Wednesday, June 27, 2012

EU Summit and Market Behavior

We are coming very close to the IPM turn window. If we have correctly identified the current EW market pattern (diagonal), the market (SP500) should not rise above 1365. This area holds various resistances, ranging from MAs to 61.8% fib retracement. Above all, according to the Elliott Wave theory, current rise cannot exceed 1365 or something much more bullish will be unfolding.

The second (extreme bullish) alternative is a very low probability because we are in an overall downtrend and are approaching a top date.

As a conjecture, we might see a rally till Friday when the EU announces its plans and then the market could sell-off for 1-2 weeks (till the earnings start). This is just a hypothetical scenario, but it would be similar to what happened in October 2011 i.e. market started rallying in early October and topped out when the actual EU summit took place (Do you remember when Greek Prime Minister wanted to hold a referendum??)

Finally, there were some comments about the model and the possibility of a sharper decline starting. These comments were completely rational, as Mike said, it was a tough 40 point ride.

But you might remember that on June 17, 2012, it was stated that it would be interesting to see how the market reaches the end of June/early July top. At that point the rally was so strong that if the market had continued its rise for the next 2 weeks, it would have eclipsed April highs. Since the market had completed the 8/4 test to the downside, new highs were a very low possibility. At that point, I wondered if the market was going to trace-out a diagonal pattern (it was just a guess to align market structure with the probable topping time frame along with sentiment data).

At this point, it does seem like that we are witnessing a diagonal pattern. One important aspect of the diagonal patterns is that no one identifies them until the very end. In current situation, I have not read anywhere on the financial websites that we are in a diagonal pattern, so it is possible that we might really be in one. In any case, next few days are very important. The nature of the current rise and the subsequent decline will tell us about the future direction of the broader market.

-- Critical Level: 1307. Break below this level would mean that the broader downtrend has again exerted itself.

Personal Note:
Believe me, trading is a tough/stressful job. Whoever felt anxiety during the last decline is in the same boat as me. I was stressed even with model and algorithms. I can only imagine being in the shoes of people who have thousands of dollars in 401Ks and who watch the market decline 100s of points.


  1. Naqvi, when I look at your last post, you recommend a target of 1380, but now you said the top cannot rise above 1363??? You are just bullshitting!!

  2. Dear Nick, Market structure evolves over time. No one can say anything with 100% certainty in the markets. The art is to know what is the most probable scenario at any particular time. Thanks for your input!!

  3. We are entering the IPM turn window, during which market can top out. Today, another market structure has come to the forefront. Based on this structure, potential market topping area: 1390-1360. Next week will be very interesting as earnings will start during the week of July 9, 2012.

  4. Naqvi - it's hard to ever win! :) I mentioned before, we never breached 1305, so your hypothesis was always in place. It is hard for people to weather the storm when stuck in a range. Lots of chop clears out bulls and bears....but in the long run patience wins out. As of this moment, futures are blasting up based on Eurozone news...if we can gap and run, 1360 is resistance, and if we clear that, who knows? If we get stuck there, then we will once again be between 1305 and 1360. I am enjoying it as I can finally feel a rhythm to the market. I know it's short lived, but I will milk it while I can. Obviously things can change before the open, but gap ups are usually followed with some volume....end of quarter can also fool people. Lots of scenarios, but still not a good idea to ever short this market unless we breach 1278 - too much manipulation. -Mike

  5. Naqvi- So you see market can't break 1365? I don't think so, in fact, I see 1393 as an ultimate target. Market top at 1365 when you called a top at 1380 some days ago. Market bottom at 1313 and approaching 1365. You are just calling a top when market fall, and calling a bottom when market is up. lol... You can always be the winner...the lagging winner... if I really followed what you recommended, I will suffer a hugh loss by numerous cut loss. Please study carefully before you publish you forecast. Fool~

  6. Nick, do you have any better analysis? Back it up. I'd be interested if you can beat Naqvi's hard work with blogs and forecasts. Do you have a blog?

  7. Dear Nick, I do not say I have a crystal ball. I am thankful to God for all what I have and always try to improve. Now that you have written a few comments, let me recap the month of June...

    1- On June 5: It was suggested that the market could bottom during that week and reasons for a potential market bottom were highlighted. It was also mentioned that the rally could last for 3-4 weeks i.e. till end of June
    3- On June 7: Potential market rally sketch was presented
    2- On June 17: IPM turn window was specified and it was mentioned that we are undergoing a VIX sell setup which was a reason for concern. VIX did generate a sell signal and we went down for few days!!
    3- On June 21: It was suggested that SP500 could rise up to 1380 based on a specific EW structure that I though was playing out based on the data up to that point
    4- On June 22: 1305 Critical level was outlined which would have negated the bullish argument.
    5- On June 27: It was suggested that SP500 structure had evolved and it should not rise above 1363. However, it was mentioned that if it did rise above 1363 than something big is happening.
    6- On June 28 (in comments): The structures further evolution along with the IPM confluence suggested that the top can be between 1360 and 1390.

    Conclusion: Markets evolve over time and this is something that I have learnt with experience, so if a person stays rigid then he will lose his shirt in the long run. Furthermore, I try to give my honest insight to help my readers and don't try to show them anything which is not possible. Buy/Sell strategy is up to everyone's own risk-appetite. For me it is better to understand the potential market structure and then devise a trading plan, rather than some one else giving me 50 different pivot levels and forcing me to trade accordingly.

  8. By the way, in June 27 post target was 1365, which mean that the market will eclipse last highs!!

  9. Being constructive to this blog, I would share what I see in the market. Although I am bullish in short term, I expect to see a lengthy correction started on Monday before edging up to new high.
    Scenario 1) Support at 1335-1345, projected top is at 1475; But if the zone cannot hold, scenario 2 will play out as: Scenario 2) Support at 1313, projected top is at 1393.
    I am not going to see a break of 1365 in coming few days. So let's see!

  10. Dammit (and I do know how to spell it correctly)! I went on vacation and while on vacation, I bailed on the 27th just before we made money. Ugh! I basically ended up behind a bit, but if Merkel didn't pull that rabbit out of the hat, it would have been the right move (shoe won't be re-elected, the German's hate this idea). I think the bulls will have this week, but I want to see tomorrow if there is follow through or pullback. Short term could see 1390 to as high as 1400ish. I don't think short term is 1475. Be careful out there, Brad

    ps. I saw one guy think the SP500 was lining up to 1577 - so be careful).


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