Wednesday, March 23, 2011

Tentative Market Time Line

Update - March 30, 2011
Update - April 20, 2011

This timeline is totally speculative and should not be used for trading purposes:

So far so good. We would like to stay with the trend - which is up. Following dates will be updated in the near future.

March 28, 2011 (+/- 2 days) - Minor Top around 1332: Achieved/ Market could continue higher till April 4, 2011 (+/-3 days); Achieved/ Market topped on April 5, 2011 @ 1339
April 8, 2011 (+/- 2 days) - Bottom around 1295: Update/ April 18, 2011 (+/- 4 days) - Bottom around 1300; Achieved/ Market bottomed on April 18, 2011 @ 1296
Earnings: April 11, 2011
April 20, 2011 (+/- 2 days) - Momentum Peak 1390: Update/ April 22, 2011 (+/- 3 days) - Momentum Peak
May 24, 2011 (+/-4 days) - Top SP500 (below 1420)

This timeline takes into account long-term AD cycles, independent timing models and other external Elliott Wave relationships. These dates will be updated when new data will be made available.

Note: This data is for my reference only, so that I can refine the dates as we come closer to them. This information does not represent any model based data, and will not be directly used for trading.

Monday, March 21, 2011

Detailed Market Analysis (Mid 03/11) - Part 2

"Inability is disaster; patience is bravery; abstinence is a treasure, self-restrain is a shield; and the best companion is submission to the Divine Will" - Hazrat Ali

Stock Market Analysis - March 21, 2011

Based on current sentiment readings, historical perspective, indicator's analysis and Elliott Wave structure, it seems that we are approaching an inflection point. Therefore, one should be ready to buy the market. This observation is in agreement with the new inflection point model. Market Matrix is given below. 


There are many flashing green lights. It appears that we are nearing a bottom and are still in an uptrend. This bottom will be confirmed by a break above 1294 (closing) in SP500. With cycles bottoming, technicals improving, sentiment pessimistic and waves complete, the risk-reward ratio is very low. This suggests that we are witnessing a good buying opportunityIn any case, we will wait until we get a verification from our trading model before going long. This model will give a buy signal, if market closes above 1294. However, if SP500 breaks below 1240 then market could see further selling into high 1100s

Various supporting wave structures and cycle turn dates have already been discussed in the last few updates on this blog. These supporting wave structures include: Emerging Markets, Nasdaq Index and Real Estate Index. At the same time, there has been a continuous discussion of the Inflection Point Model on this blog.

One important development to keep in mind is that we have witnessed a sharp decline in the optimism towards the market. This behavior along with widespread uncertainty related to the Emerging Markets, military action in Libya, Japanese Earthquake and the following Nuclear Issue, can prove to be a catalyst for a significant rally to new highs. Further, wave structure is in its early development stages. For a detailed overview of the sentiment data please visit: Trader's Narrative

Even with all of this analysis, one should always remember that only price pays. Therefore, one should always trade in the direction of the primary trend and have a comprehensive risk-management strategy. I will discuss risk-management and possible Elliott Wave scenarios next week.

Friday, March 18, 2011

Detailed Market Analysis (Mid 03/11) - Part 1

We are finally around mid March 2011. Market remained down during the last month. The model never gave a sell signal and therefore, was neutral at worst. At this point in time, I would like to analyze the market in detail from Elliott Wave, Sentiment, Cycle, Models and Technical Indicator perspective. This study will be culminated with a detailed trading plan in conjunction with the Market Matrix.

Cycles model predicted a turn between March 9 and March 18. The market (SP500) came down to 1250 - a 100 point (approx.) decline from its high of 1344. Detailed cycle analysis is given at: 
1-         Mid March 2011 Buy? - Inflection Point Model (Part 1)


Nasdaq Composite

This chart shows Nasdaq Index from July lows. The recent correction (Feb 2011 - March 2011) conforms to the definition of a counter-trend (A-B-C) correction in a primary-trend rally (5-wave). It appears that the market might have completed this correction phase and is setting up for the next rally phase.

Although there are other ways of counting the waves, the nature of the recent decline, its time duration and price ratios, all point to the fact that there is more rally left in this market.

On the other hand, if we make a lower low by 1% then the situation would tilt greatly in the favor of the bears.

Emerging Markets 

Emerging markets have been one of the leaders of the global stock market rally. However, recently they have not done anything extra-ordinary. In fact, they have been going sideways for the last 3-4 months. During this time period, the sideways behavior of the emerging markets has carved out a running triangle. Triangles are normally followed by sharp moves in the directions of the primary trend, which in this case would be up.

At the same time, sentiment towards the emerging markets is also very negative with unrest in Libya, Egypt, Saudi Arabia and recent Earth Quake in Japan, people are taking money out of the emerging market funds. This suggests negativity and fuel for a upcoming rally. These are the kind of events, which mark the bottom in markets, in a primary uptrend. This is because the majority of the people are too worried about the news that they do not participate in the rally. 

Finally, the long term wave structure of the emerging markets suggest that we need further upside to complete a full Elliott Wave structure.

Real Estate Sector

A few months back, I wrote about the Real Estate sector that it was about to fall of the cliff. Since then this sector has not done much. However, upon close analysis, it seems like this sector is getting ready for a very sharp rally.

"A good analyst always listens to the evolving tone of the markets, and does not impose his will on the market." Brian Shanon

Since the rally before the recent correction sported a clear 5 wave structure and the corresponding decline has been just a 3-wave decline. Therefore, this means that the primary trend is up and once the market finds its footing, it will zoom to new highs. On the larger scale, it seems like that this market has completed a sequence of 1s and 2s and will soon embark on a strong 3 of 3 wave. I will discuss this possibility in detail in one of the future posts.

Overall, evidence is suggesting that there is a strong potential that we might have seen the bottom in the markets and are setting up for nice rally. 
        In the next post, I will discuss possible Elliott Wave counts for SP500.

1-         Uncertainty marks the bottom in markets, in a primary uptrend. This is because the majority of the people are too worried about the news that they do not participate in the rally. 
2-         "A good analyst always listens to the evolving tone of the markets, and does not impose his will on the market."

Wednesday, March 9, 2011

Charles Nenner - March 2011

If you have not made your year by now, you are dead meat. Many of 2011’s big moves have occurred, and there aren’t going to be many fireworks for the rest of the year. Many asset classes are about to settle down into boring, predictable trading ranges.

Charles is not yet ready to short the US stock market. While the rally is definitely showing advanced signs of age, the upside momentum is impressive, so he would rather stand aside. His extreme, best case target for the S&P 500 is 1356.

Nenner caught a short play in gold earlier in the year, on which I was able to ride the coattails. Now that we are back up to all times highs he is looking for a repeat. Ditto for silver.

Charles is looking for further weakness in bonds, but doesn’t see a crash. His preferred play is a short volatility one whereby he shorts puts on both the 10 year and 30 year September bond futures contract at the 110 level. That equates to a yield of 4.2% on the 10 year and 5.2% for the 30 year. If yields don’t get that high, he keeps the entire premium from the short put trade. If he goes in the money, he is quite happy owning bonds at these levels, which he can then sell on the next rally.

We are in the midst of a major long term bull market for the grains and commodities. His next target is $4.84 for copper, up 5.6% from today’s level of $4.49. The food sector is getting an assist from high oil prices, as all types of farming have substantial energy inputs.

I always end every one of our conversations by pinning Charles down on the one trade he would pull the trigger on today with new money. Wait for the Euro to hit $1.40 against the dollar, and then go short, with a $1.4050 stop. At that point the European currency will have had an impressive 12 cent rally against the greenback and will be well overdue for a correction. European Central Bank president Jean Clause-Trichet has shot his wad with his promise today of rate hikes, and from here traders will want to see the color of his money. But break the $1.4050 stop and you should run for the hills, as the next target is $1.46.

Note: Interesting to see how Understand, Survive and Thrive's model predicted a turn in the equities within 1 point (Mashallah) on February 16, 2011 Stock Market - Risk Definition 

Monday, March 7, 2011

Mid March 2011 Buy? - Inflection Point Model (Part 2)

Mid March 2011 Buy? - Inflection Point Model (Part 1)

Like February, multiple posts will be posted as significant information becomes available and indicators become more enticing for long entries. Towards the end of March, a quarterly publication will be published by Understand, Survive and Thrive, discussing last quarter and projections for this year. If interested, leave a comment and we will try to include you in the mailing list.

Trading Nuggets:
1- It is not worth trading against the primary trend even if you know that the market is going to correct. This distracts the trader from exiting shorts at the right time. In others words, the expected returns are far less in counter-trend trading.
2- It is always better, easier, profitable and convenient to pick a bottom in an uptrend than to pick a top. And similarly, it is always good to pick a top in a down-trend than picking a bottom.

There are three scenarios in which this turn date can play out:

1- Market bottoms and turns up till the next turn date - Highest Probability
This is the highest probability scenario because of EW structure and strong breadth readings. A 2-3 weeks correction is a good pause for the market before the next leg up.

2- Market pauses (shallow rise/sideways), Resumes downtrend and bottoms at the next turn date - Medium Probability 
Although this is a lower probability option, if the market manages to decline below the 1260 level after the forthcoming turn date then it would suggest that market will continue its decline. In that case market will most probably decline till April 2011.

3- Market falls, and then rises into the next turn date - Lowest Probability
This situation is possible if market makes a bottom in late March 2011. The best technique to counter this scenario is to have a tight stop. Therefore, if the market falls below a particular level then one should exit longs. In this way, he will be sure of the new direction i.e. lower. As of today, the trend reversal level line in sand (on a closing basis) is 1260 for SP500. This scenario is low probability because over the course of last 2 years this scenario has played out very rarely.

1- If the market does not declines significantly or rises sharply after a trend reversal date, it would go sideways for some time: This kind of behavior is normally exhibited by strongly up or down trending markets.
2- Always trade in the direction of the trend. Even if there is a trend reversal date, wait for confirmation by other signals because "Markets can remain irrational, more than you can remain solvent."

Sunday, March 6, 2011

Trade Ideas - Reference

Some ideas to keep in mind during next buy phase. Please refer to the last post:

1- Financials (22%) - Not a loved sector and is in a position to breakout during this rally phase
2- Small Caps (25%)- Gigantic inverted head and shoulders pattern, will result in new highs
3- Emerging Markets (30%) - Unloved due to socio-economic reasons. Almost complete 3 month correction pattern
4- Real Estate (23%) - One of the sectors in best position to rally hard

These ideas will be discussed with in depth technical and fundamental analysis, near the buying opportunity.

Saturday, March 5, 2011

Mid March 2011 Buy? - Inflection Point Model (Part 1)

In the name of God, who granted me insight, knowledge and wisdom to walk through the confusing financial markets. On February 5, 2011, it was stated that the inflection point models were suggesting a top in the financial markets around February 14, 2011 (+/- 4 days). Later, it was stated on February 16, 2011 that "Based on analysis SP500 should not exceed 1345 in the near term. If it does break above this level then the risk-reward ratio, which is currently very low for shorting the market will turn higher." 

Interestingly, the market topped on February 18, 2011 at 1344 and immediately declined to 1294 within next 4 trading days. Furthermore, since then the market has chopped around without exceeding the February highs. Although I have been out of the market during this chop fest, I am keenly watching the unfolding socioeconomic situation, Elliott Wave pattern, sentiment gyrations and the Inflection Point Model. 

In order to generate new turn dates, the two Inflection Point Models were re-ran and following conclusions were achieved. 

Model 1 and model 2 are both suggesting that the next market turn date will be around March 14, 2011 (+/- 4 days). Therefore, we can have a turn window from March 9 to March 18. This means that we can still see further decline in the equity market into these turn dates. Furthermore, week of March 14 is the options expirations week and many market turns take place during options expiration. Interestingly, Spring Equinox: March 21 (Monday) and Full Moon: March 19 (Saturday). 

When the time comes, the turn date will be narrowed in conjunction with several other indicators like:

1- Sentiment
2- Elliott Wave structure of Indices, US Dollar and Commodities 
3- Cycles 
4- Technical Indicators

These will be discussed in an upcoming Market Matrix post. In short, we might be nearing a significant bottom. But we are not there and might need further selling to reach that point.Therefore, one should be vigilant for potential long opportunities, but should wait for a confirmation from other models before entering long. 1270-1280 (SP500) is a good area for the bottom. However, if market rises above 1340, it would suggest that market has already bottomed.