Market Structure - PTP Episode 3

We finally entered the turn window yesterday (August 17). Interestingly, the market rose into the turn window which suggests that the stronger potential is that we have seen the top of the recent rally yesterday. 
     As mentioned in the last post, there are two prominent market trajectory potentials. I will try to discuss both of these potentials here, so that we can better define whether the upcoming turn window will give way to a rally or a decline or both.


Bear Market Scenario:
     The recent decline has resulted in a change of market's character from Uptrend to Downtrend. This decline might be the start of something extremely significant and potentially disastrous for the global economy. This scenarios means that the stock market ended its rise from July 2010 in an ending diagonal pattern (shown below), with a shortened last rise. This shortened rise gave way to a Head and Shoulder's topping pattern. Ending diagonals are terminating moves, followed by sharp declines (witnessed by the global equity markets).
     However, we have not seen a complete Elliott Wave decline pattern, suggesting that a bottom is not in place. This behavior when combined with rise in optimism among investors over the last week is a catalyst for further decline. Further decline would be the 5th wave required to complete the decline pattern. 

After the pattern is complete, markets will rally, correcting the previous decline from 1350 to 1100. 


Bull Market Scenario:
     The recent decline is a 3 wave correction (W-X-Y), with the Y wave being sub-divided in to 5 sub-waves. This pattern also requires a final 5th wave decline (similar to above mentioned scenario). This scenario is shown in the chart below. 

     The current decline could end at 78.6% retracement of the rise from July 2010 to February 2011.  78.6% retracement is a typical retracement for the 2nd wave. According to this scenario, market holds very strong rally potential to new all time highs. 
     However, in order for this scenario to play out, market (SP500) should rise above 1300. But this kind of rise does not occur over night and demands choppy up/down base-building process. Therefore, there will be buying opportunities in the near future with minimum capital risk.


Conclusion
     In both cases, market should decline over the next few days. It would be very interesting to see if the market declines in the coming week and then bottoms by August  26, 2011 - coinciding with Federal Reserves' Jackson Hole summit. This is the same conference, which initiated QE2 based rally in the global equity markets.


Note: Trading Algorithm generated a sell signal yesterday at 1195 (SP500) based on the test of the UST proprietary MA. In the next post, I will discuss the Trading Algorithm status and important levels.

500 Point Rally and Market Recap

Wow!!! Trading Algorithm's sell signal saved the followers more than 17% in just 2 weeks. 


Last week turned out to be a very volatile week in both financial and political worlds. Before going on vacation, UST stated on August 6, 2011:


"Next few days will be very interesting with considerably choppy market action. Therefore, the best strategy will be to stay on the sidelines, continue to analyse the market, define risk and trade based on Trading Algorithm signals."


In the hindsight, it seems like a very good advice. 


Yesterday's 400+ point rally, followed by today's 100 point advance, might have forced several analysts to proclaim that the market has bottomed. However, last week's precipitous decline has extensively damaged the technical health of the financial markets. In fact, according the UST's proprietary indicators we are now officially in bear market territory. This means that the best approach will be to sell rallies, instead of buying dips. Because in a down trend, good news are sold and rallies are short-lived.


Market Matrix is also not yet indicating a strong buy point. Furthermore, last few days have seen a rise in optimism among the investors. Optimism in the face of such week price action, does not bode well for the overall market. Moreover, recent decline was very extreme in nature. Extreme declines are often followed by price retests. This technical behaviour, when combined with current sentiment backdrop and turn window of August 17 to August 26, leads to the conclusion that we will further decline before putting in a bottom.  


Although picking the bottom in a down trend is not a good trading strategy, we will keep a sharp eye on the market structure and Inflection Point Model. Overall, current market structure leads to two possible market scenarios:


1- We have entered a new bear market, and will end up in a depression
2- Market will soon bottom and lead to a significant rally. 


Each scenario can be demarcated by certain price levels. And in both cases we will experience extreme price movements. Therefore, it will dramatically pay-off to be aware of the pulse of the market, and trade accordingly.


In next issue of Pick the Turn Point series, we will analyse different market structures, price levels and Trading Algorithm's signal level.

US Downgrade: Market Crash or Rally?? - Episode 2

Today US lost its AAA rating: An event which was once considered unimaginable has finally taken place. According to the main stream financial median, a Debt Downgrade could have severe consequences, like rising interest rate and declining stock market. This kind of behavior would result in reduced economic activity, ultimately leading to another recession.

At this point, I would like to ask: Are we going to witness a dramatic sell-off Sunday evening? Or will this downgrade give way to a temporary rally? Based on our trading experience, current market structure and Inflection Point Model turn window of  August 17 - August 26, it would make sense for the market to shrug-off the downgrade news and rise for a few days. This rise would lead to a final decline into the turn window.

In any case, next few days will be very interesting with considerably choppy market action. Therefore, the best strategy will be to stay on the sidelines, continue to analyze the market, define risk and trade based on Trading Algorithm signals.

Note: I will be on vacation starting August 7, 2011, till August 11, 2011. After vacation we will thoroughly re-analyze the Market Matrix to decipher whether the market will bottom in the Turn Window or will give a selling/shorting opportunity.

Inflection Point Model: PTP Campaign - Ep 1

Although anyone who had followed Understand, Survive and Thrive's Sell Call would have saved over 10% in less than 2 week, I myself did not anticipate such significant decline. This kind of severe sell-off begs the question whether we are approaching crash territory or are we near a bottom?

Throughout today, I have been seeing a lot of TV personalities saying that this is a great buying opportunity. In my humble trading opinion based on extensive trading experience, bottoms are not formed when everyone knows that it is a buying opportunity. This being said, we have certainly started to see some very good PANIC signs. Therefore, we can say that based on psychological analysis and market understanding we are near a bottom but might not have bottomed yet. 

Inflection Point Model

In any case, our trades are governed by the Trading Algorithm, not by our opinion. In this regard, we re-ran the proprietary Inflection Point Model, to discern the next possible Stock Market Turn date (Pick the Turn Point). The program output is given below:

Analysis

According to the two models, the next turn date is scheduled for August 23, 2011 (+/- 4 days). Moreover, both models are showing a potential turn, thus amplifying turn possibility. To our amazement, the amplitude of the turn point is very high. In fact, this amplitude is comparable to the amplitude we saw at the March 2009 bottom. Hence, we might be in for a significant turn point. Interestingly, this time frame also coincides with "Options Expiration Week" and Federal Reserves' Jackson Hole summit, where FED last year announced QE2. 

All of these observations, collectively force us to observe that we might witness another significant announcement from the Fed, which might mark the bottom of the current decline. (If the uptrend is intact). Otherwise, if we have entered a bear market, next turn point could mark a top. 

The Inflection Point Model is the primary reason why we has not tried to pick the bottom in this market, even when various famous individuals like Lazlo Brinyi and Biggs are recommending to hold the stocks. 

Bottom picking is hard, and can result in significant declines. Some people might assume that we will rally based on employment numbers tomorrow, but we believe that any significant rally cannot take place until unless the Trading Algorithm gives a buy signal. Hence, even if the market rallies tomorrow, we will intently and safely wait on the sidelines for the turn window.

Conclusion

Now that we have a turn window date, we will concentrate on how to evaluate the market going into the turn window. Risk management is the key to success. In the next post, we will evaluate different market structure scenarios which can take place and how to play them for profitable trade in these tumultuous times. 

Pick the Turn Point Campaign - August 2011

Pick the Turn Point Campaign's Introductory Video has been released. It is available in the sidebar or at Youtube.

Next Posts:

1- Inflection Point Model: Identify the turn date
2- Market Structure Analysis: Identify the market decline potential


Note: I will be on vacation from August 6, 2011 to August 10, 2011.

Latest Market Timing in Charts

Buy Signal @ SP500: 1302 on July 19, 2011

Sell Signal @ SP500: 1322 on July 27, 2011

Today the market closed at 1254.

Please review the Trading Algorithm Buy/Sell Signals (by the grace of God).

Inflection Point Model Signals

Over the past 2.5 weeks the Trading Algorithm not only generated a 1.5% Profit, it also allowed us to preserve capital. In fact, it resulted in almost 5% savings by generating a sell signal at 1322. An average investor in the stock market with $20,000 in capital would have saved almost $1,000 in less than 2 weeks with this information along with significantly reduced stress levels. This $1,000 savings is surely more than double the cost of possible annual subscription (fee not decided yet).

Moreover, Inflection Point Model has generated a turn signal at every turn point. Therefore, it is a pretty accurate market timing model.

Note:

As you might know, UST team is considering initiating a subscription services for only 50-60 subscribers (first come-first serve). Please contact us for more information.  

Why Trading Algo Sold Before the Debt Deal?

On July 27, Trading Algo generated a sell signal at 1322 (SP500). Since then markets have continuously declined (SP500 low of 1273 seen today). Although we have seen the debt deal materialize, UST's proprietary model is still far away from a buy signal. Such market behavior gives rise to the question, "Why did the Trading Algorithm got into cash at 1322, when everyone knew that a debt deal was certain?" 

Debt Deal and Market Response

Let us start with a question that was asked yesterday at the blog, "Market futures up due to budget deal. What is the S&P buy signal number?? Thanks." My response was, "Buy Signal will be generated above 1320. It will be interesting to see how the next few days unfold. Since debt deal was a known, are we going to see sell the Rally approach? Moreover, the bill has not passed the Congress yet. You never know if the Congress pulls-off a last minute Tuesday night drama, which could send the market down again. In any case, it is time stand on the sidelines for next few days."

This question was very thought provoking as the futures were up more than 150 points over night. However, as suggested in the reply the market gave up all the gains and some, during the initial trading hour. This kind of behavior is not only strange, it shows us that "News" does not govern the market. 

The News based trading dilemma is widespread in the financial markets. This is primarily why, UST developed the Market Matrix - a comprehensive analysis of market's strength. This analysis not only tells us where the market is headed, but also whether to trade in that direction or not. At Understand, Survive, and Thrive, we believe that market is like a river, and trading along the flow of the river is the best strategy. This is why when the market declined below 1322 and triggered the proprietary 8/4 indicator, we sold. 

Primary Reasons of Selling

First of all, last week investment advisers were not worried at all. In fact at one point they were 49% bullish according to both HSNSI and Investor Intelligence survey. This was quite worrisome. After all, if the threat of Uncle Sam defaulting or a downgrade of his debt is not enough to build a robust wall of worry, what will it take?

Secondly, the market turn (top) coincided with the Inflection Point Model (shown on right) signal. This signal, though weak, was sufficient to trigger a warning signal. Technical indicators were continuously deteriorating, and market structure was evolving into a form which resembled correction rather than start of a new up trend.

All of these developments when coupled with the 8/4 sell trigger were sufficient to get us out of the market. Even though it was certain that the market might rally based on the news of Debt deal. So I hope that all of you have seen the benefits of using UST's Trading Algorithm.

Pick the Turn Point Challenge

Now, the trend is neutral to down. There are three possible market structure scenarios. New Inflection Point date has been generated. Trading Algorithm is continuously updating its buy points. This is the most opportune time to launch the Pick the Turn Point Challenge. Here, we will try to identify the next market turn point. So stay tuned.