Friday, August 26, 2011

Short-term Market Structure - PTP 7

Update (August 26, 2011 - 10:23 AM)
As per last night's posting, we have either bottomed or will bottom near current levels in the next 1 or two days. This will be followed by a sharp rally. UST Inflection Point Model's August 4, 2011 prediction of bottom on August 23 (+/- 4 days) has held so far. If it holds then be on the look out for a sharp rally into September's next FOMC meeting.

I have posted all of the UST Trading Algorithm updates on MarketWatch for your historical reference. 

Note: I think its prudent to go long on a small position here with stop below the low (tight risk-management), with goal of going full long next week. - let Hurricane Irene pass.

UST Trading Algo exited longs last morning (please review Trading Algorithm Update) based on the completion of 5 wave Elliott Wave formation (shown below) in all the major indices: SP500, DJIA and Nasdaq. This formation shows a clear five wave advance. Five wave advances are followed by 3 wave correction. This scenario coupled with the fact that we are in a downtrend, coaxed UST Trading Algo to take profits.

UST Trading Algorithm assumes that the trend is like a River Current: One should always swim/trade in the direction of the current; against the current trades should only be undertaken with stringent risk-management measures. Since no one can be a 100% sure of potential market direction and trading is a probabilistic game, one should always take the highest probability trade and secure profits.

Note: If right now we were in an uptrend and had seen the same formation, UST Trading Algo might have held some of the longs. This is because the probability of an upside break-out would have been very high. But right now - its better to be safe than sorry.

The above chart shows a clear five wave advancing structure. This structure carries far-reaching market implications in the coming weeks:

  1. It suggests that markets bottomed within the turn-window of August 23 (+/- 4 days)
  2. Five wave advances indicate change of trend: Down to Up
  3. Current correction (started August 25) should end above the August 23, 2011 low
  4. Important support will be found near 1145 and then at 1130 (SP500), which contains Fibonacci and EW support 
  5. Starting next week buying the dip will be the right approach (After Bernanke Speech and Hurricane Irene have passed)
  6. If market does not hold above August 23 low then we can see a sharp decline because the next turn window is in September (will soon post the data)
  7. If market holds above August 23 low then we can see a sharp rally because the next turn window is in September (will soon post the data)
  8. Risk management is the key because we are still in a downtrend

Markets are at a very critical juncture right now. UST strategy will be to go long early next week. However, success of this strategy will be governed by the degree of pessimism that is brought back into the market by the current decline. If we see excessive pessimism then we will rally, but if everyone decides to buy this dip then markets will nose dive. Therefore, sentiment will hold the key. UST will try to keep its readers updated through Market Matrix analysis.

Note: Reaction to tomorrow morning's Ben speech will be much important than the speech itself.

Q. Lets see how many people are disappointed by Bernanke or are terrified by Hurricane Irene or are spooked by the European debt problems, over the next few days??

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