Market Prices Fall

Markets fell sharply this week.  SPY, an Exchange Traded Fund that mimics the SP 500 index, fell 16.24 points (-5.92% on the week).

While the downturn appeared severe, technically, the damage appears minimal so far with support coming in at the 40 week average, just as previous downdrafts did.

For trend buyers, buying at or below a chosen long term trend is a good strategy.

From a cycle perspective, the timing of this decline is similar to the previous decline.  Not to say that the decline is over, but Size, my view of volatility over the past 20 week period, continues on a downtrend and is easing to the moving average.  Further declines and an increase in this indicator would push me to reevaluate my current thinking, that we are at or close to the bottom of this wave.

On Thursday and Friday, I began purchasing call options.  On Thursday, I purchased options with an early May time horizon, anticipating that SPY will make a three-month test of the recent highs.  The test occurs at the end of April.  Throughout this bull market, prices easily cut through the previous highs.  Not saying that this is what I expect, but I am positioned for it.  Should price meet with resistance and it fails to make new highs, at that point, it would be a good time to begin positioning for a downturn.

Analysis, that I will present at a later time, shows that the wave 5 can run for quite awhile, like longer than a year.  More to come.

SP Marks All Time Highs

After dramatically selling off several weeks ago, the equity markets have come storming back with a vengeance.  Nearly non-stop, the S&P 500 index has rallied some 90 points without barely taking a breath.  But now that we are at new highs, where are we in the cycle?  Some had expected a test of the low at the 1900 SP level.  This never happened.

I have been watching Elliott Wave technicians during this move and have found that there isn't too much agreement.  One chartist that I like is Daneric's Elliott Waves  http://danericselliottwaves.blogspot.com/.  In his post today, he shows that he expects that we are at a top for this current move up.

After a move down to iv on the chart, the SP will make one final move up to 5, marking the end of the cycle move.

Others feel that after hitting the little v mark, the market will fall back but not as far as Daneric is calling for.  They feel that there will be one more leg up taking the SP close to 2100 and then the big move down.

What most seem to agree on is that we are midway through or completing a wave iii and that there are at least two more moves coming, one down move to iv and a move up to new highs v.

My analysis is less complicated.  Last week, I was watching to see if the market would make a three week test of the high.  Although the market soared from the lows, it was far shy of the high mark.  Sometimes the three week test can turn into a four week test, so I allowed it some room to run.

Should the SP sell off tomorrow and close below 1978, some 14 points lower than today's close, that would be my sell signal. 

It's hard to say what the market will do though.  Once upon a time, there was a limit to money and credit to drive markets higher.  Now there is no limit.  On top of all the cash that the Central Banks are manufacturing, $100s of trillions of derivatives also drive the market.  That makes it hard to understand how the wave theory could really affect market movements, that is, unless everyone is watching it and making decisions based on the wave patterns they are seeing.  But the truth is, there doesn't seem to be a lot of agreement at this point of where we are in the cycle.

As for my positions, I took profits on SPY calls yesterday and missed some of yesterday's and today's move.  I have been buying put spreads since the 195 level on SPY and have been adding more each two SPY points up.  Should we rally above 200 on SPY, I will be adding still more.  That being said, I am a fan of Daneric's count, looking for a sell off to capitalize on my puts and reenter October calls. 

At the end of that rally, I hope to position myself well with longer term puts in anticipation for a larger move down. 

Shooting for the Highs

Stocks surged as soon as futures markets opened Sunday evening and followed through as cash trading opened this morning.

While most bloggers reflect great certainty that the S&P, Dow and other major indices will more than handily take out the highs, I'm still less than convinced.

One thing that troubles me, aside from everyone being so bullish, is that my statistical indicators show that momentum is still lagging.  With such a powerful surge over the past couple of weeks, I would be expecting some of my key indicators to reflect greater strength, instead of weakness.  The divergences I see in my numbers lead me to believe that either the SP will not take out the recent highs and if it does, it won't hold and we will close out the week having tested the highs but failing.

I still hold a number of October 192 calls purchased near 190 on SPY.  As we continue to move up though, I've been adding puts and put spreads just in case.  If SP goes as high as many are predicting, I'll surely make more than enough to cover the losses on the protective puts.  And should the market drop hard, I think that I would be equally as successful. 

I can't begin to say what might slow the market down.  Again this evening, futures are up across the board. 

Test of the Highs Fails

What was expected to be an “anything goes” week turned out to be just that.  After rallying close to a strong resistance area of 167, unsubstantiated reports that Ukraine held off a Russian invasion slammed the market down hard.  As future reports indicated that if there was any such attack, Ukraine in fact destroyed their own vehicles.  The markets firmed up but could not provide enough power to push it beyond 167 to test the highs of three weeks ago.

Traditionally, a failure of the three week test of the high has been the key intermediate-term sell signal.  One might expect to see the market still try to take out the high and succeed.  Other indicators provide additional information that show that momentum may be slowing and that the market will soon sell off.

Hard to say what will happen as market participants have been well-trained to BTFD, or "buy the f...ing Dip!"  And that's exactly what happened.  Some curious notes of interest mentioned how it was puzzling that the market did not react negatively to an apparent recession occurring in Europe (as this was expected anyway), but when a news report mentioned that a Russian convoy was attacked in Ukraine, the market was roiled (as that was unexpected).  But as an earlier post mentioned, this news was out there even before the market opened.  It could be that just simply, the market hit the resistance and sold off, as many wave counters have pointed out.

 

I also like how it was pointed out that the rebound took shape in a typical Elliott Wave five wave move up.  Perhaps some downward pressure will resume.

 

One rule of thumb that I developed in Grad School was in an up market, if the market is up on Friday, buy the open on Monday and sell the close.  It generally seems to work.  However, if the market is a down market, this rule does not work.  I will be watching how the market reacts Monday morning.  Perhaps this will give me an indication as to whether we are in an UP MARKET and the market could be expected to go to new highs, or if we need to see another attack at the 190 (SPY) level.

SP to Test . . . but what?

Stocks never did come down to make a test of the lows on Tuesday but instead, rocketed ahead, now rebounding up close to the SPY's 20 day moving average.

The average rate of change for the 20 day moving average is down .20 per day, so if the trend is your friend, one might consider adding some puts here. 

For Elliott Wave fans, while I am not an expert in this area, I do keep my eye on what the bloggers are saying.  Of course, there is no concensus and even the wave counts are all over the place.  It could be that we are in the process of making another strong wave down which could at the very least hit the 190 level.  My gut tells me though that we might break down even further to the 186 level before then turning up.

I myself am conflicted as where the market will be going.  I see the tried and true three-week-test of the highs developing and it seems that each time we have tested this, we broke through and made new highs.  Yet the case for the downside is convincing as well.  On a Fibonacci retracement, with a SPY coming in at 199.09 and the low at 189.61, a 62% retracement brings SPY to 195.48.  In premarket trading, futures rallied and SPY came close to this mark before turning around.

That being said, I am long term bullish and short term Bearish.

Comments welcome