Tag Archives: elliott waves

Interesting juncture in sentiment

Posted on
15

We reached a point this week where almost all bears turned short-term bullish at the very least, if they didn’t swear off shorting altogether. Hordes of hobby bears were crushed over the last three weeks, and even hard core bears from before 2008 seemed to adjust their wave 2 targets upward as high as SPX 1200.

I took that as a sign of short-term weakness at the very least, so in addition to my regular purchase of December 2011 puts, I added a few March QQQQ puts and October 09 calls on the 10 year note. This AM I also took another stab at picking a top in copper at 2.60, with a 2.62 stop.

The reaction to GDP so far has been encouraging, with futures traders not buying the BS that the economy only shank at a 1% pace, since the surge in government spending gave it a phony boost. Since there is no P in government, why is government in GDP? GDP can go as high as the Feds want. All they have to do is spend and have the central bank monetize whatever bonds the market won’t absorb. This chicanery, plus inventory replacement, could bring a slightly positive number in Q3, ironically just as TTM S&P 500 earnings go negative for the first time since they started keeping records in 1936.

I see no reason to change my guess that the end of wave 2 is nigh. I have been thinking since spring that 1050 or September, whichever came first, would be the signal that the top was in. It could be in already, but don’t expect things to drop off a cliff right away. A wave of this magnitude rolls over slowly, with plenty of smaller breaks and rallies before the trend has solidly reversed.

Keep an eye on the credit markets. When fear comes back in earnest, corporate bond spreads will break their relentless slide downward, and short to intermediate term Treasuries, if not the 10-year and 30-year, will signal a renewed flight to safety.

A rerun washout?

Posted on
4

Once again, fasten your seat belts. We still need a washout to set us up for a lasting thaw. Adam at goldversuspaper noticed the striking similarity between the pattern of the last few months with that of the 1937-1938 “second dip” crash in the Great Depression:

At first I did a double take and thought I was looking at recent history (with a projection of the next few months).

Just read his post for all of the technical reasons for this prognosis. He does a great job covering them. Basically, we are looking for a bottom of the wave 1 of C that started in July or October 2007. This should be the largest bottom to date in the bear market, yet we have not yet had the panic conditions necessary to scare away the premature bottom feeders and permabulls. Watch the volatility index (VIX) and the put/call ratio. When they spike, we are nearing an important bottom.

My candidate for the meaningless but newsworthy explaination/catalyst for this phase of panic is the trouble that western european banks have created for themselves with eastern european debt. I actually just returned from a visit to Kiev this week, where all of the restaurants and cafes suddenly became empty just a few weeks ago. Steel production is down by half this year, and apartment prices are down by 40% in just six months. Things have come to a standstill, the people are talking about revolution, and there is even the fear of another major war, but all is still calm for now. As elsewhere in eastern europe, the currency has crashed, but the housing, auto and credit card debt is denominated in euros or swiss francs. Ugly.

**Note: This post originaly stated that housing prices and steel production were each down by 2/3. A friend in the Ukraine sent me references for the revised figures.

Ahh, panic is back.

Posted on
12

Everything that was hot, all of a sudden is not.

For the past nine trading days, we’ve seen a rapid return of the kind of fear we experienced last fall. The carry-trade currencies (dollars and yen) and Treasuries have appreciated against everything else: stocks, the former bubble currencies (GBP, EUR, JPY, CAD, AUD, etc) gold, oil, grains and metals.

Today’s action was particularly convincing because of the breadth and extension of the equity sell-off, coincident with the VIX cracking 50, gold nearing 800 (a one-month low), and the 30-year Treasury yield pushing strongly back down to 2.9%. This across the board unwinding and preference for senior currencies and Treasuries is exactly what wave 3 of the crash looked like from September to November.

That’s all, folks.

I think we have seen all the bounce (Elliott wave 4) we are going to get off of the November 21 lows (Dow 7392). Too many bulls and bears alike were expecting a repeat of the November 1929 to April 1930 post-crash rally. Perhaps that rally was more powerful because it corrected a more oversold short-term condition, a 48% drop in 10 weeks that came right off the very peak of the preceding bull market. Animal spirits were still strong that winter, while the memories of rebounds and new highs were still fresh in traders’ minds. This time around, our rally only needed to correct a 35% drop over three months (Dow ~11,500 in August to Dow 7400 by Thanksgiving), while the underlying economic situation and social mood were in a more advanced stage of depression (at least a year into the economic contraction and two years into the housing bust).

The weakness of this post-crash rally is also another indication that we are in a larger degree decline than the depression of the ’30s, indeed a Greater Depression, as befits the aftermath of the largest credit bubble in all of history.

Targets and strategy.

At any rate, this plunge looks ready to take us much lower, probably well below 7000 on the Dow. I also hope that oil gets dragged to $25 and gold to near $600, where I will be a buyer of each for the multi-month corrective rally that should follow, prior to yet lower lows in equities (Dow 3000?) and mood.

I’m still holding many of my REIT, S&P 500, and miscellaneous stock puts from before the crash, and I intend to sell into the plunge just like the last time. If we bounce from here in the next few days, I’ll perhaps pick up some near-term puts for some extra oomph.

A bleak, bleak year ahead.

2009 will be the first time that it feels like a Depression to most people. Only about three million jobs were lost in 2008, and the crash came at the end, so most people have still been in denial about the severity of this event, or have yet to lose their faith in the Fed or the change in the White House. As stocks sink through their 2002 lows, house prices drop even faster, entire malls start to close, and huge waves of layoffs begin, the social mood will get dark and increasingly volatile.

What a close. Down 473 points in 15 minutes.

Posted on
1

I have built up a position in DIA Nov. 08 puts on rallies over the past couple of weeks, and with the Dow up 300 at 3:30 today, I couldn’t resist adding a few more than I would ordinarily be comfortable with. I intended to part with the extra contracts maybe tomorrow or the next day in the inevitable correction after such an awesome rally (1,208 points, 14.8%). As it turned out, the Dow proceeded to drop 473 points in about 15 minutes, and I unloaded the contracts at the close for the fastest money I’ve ever made (as regular readers know, I’m more fond of buying LEAPs to capture the big, multi-month moves).

From Bigcharts.com, here’s the 1-day chart (1 minute):

Click image for sharper view.

As I count the Elliott Waves, this pattern has the A-B-C shape characteristic of a countertrend move, so it doesn’t change my expectation for new index lows in the coming days or couple of weeks. The mini-crash at the close looks like waves 1, 2, 3 and 4 of an impulse wave, which would resolve with another drop below the wave 4 low near the open tomorrow. Impulse waves move in the direction of the one-larger degree trend, as opposed to A-B-C moves.

Today’s chart also illustrates another textbook pattern: the contracting zig-zag from 2:40 to 3:15 resolved in the direction of the previous trend — up, way up. The 1-month pattern is still a very large contracting zig-zag, which, should it stay true to form, would resolve downwards, perhaps to Dow 7000, though a push above the October 14th high first is also possible:

Click for sharper view.

All of this near-term wave counting and trading is really just a hobby for me. I don’t use big money in it, but just enough to keep my attention so that I learn something. My real money is in T-bills, gold and still a boatload of 2010 puts that I accumulated over the last 15 months (see disclaimer), though I have been paring that position in the crash. If I hadn’t been selling, it would be about 85% of my portfolio by now.

–

Sorry for the paucity of posts lately. I’m in the middle of a trans-oceanic move, ditching a ridiculous Latin American country for a central European one known for staying sane while the rest of the world goes nuts.

A massive rally is straight out of the 1929 playbook.

Posted on
1

Below is a table of highs, lows and closes from October 23rd to November 14th, 1929, courtesy of Yahoo!. (Unfortunately, their date function is stuck in 1969, so you have to count up from the bottom.)

Key dates:

  • September 2nd. Pre-crash high water mark: Dow 381.
  • October 25th, Black Thursday. From the previous close of 305, down 11% in early trading, a swing into the black, and a close down 2%. (eerily similar to last Friday).
  • October 28th, Black Monday. Down 14.7% intraday, 13.5% at the close.
  • October 29th, Black Tuesday. Down 18.5% intraday, 11.7% at the close.
  • October 30th and 31st: Huge two-day rally, 19%.
  • November 13th: Bottom for 1929: Dow closed at 198, down 48% in 10 weeks. It then rallied to 294 by late April, before declining to 41 by July 5, 1932.

Here’s a visual aid (wider time frame):

Source: sharelynx.com

Look at the rally from the 29th, Black Tuesday, to the 31st: 19% by closing values, and 33% intraday. So far in the Panic of ’08, we are up 11% from the close and 21% intraday from last (Black) Friday.

The rally in ’29 was a wave four bounce within wave three, and it failed spectacularly. I’m not saying this wave four of three bounce will end in exactly the same way, but I think we have yet to see the lows for this fall: