A Descent into the Abyss

It's been over a month since I last commented on the market. But wave 4 finally ended. Did it? Wave 4 is tricky. But it appears that we are really in a deepening wave. Is it wave 3 or wave 5? I think it is wave 5 but you may know that this may prove to be wrong. After all, it is all about probabilities. But it really doesn't make any difference because at the end of this wave there will be a great opportunity to go long and make huge profits. The task ahead for me is to determine the end of this wave so I can reverse my position from being short to being long. The signs that I look for are: a 20 to 1 ratio of declining stocks to advancing stocks; a change in the direction of stochastics and also in the MACD on the Daily stock market indexes. These signs are all pointing down at the present time indicating that we have a lot further to go. What can we expect at the end of wave 5? Elliotticians will expect a three wave corrective phase. This may cause an "end of the year rally"! Some will call it the "Santa Claus Rally". Traders will jump in and move the averages quite a bit higher. But beware because this is not the beginning of a new bull market. When the correction is over, the Bear market will surely resume.

A Fifth Wave

Well, I think the fourth wave is over and that we are in the fifth wave. It is unbelievable how complex the fourth wave can be. I thought it was over in August. It continued to zigzag until recently. I now think the fourth wave is over. However if you look at any of the daily charts, you will see that MACD has not yet confirmed that the market is in a downtrend. The shorter term charts do confirm that we are in a downtrend. So who do we believe? I am not a short term trader and wait for the daily, weekly, and monthly charts to confirm. When the daily confirms a new downtrend, I will get involved. Until that happens, I remain mostly in cash and short term bills.
Success to your trading.

Fifth Wave finally!

The fourth wave has been extremely frustrating. It has lasted longer than expected. Another reminder that patience is needed in trading. Has the trend changed from up to down beginning wave 5? Time will tell. Wave 5 will contain 5 minor waves. It appears that minor waves 1 and 2 have already been completed. We should now be in wave 3, always the longest wave. What is our strategy at this time? Most investors should be in cash awaiting the end of wave 5. More aggressive investors are short the market. As we approach the end of wave 5, short sellers should take profits and prepare for the corrective 3 waves. How low will the market go? You have to look at past support levels to answer that question. The S&P index indicates that around 1100 would be a good time to take profits. Interesting times.

Wave 3 is complete

Wave three appears to be complete and we are in the final stages of wave 4. During wave 3 we were short the market. We covered and went long for wave 4. Since wave 4 is complete or almost complete, we are prepared for the reversal. The next wave is wave 5 down. Wave 5 down may end with a selling panic. My strategy is to be short the market but we will cover our shorts before the end of wave 5. Wave 5 will be followed by a corrective A-B-C move. Go long for the corrective move. Robert Precter recently stated that this is the opportunity of a lifetime! I believe it. But only if you know how to follow the wave theory. Check out the chart to see if you can see the theory in action.

elliott wave three

It appears that we are indeed in wave three. Those who have studied EWT know that wave three is longer than wave 1. So we have further to go. On the SPX daily chart shown here we point out the end of wave 1 and wave 2. The question now is where does wave 3 end and reverse. The signs I look for is a reversal in the stochastics and in the MACD. Also the advance/decline ratio will expand. Right now it is about 2 stocks down for 1 stock up. Ultimately, the ratio will be about 20 down for 1 up. My strategy is to hold the indexes short and to prepare for the reversal. At that time I will go long for wave 4.

the alternative is Wave 3

The above chart is from www. stockcharts.com/

In the previous blog I said that we were in wave 5. However, I realize that upon looking at it again, I now think we are in wave 3. As noted in the previous blog wave 4 was definitely larger than wave 3. This is unacceptable to me. So, I am now stating that we are in wave 3 which makes more sense. Wave 3 will be longer than wave 1 and much more violent. I believe this wave is in the beginning phase and will be quite exciting. Best to your trading.

wave five underway

The above chart is from www.stockcharts.com/

I'm not an expert on Elliott Wave Theory but I have numbered the waves as I see them on the daily chart. 1370 represents the end of the supercycle correction. It is "C" of the end of an A-B-C correction which started in March, 2009. Currently we are in minor wave 5 of a larger wave I. My only problem with my count is that wave 4 is larger than wave 3. Wave 3 should be the largest wave. However, exceptions to the Elliott rules do happen. This places us in wave 5 which should bring us below 1258 which was the low of wave 3. My strategy is to remain short the indexes. A more prudent person would be in cash waiting for the end of wave 5. Best to your trading.

Fifth Wave?

It appears the 4th minor wave is complete and that the 5th minor wave is in progress. If you use Elliott Wave Theory as your guide, you can see that the Dow Industrials is very clear. Notice in the chart that you can easily see the wave structure from May 2nd. If you are an intermediate term trader, one strategy that you can use would be to cover your short position when wave 5 is complete and go long for the A-B-C corrective rally. The corrective rally could easily last until August.

Major averages look bearish

The S&P, the Dow Industrials, the Nazdaq, and the Russell 2000 averages have all broken through their 20 and 50 day moving averages. These are the averages on the Daily charts. This is a good sign for the Bears who trade for the intermediate term. The best strategy is to remain in cash or to be short the equities. The trend is down at the moment.

Downtrend! Just the beginning.

It appears that May 2nd marked the top at around 1370. The first wave from that point is around 1320. The second wave completed yesterday around 1350. Right now we are in the beginning of wave 3. The conditions are certainly right for a decline in the market. Jobs, industry, and home sales are terrible. And the prospects for a QE 3 are not good. The only thing QE2 helped was the stock market. My strategy for this decline is to short the indexes. A more cautious person would sell their stocks and hold cash or Treasuries.

Should you buy the dips?

Buying the dips has definitely been the best strategy. Those who believe we are in a new Bull market have made a lot of money. Right now the Bulls are waiting for this correction to be over so they can ride the Dow to over 14000 and higher.

The poor Bears think that we have just completed a bear market rally on May 2nd at 12,876 and that the market is going lower. The cautious Bears are holding cash. The speculator Bears are already short the market. My opinion is that the bear market rally is finally over and Wave 3 of the Bear market has resumed. I am short the market and believe we will be in a bear market during the summer months. The confirmation of my opinion will come if the uptrend is broken at 11, 600. This is about a thousand points away as I write these thoughts.

Decline to the previous 4th wave!

The decline has finally been confirmed. As one wise guy has said "even a broken clock is right twice a day." But, at least, this time the decline appears to have begun. You should be in cash or short the market waiting for the next opportunity to buy stocks. This decline has a long way to go but there will be many opportunities to make money along the way. According to the Elliott Wave Theory, the next stopping point for the market is at the previous wave 4. The previous wave four for the Dow index is at 10,929. So a good place to buy the market would be around 11,000. Right now the Dow is at about 11,800. There should soon be a move up from 12000, and then a sharp decline to about 11,000.

Confirmation of trend change

It was a long time coming, but the trend change is now more evident. The question is: how low will it go? But the thing to know is that the 20 day and the 50 day moving averages have been pierced. Is this an infallible sign of a downturn? No! But it is a significant clue as to trend. I believe the trend has decisively changed. My strategy has been to sell all of my long positions and to go short the market. A more cautious strategy would be to hold cash and wait for a new uptrend. But remember the recent uptrend has lasted two full years. I expect this new downtrend to last a long time also. Enjoy the ride down! This is what makes following the markets fun.

The Black Swan is being noticed!

In our last post, we were among the very first to notice the Black Swan (the Middle East problems). Now almost everyone is blaming the recent decline in the markets on the Middle East. But we were in the final stages of an Elliott Wave Theory Fifth wave and the Black Swan arrived on schedule. It always does!

The important thing for me is that the trend has changed. The markets are now in a downtrend. Bring up a chart of any of the indexes and you will see that this is true. It is confirmed by drawing a trend line from the previous low to the high of the market. The line has been decisively pierced. Also the MACD is also confirming that the market is in a downtrend. (Daily Charts)

The strategy now is to take profits if you have been long the market and either go into cash or go short the market. Right now the markets are in a SHORT TERM market downtrend. But, I think it will have a long way to go down. But, this warning is in order: I have been wrong before. Remember, this is all about probabilities! Anyone who tells you otherwise is a faker. In conclusion, it appears the market's trend has changed. Act accordingly. Keep your feelings out of your decision making.

Has the long awaited bear market returned?

It appears that minor wave 5 of a larger wave 2 has finally been completed. This has been like waiting for a baby to be born from the moment of conception to the date of birth. In the case of the stock market, it took more than nine months. If this view is correct, the market will decline. How it will decline we do not know. It may be a quick decisive drop like the 2007 bear market, or it may be a slow horrible decline. At any rate, according to Elliot wave Theory, it will drop to the previous 4th wave. Depending on what market you follow, look back to see where the 4th wave began. At that point the strategy would be to cover your shorts and go long for a profitable trade. If this is truly the beginning of a bear market, and you are positioned correctly, it should be fun.

The right strategy at this time for the cautious is to be in cash or short term treasuries. For the speculators, go short at this time if you are not already short.

The Black Swan makes an appearance

The Black Swan appears and the sight of it frightens many investors. It should have been expected. It always appears at the end of a fifth wave. Why is everyone surprised. They should have seen it coming. After all, it appeared first in Greece, then in Tunisia, and now in Egypt. There will be more appearances in countries affected by the economic downturn. The mood is changing and this will have a dire effect on the markets. Monday should be interesting. It may confirm the market reversal and go down. It may contradict the soothsayers on CNBC who are maintaining that this is just a normal correction that always follows a run up in market prices. They maintain that we are still in a bull market and are advising viewers not to panic and sell their shares. Worse, they are telling the viewers that this is a good opportunity to add to their positions. But when social mood changes, the markets also change. A good strategy at this time is to be in cash, or, for the more risky investors, short the markets and enjoy the ride down. This will be better than sledding, skiing, or ice skating.

Nasdaq index reverses trend

The Q's appear to have reversed. This would not be surprising because the Q's have led the uptrend. It is only fitting that the Q's should lead the downtrend. The chart of Friday, Jan. 21, 2011 is posted. Relative strength has reversed. The 10 and 20 day moving averages have been pierced. MACD black line has crossed over the red line. Full stochastics black line has crossed over. All the indicators indicate a downtrend has started. However, The DOW and the S&P have not yet confirmed the downtrend. A patient trader will wait until all of the averages have reversed trend. A less patient trader would sell his positions and either go into cash, or, short the market. I am short the Nasdaq market. I will cautiously watch the indicators to see if this was a false start.

The end is near!

The big question is: how long can this uptrend last? There have already been more false starts than I can ever remember. But this is clear: we are one day closer to the reversal. Because the uptrend has lasted so long, the new trend will also last a long time. Because almost every one is bullish, the downtrend will not be believed and many will buy the dip. It will be an interesting and exciting ride. But the big question remains! When will this market turn down? Patience is desperately needed.

Signs of a reversal

click on the image to enlarge and check the signs for a reversal.

The completion of wave C has taken much longer than anticipated. However, Wave C has now almost completed 5 waves. When this happens we will see a huge reversal. What are the signs of the reversal? This is what I look for:

RS/Relative strenghth should be above 70. It is there now.

Waves: we should be in the 5th wave. We are there now.

Macd: the black line must cross the gray line. Not there yet!

Stochastics: the black line must cross the gray line. Not there yet!

Moving averages: I use the 10 day moving average and the 20 day average and the 50 day moving averages. When the 10 crosses the 20, it is a short term reversal. If the 20 crosses the 50 day average, it is an intermediate reversal.

When all signs point down, pull the trigger, make your move.

This is a chart of the QQQQ on January 7th which illustrates the above signs.