Thursday, September 1, 2011

Market Structure & Bullish Reasoning!!

Update September 2, 2011 @ 10:10 AM:

We might have bottomed (Low risk entry with stop below the low). Today's market slump has brought the third market scenario to the forefront. In fact, Understand, Survive and Thrive will be publishing a special report over the weekend, delineating the positive developments in the market internals, along with strict Risk-Management levels.

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Update September 2, 2011 @ 9:05 AM:

Very Bad Jobs Report!!! But we have seen in the past that markets bottom on bad news. Since we are already down considerable, I will wait for few hours before exiting the remaining long positions. Lets see if the market can hold 1179 (trailing stop level). If it does then we might be in for a significant rally based on the below mentioned 1/2, 1/2 scenario. One fundamental reason will be that current extremely poor job report will force the politicians and the FED to work harder to introduce stimulus and/or QE3, in order to prop up a weakening economy.

Note: I might do some buying also, if the market holds above the 1180 level, with a tight stop.

As mentioned in the last post, there are three potential market structural scenarios:

SCENARIO 1 - Markets Should Rally Soon (Highest Probability)
The figure below shows this scenario. As per this structure, markets are currently tracing out 4th wave which is almost complete. In other words, we might have bottomed today or will bottom early tomorrow morning. After completion of this wave, we will experience a sharp rally to 1245-1270 level (SP500). The above mentioned price target carries both Fibonacci and Trend resistance levels. This rally would last for 4-5 days. Four days starting tomorrow would lead to September 8, 2011 - Thursday, the same day when President Obama is going to speak to the Congress and unveil his much anticipated Job Creation plan.

Note: It would be interestingly ironic to see the markets top (intermediate term) on or around Sept 8, 2011.

In order for this structure to be valid, the market must hold above 1190 (SP500). If the market comes below this level then a different market structure might be unfolding.

SCENARIO 2 - SP500 Should Decline Below 1190 (Low Probability)
The second chart shows the potential of a much more protracted decline. According to this scenario, markets have completed a 3 wave counter trend (~10%) advance since August 23, 2011 bottom. And now markets are on the verge of a significant decline to new lows. Three wave rallies are counter trend in nature and are completely retraced by the ensuing decline. This scenario will deserve more attention if the markets decline below 1190.

SCENARIO 3 - Market Tracing out 1s and 2s (Low Probability)
If the markets breaks below 1190 (SP500), third scenario would mean that markets are tracing out a series of 1s and 2s before a strong rally phase. Since we do not know whether a breach of 1190 would mean: Start of a new decline phase to new lows or just a brief decline before a sharp rally, we will let the markets direct us in the right direction. 

The reason for elaborating all three possible cases is that the reader should be aware of potential market direction and the associated risks, in terms of time and price. Risk-management levels have already been discussed in the Trading Algorithm update. As far as the Understand, Survive and Thrive team is concerned, we are Bullish, and we have very sound reasoning behind this bullishness. UST Trading Algorithm predicted the market bottom on August 23, 2011 and is sticking by it because of several reasons which we came across during market analysis. In any case, risk-management strategy laid out in the previous post will be strictly followed.

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