Thursday, May 24, 2012

Structural Update

Yesterday market wiped out a nearly 200 point decline by the close of the day. An impressive achievement but in the process market lost a lot of energy. These kind of reversals either mark the start of a rally or start of a sharp decline. In the rally case, these reversals are considered to be outside day reversals where the selling pressure exhausts and buying pressure takes over. In such cases, market continues to rally over the next few days. This kind of situation is typically observed after a panic wipe out.

On the other hand, if the selling pressure is not truly exhausted then rally could exhaust the buyers, leaving behind only the sellers to sell this market down. Right now we are not seeing panic and wipe out conditions. In fact, the decline in May has been very orderly, therefore, it does not appear that we have achieved a selling climax.

In terms of the market's structural possibilities, the highest probability scenario suggests that the market has completed a counter trend rally and will soon decline. The following chart shows that the rally from Friday's low to Tuesday's top was a 3 wave rally, which was followed by a clear 5-wave decline (Tuesday and Wednesday). Yesterday's rally also has only 3-waves and it stopped at the .786 retracement level (a typical retraction for 2nd waves). 3-wave moves are counter trend moves.

As long as the market does not rise above 1330 (SP500), we will soon experience a sharp decline. Even if we do, there is significant resistance in the mid 1330s. In case market starts breaking down, wave 5 target will be around 1260-1270.

However, if SP500 manages to break above 1342 then we would have to reconsider the market structure and open more bullish possibilities.

As far as a slightly long-term chart is concerned, it is evident that the market is in a clear downtrend. The market will soon complete the 3rd wave down (with the next decline). This should happen during the upcoming IPM turn window. End of 3rd wave will be followed by a 4th wave correction. Based on the concept of alternating corrective patterns, next correction will most likely be a sideways correction because 2nd wave was a upward correction.


  1. Interesting as always...thanks for your thoughts. One thing I haven't been clear on is when you think it's an actual good time to take a real position. I know you, and myself/others, often talk about possibilities and what may or may not happen, but I am not quite sure when you are issuing a clear buy/sell signal. You sometimes mention in posts when you have made accurate calls, but it's often in both directions based upon many factors.
    What would be interesting is to have a page on the website that starts with a balance of $100,000 that only buys or shorts the SPY based on your signals. Then you would have proof to back up the solid work that you do. If you request donations to the site, you will at least be able to quantify one aspect to what your website offers. There is obvious value in the day to day research that you do, but there is no way to know how much it helps unless you put some kind of dollar amount on it. Thanks again. -Mike

  2. Dear Mike, a detailed trade signal study was done from March to November 2011. All signals and corresponding returns were published in the Newsletters section. At that time, UST was offering a subscription service. As a part of the subscription service, UST was offering Trading Algorithm updates, which precisely outlined the type of the market, location of the stop, where to enter and profit objective (you can look at the historical blog posts). This update was sent, twice a week.

    However, due to academic obligations, I was not able to devote 100% of the time to the subscribers. As a result, we decided to publish free research on the blog and put-off subscription till more time is available. After studying various subscription services over the last 4 months, it was decided that we should try something different than subscription i.e. Performance Based Bonus. Its a new concept, and will evolve over time. Thanks for the comments mike.

  3. Any news? Is this the bottom?


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