy line holding above the Sell line, indicating buying pressure still exceeds selling.  Meanwhile the V Stoch is moving to the bottom of it's chart.  If the V Stoch dips below 20 and curls up while the trendline/oscillator remains in buy mode I may add to the ES long position, however with much tighter stops on the added position (10 - 12 points). 

Tuesday 7/13/10 wrap up

Market wasn't as tired as it seemed.  Continued rally today, including an after hours pop on positive Intel earnings.  The ES broke above a significant down trend line from the late April highs, bad news for the bear case.

Although I don't usually deal with currencies on this blog, two other potentially significant events happened today.  Both the DX (US Dollar index) and the EUR broke out of daily channels, the DX to the downside and the EUR up.  These also are bad news for the bear case.

Incidentally, the Trendline/Oscillator System works in just about any market, including currencies.  The only reason I don't trade those markets is time limitations. 
Putting the picture together, right now it looks like the ES lows of last Tuesday could be it for a while, notwithstanding normal corrective activity.  Hard to swallow given the macro economic backdrop, but it is what it is (which is a 2 ton elephant that does what it pleases).

Still holding long from ES 1032, moved the Stop and Reverse to 1060.