How Bad Is IT??

The situation must be really bad that the Fed had to intervene. Is this a good shorting opportunity??? Or have we bottomed?? We are in the IPM turn window!!! Details will come soon...

One thing is for sure, market is throwing so many participants off its back - It must be getting ready for something big in December???

DECEMBER to REMEMBER!!!

Subscribers will get detailed analysis and risk-management levels tonight...

Stock Market Overview - 11/28/11

MARKET REVIEW

Predicted

Happened

Last week’s special Market Matrix update pretty much summarized the sentiment and Elliott Wave picture and highlighted the reasons behind uncertainty i.e. Inflection Point Model turn dates. The analysis came to two conclusions:

1-     If the market declines sharply in conjunction with a sharp rise in US Dollar then it would suggest that we entering a sharp decline phase. Soon we will start seeing bad economic data and European crisis will get worse.

2-     On the other hand, if the market stays above 1200 and US Dollar starts to decline then it would mean that markets bottomed during the IPM turn window and will rise for 1-2 weeks.

By breaking below 1200 last week, SP500 completed the 8/4 test which resulted in a downside reversal. Afterwards, market swiftly declined to 1158. Now we are in a well-defined Bear market. 

As far as the fundamental developments are concerned, the sovereign debt crisis is spreading to the core of European Union. Since markets do not go down in a straight line, we will see rallies based on hope and anticipation. However, until unless we see a trend reversal, all rallies will be good shorting opportunities (like the end of October rally, which was rightly named as wave 2 rise by UST).

TRADING ALGORITHM REVIEW

Although UST Trading Algo did not lose any money as the market declined more than 7% (1250 to 1160), it missed out on an exciting shorting opportunity. The worst part is that the UST Trading Algo was on the right side of the trade i.e. shorted  SP500 at 1241 and did not generate a buy signal. However, it was human emotions that overcame the Algorithm and short positions were closed around 1250. In other words, market succeeded in throwing us off its back by gyrating sideways, before the major decline.

As a result, a comprehensive trading strategy re-evaluation was performed over the Thanksgiving break. The goal was to further reduce emotional aspect of trading. This was achieved by realizing the fact that trading strategies should be treated using varying order of significance. And that trading in direction of the primary trend should be held above signals generated by IPM or Elliott Wave analysis. Furthermore, a better proxy index was identified, which adheres to the trading rules much more smoothly than SP500. 

After comprehensive evaluation, a trading scheme has been devised for different types of markets (Bull vs Bear). This trading scheme will be posted online in the next few days.

CURRENT MARKET ACTION

As far as the current market is concerned, it is alarmingly to see that market participants are not exhibiting any signs of real panic.  Although the market has declined more than 7% in less than 2 weeks, there has not been any spike in volume, surge in pessimism, jump in put-call ratios or any other sign of capitulation. Market structure favors further decline and the supporting markets are showing no support. 

In other words, we are most probably headed towards a test of the October lows, until unless we can break above 1220. However, one thing that is currently in market’s favor is the fact that it is pretty oversold. Hence, we can see a sharp rise for a few days. Please keep in mind that this rally could be a good shorting opportunity.

Overall, we are now in a well-defined downtrend and are back in the Bear market territory. Typically, markets whipsaw only once before changing their trend. If this is true then we have most likely already seen the whipsaw:

Bull => Bear - 08/2011  => Bull (Whipsaw) -10/2011 => Bear (Final) - 11/2011

Normally, Bull or Bear market remains intact for several months. Therefore, if we do not break above 1220 real soon (by the end of the year), we will most probably remain in a bear market for the next several months. Under such circumstances, the best strategy would be to pick tops during the IPM turn dates.

Please keep in mind that like a Bull Market when the market rises persistently, in a Bear Market, market will fall. Although we will experience sharp rallies along the way, market will continue to decline with a series of lower highs and lower lows. So the task should be to identify the primary trend, pick trading locations, manage risk, take profits and re-evaluate. I hope that the enhanced trading scheme analysis will bring some clarity into current trading atmosphere.

Market update schedule (tentative):

11/28/11: Market Overview

11/29/11: Inflection Point Model (Primary Subscribers)

11/30/11: Trading Scheme Update + Trading Algorithm Update (Subscribers)

11/31/11: Trading Scheme Update

12/1/11: Trading Algo Update (Primary Subscribers)

Market Matrix Analysis

Market Matrix Update has been sent to subscribers. Addressing the following topics:

1- Market structural analysis
2- Trend defining levels
3- Current Sentiment and its implications
4- Technical Indicators
5- Inflection Point Model and its current status
6- Supporting market structures

along with fundamental developments in the economic world.

CONCLUSION

1. If the market declines sharply in conjunction with a sharp rise in US Dollar then it would suggest that we entering a sharp decline phase. Soon we will start seeing bad economic data and European crisis will get worse.
2. On the other hand, if the market stays above 1200 and US Dollar starts to decline then it would mean that markets bottomed during the IPM turn window and will rise for 1-2 weeks.

These are very interesting times. Even if the downtrend is confirmed, we will wait for a better shorting opportunity to minimize stop-loss risk.

Market Story Update

1. Weekly IPM update and its implications (NEW) - SENT
2. Daily IPM update and its implications - SENT
3. Market's structural analysis: Various potentials and strategies - SENT
4. Market's sentiment analysis
5. Regular and Customized Technical indicators 
6. Supporting markets' structures
7. Time symmetry and potential reversals
8. Trading Algo Updates
9. Market Matrix Update
10. Market Barometer (NEW): Will statistically weigh all the above mentioned analysis techniques as parameters and then generate a total market directional probability - WILL BE SENT

Market Overview - November 15, 2011

Financial markets have gone sideways over the last two weeks. This kind of sideways action means that the market is coiling up energy to break in either up or down direction. Along with the price action, technical indicators are also coiling up energy. This would lead to a sharp move in the stock market. Therefore, one should be ready with strict risk-management strategies.

There have been various instances in the past when such sideways movement resulted in market tops. Plots of previous major tops (April 2010 and Feb 2011) are shown below. If we are currently witnessing a top formation, it would suggest that the market is tracing out a series of 1s and 2s, which would lead to a sharp decline to 1100s in SP500. Under this scenario, market should not break above 1275 (SP500).

April 2010 Top

Feb 2011 Top

Nov 2011 Top?

This development in conjunction with the detailed market structural analysis, Fibonacci relationships and supporting market structures (sent to subscribers last week), support the fact that the market has completed a counter trend rally from October 4, 2011 low. 

At the same time, optimism is also reaching elevated levels as seen through Individual Investors, Rydex investors and other ratios. Therefore, sentiment is supporting the possibility that markets topped on October 27, 2011 (until unless market breaks above 1275 SP500).

During the recent sideways market action, it was noticed that bulls got emboldened and started to bet on the Santa Claus rally. Furthermore, recent up down gyrations whipsawed a lot of investors out of the market. Since markets are notorious about getting rid of majority of traders (long or short) before initiating the major move, we might be on the cusp of sharp move in the financial markets (rally or decline). 

Tonight or tomorrow, Understand, Survive and Thrive will publish the Daily Inflection Point Model, this model has some very important dates to keep in mind over the next few weeks, especially with respect to End of Year Rally.

Market Structural Overview

As US stocks rallied during the last 5 weeks, sentiment also got more optimistic. This is not good for the market. According to Mark Hulbert, “The HSNSI is now 51 percentage points higher than where it stood a month ago. To put that in context, consider that over the first month of the last six bull markets, the HSNSI never grew by that much. In fact, the average increase in this sentiment index over each of those six bull markets’ first month was just 19.9 percentage points.” This kind of behavior symbolizes the fact that we might not be in a bull market, rather are experiencing a bear market rally.

We have already discussed the potential of a turn point based on Daily and Weekly Inflection Point Models. (Please review earlier IPM posts). Today, we will look at the markets from a structural point of view.

5 Wave Decline = Downtrend

All major US Indices (SP500, DJIA, Russell 2000 and Nasdaq) declined in clear 5 wave fashion from May 1^st 2011 to October 4^th 2011 (shown below  - figure 1). 5 wave movements are regarded as impulsive moves. Impulsive moves occur in the direction of the primary trend. This decline terminated in the form of an ending diagonal. Please note that October 4, 2011 turn occurred during the last turn date September 28, 2011 (+/- 4 days)

Figure 1

One of the characteristics of 5 wave declines is that 4^th wave does not enter Wave 1. However, in case of Nasdaq, Wave 4 entered the Wave 1 region (shown below – Figure 2). This means that Nasdaq carved out a wedge formation. Wedge formations either occur at the start of a trend or at the terminating location. In July 2010, markets carved out a similar wedge formation in the upward direction. This wedge was followed by a sharp decline in wave 2 through August 2010, retracing 0.786 (Fibonacci ratio) of the prior rise. In late August, many investors assumed that it was the start of a new downtrend, but soon thereafter markets staged a very sharp rally to new highs.

Since current wedge formation was to the downside and it was followed by a sharp rise, retracing 0.786 of the previous decline, it might be possible that markets will start a new decline phase to new lows below October 4^th low.

3-Wave Rise = Counter-trend Rise

Since October 4, 2011, markets have risen for almost 5 weeks. Although this sharp rise managed to entice many to believe that the uptrend has returned, it did not result in an impulsive rally structure (5 waves). Rather, we have seen only a 3-wave rise (figure 3). ABC patterns (3-waves) are a hallmark of corrective wave, and can retrace anywhere from 38.2% to 78.6% of the prior move. In case of 2nd waves, the retracements are steeper. Recent market rise since October 4, 2011 retraced almost 78.6% in all the major indices.  According to Elliott Wave theory, 2^nd waves are defined as: “Wave 2s are very deceiving, and they are technically broken.” It will be highly ironic to see Wave 2 end on the news that a bailout package was negotiated in Europe.

This article is continued for subscribers... If you want to continue reading about:

1- Counter trend rally

2- Anomalous behavior of the QQQs

3- Recent market action

4- Head and Shoulders Top

5- 8/4 Test

6- Supporting structures of Euro, Treasuries, US Dollar Index and European markets

Sign up below: 

Market Story - 11/6/2011

1. Weekly IPM update and its implications (NEW) - SENT
2. Daily IPM update and its implications
3. Market's structural analysis: Various potentials and strategies - WILL BE SENT 11/7/2011
4. Market's sentiment analysis
5. Regular and Customized Technical indicators 
6. Supporting markets' structures
7. Time symmetry and potential reversals
8. Trading Algo Updates
9. Market Matrix Update
10. Market Barometer (NEW): Will statistically weigh all the above mentioned analysis techniques as parameters and then generate a total market directional probability

Market Synopsis - 11/04/11

Since the last blog post titled Vix Up 20% - WHY??, market has been going up. However, it seems like the trend is exhausting. Therefore, one should be very careful with tight stops (if long).

 

The primary reason why it seems like that the trend has reversed is because the initial decline from 1291 to 1217 was a complete 5 wave affair. 5 Waves represent trend reversal. Furthermore, this initial move from 1291 to 1217 was very violent, hinting to the possibility that we have entered a downtrend. The subsequent rise from 1217 to 1261 has come in the form of choppy market action. Choppy action is a hallmark of a countertrend rally (wave 2). Finally, recent rally has retraced 61.8% of the initial decline. 61.8% retracements are typical retracements for counter-trend rallies. All of these observations are shown below.

 

 

 

At the same time, the sentiment has become very optimistic again. This optimism in the face of a declining to sideways market is dangerous for future market rally. 

 

8/4 Test:

Subscriber Only

 

STRATEGY

Subscriber Only

Inflection Point Models

Interesting Summary - Confluence of turn dates and 8/4 test reversal!!!

Detailed Inflection Point Model Output + Analysis ==> Subscribers

Vix Up 20% - WHY??

Why is the Vix up 20%?  Just on the assumption that Greece is going to carry out a referendum??? Vix wasn't this high when EU did not have an agreement, but now they do have an agreement!!

If Greece's Prime Minister wanted to listen to the people of Greece, he would have listened earlier when they were protesting.

In any case, buying right here might be a very dangerous trade but can be a very interesting trade also, with markets re-testing the Up-trend demarcation MA. It also offers low risk entry for a quick profit!!

We will see.

Note: This trade does not mean that we are going to new all time highs, it just means that right now market is a little over-reacting.