It’s been quite a time since my last post.  The real reason is that I was out of the rhythm and beat of the markets since covering a multi-year short bet in March.  I didn’t have the force of character at the time to flip long, at an incredible opportunity cost to my trading account.  The lack of clean pullback from the March 2009 lows has provided very few good entry points.

I have also come to realize the futility in relying on other trader’s calls – most notably Doug Kass’.  I am relying much more on my own insights going forward, with links noted wherever possible to relevant market insights.

The markets are experiencing the second day of pullbacks from multi-month highs.  In particular, the structure of the S&P 500 suggest the possibility of a completed 5-wave series given the near-perfect Fibonacci ratios between successive waves.

Thanks to scooter for posting this updated AdvancedGET daily chart of the S&P 500 futures.  There is a rather large make-or-break (MOB) zone at the 980 – 1,000 century mark.  This target level was originally called in the Advanced GET blog postings starting on July 16.  At that time, the Elliott wave count was putting in an intermediate term wave 4 low.

Once again, we are looking for signals of an ending 5-wave count and trend change.  This should be accompanied by a clear divergences of prices vs. momentum – higher prices, lower momentum compared with the previous wave 3 highs.

This is a follow-up to the March 10 wolfewave setup in the financials.  They are now at target levels after a remarkable week.  Technically, this is the first solid lift above the daily 20 exponential moving average.

US Dollar index update – the setup which was first flagged on March 3 as the dollar was retesting its 2008 spike highs has indeed produced a clean pullback.  It is now approaching target levels – and as expected, dollar-denominated equities / stocks / commodities have lifted nicely in response to movements in the foreign exchange markets.  With the Fed action expected today, I believe that the target levels will be met around 85-86.  In the larger context, this will be an inverse head & shoulders pattern in the making.  A day to book profits in short dollar positions (long EUR AUD) after the Fed announcement in any late surge.

7:00pm update – Wow.  The Fed announcement that they would be buying up to $300 billion in long-term goverment bonds sends the dolllar into a hard tail spin, ending much lower than the projected wolfewave target.  At this juncture, it has pulled back exactly 59% of the previous swing high on the daily chart.  Interestingly enough, this is the same percentage at which the swing low was recorded on the weekly chart in mid-December retracement.

A follow-up to the March 12 setup – markets have now retraced to the January spike lows around 800.  The Advanced GET software is suggesting that a 5-wave advance has completed on the hourly charts.

The S&P has completed a 50% retrace of the previous leg down from the February highs.  This is the same retracement that defined Elliott waves 1-2, and has also completed a channel measurement before yesterday’s rally fizzled.  Are the markets now poised for the final chapter – fifth of 5 of (5)?

12:45pm – A push to retrace into the Brach zone (62-78% Fibonacci levels).  Is this a possible B wave high in an a-b-c sequence?  The overlapping structure on the 5 minute chart is giving a head’s up signal that price action could stall at these levels.

9:00pm update – Markets have continued to lift thoughout the day, calling into question the Elliott wave count.  It may well be that the ‘dancing with the devil‘ 666 level sets a low-water mark and would be labelled wave 5 lows.  This would also confirm the count and make-or-break levels as provided by the Advanced GET folks in the March 10 blog entry.

12:10pm – A 5-wave advance on the hourly chart nears target levels.

Hourly chart approaches the key pivot of 742 – the November 2008 spike low mark.

These are charts posted yesterday by the Advanced GET traders indicating that the counter-trend rally was imminent.  This software program has a very sophisticated method of interpreting market structure and ordering it according to Elliott wave principals.  The cyan/magenta line is considered a ‘make-or-break’ (MOB) level at which we are to watch for a reversal sequence, especially if a 5-wave sequence has completed as shown below.

“This week could offer us some hope in a very dark market place. Last week, the Dow reached its MOB on the Daily low, setting up a counter trend BUY on the Daily chart. The S&P and the NASDAQ both had more room to go before encountering support. On Friday, the S&P finally made its mark, coming down on the MOB right at the first time objective. Thus, two of the major market indexes are now set up for a counter trend buy on the daily charts. The NASDAQ has been the strongest of the majors, still having yet to make a lower low than we had back in November. I think we have enough at this time to make a play for a possible SHORT-term rally.” — Episode 1, A New Hope

Here is the hourly chart showing a similar reversal sequence taking shape:

Today’s result –  NOTE: The historical track record of Friday bottoms hasn’t been very good. And based on the past 21 bear market lows, dating all the way back to 1929, there have been only two occurrences on Fridays, while twelve have occurred on Tuesday or Thursday. The most likely day for a climactic bottom is a Thursday in either October or March (44% probability).

Markets often have a way of consolidating at the 1/2 way mark of a swing in price action.  It is the very basis of a measured move setup (aka bull flag or bear flag).  The structure is an impulse followed by a shallow counter-trend movement (the flag or a-b-c retrace) before resuming the directional movement.  Here is one of rin’s charts outlining a downside target on the 45min timeframe.  Notice the unfilled gaps which are a confirmation of the trend direction.

As far as the Elliott wave count is concerned, we have not reached an intermediate wave 3 low.  The numbering which I presented in the previous post needs revision, and in this context, we use Fibonacci projections to determine some time of price level at which the markets may produce the next consolidation sequence.  There is a nice confluence of measured move target and 162% extension of wave 1-2 around 650 in the S&P.  Another number which is often bantered around is 600 – the eventual wave 5 of (5) downside target comes into play and would create a perfect Elliott wave structure where wave 1 price impuse is equal to wave 5.

3:30pm update – A third measured move is completed in this week – futures are testing the 666 devil pivot.

4:05 pm update – Amazing how numbers like 666 can ignite a fire.  Obviously the media headlines are a bit behind, since the move happened in the last 30 minutes of market action.

Back on November 26, 2008 I posted a weekly chart of the S&P 500 showing the Elliott wave count.  At that time, a PTI (profit taking index) used to measure the strength of the decline suggested that we would revisit the lows at a future juncture.  Well, here we are retesting the November spike lows.

The markets are at a critical juncture, since a trend termination often leads to a rip-roaring move in the opposite direction as either too many bulls or bears are caught on the wrong side of the price action.  This is what happens when a 5-wave count completes.  We already witnessed this phenomenon following the November lows, and are very close to another cycle of whipsaw action.  Based on the previous weekly count, I have now updated the daily chart with wave (4) highs and now the final countdown is in progress to the wave 5 of (5) to complete the downtrend since the 2007 highs.

Looking at a more finer granularity, the hourly chart is suggesting that wave 3 on the daily may be in place.  If so, we can expect a rather quick lift back into the mid- to high-700′s before the final retest of lows.  At that juncture, a rally lasting more than a few days will be possible.  Shorting the pops becomes an ever-more-dangerous trading stance and becomes now more of a game of looking for good entry points on long positions.

What type of signals do we look for to guide our trading stance?  The final fifth wave is one which will be marked by divergences in price action versus momentum and breadth indicators.  Some of the popular measures are the advance-decline ratio, the p&f bullish percent, or even the McClellan Oscillator shown below.

What a contradiction. Aren’t artists supposed to paint what they see, and not the other way around? That question is put to the test in William Morrow’s “Parallel Visions in Space, Time, and Light“. In fact, the author argues that artists’ visions and expressions often proceed the actual advances in science. The primordial soup of metaphors and unanswered questions expresses a zen riddle to the scientist, almost daring them to discover the hidden truth. These same messages serve as both inspiration and as challenge. Just how many Trekkies marveled as captain Kirk flipped open his communicator device and uttered the prophetic words ‘Beam me up, Scotty”. Today we walk around with blinking Bluetooth ear buds and rationalize that the phone is a fashion accessory. Blackberry users actually call it an addiction. Can we argue that the modern art movement with its stark canvases, random color washes, and quizzical twisting sculptures proceeded and gave way to discoveries in astrophysics, quantum theory, and the existence of black holes? Does life imitate art?

Foreign exchange traders will focus on BoE interest rate decision, and associated currency gyrations.

But don’t be fooled by the radio
The TV or the magazines
They show you photographs of how your life should be
But they’re just someone else’s fantasy

- “The Grand Illusion” (Dennis DeYoung)

Now that Halloween has passed in the United States, it seems appropriate to reexamine the continual battle of perception versus reality as portrayed in Styx’s landmark album. Running the gamut from inspirational anthems to somber ballads, the songs reminds us of our childish innocence, adulthood struggles, but most importantly offers hope for the future. At the same time, it warns us of the forces which attempt to both control and guide our lives. Interesting similarities have even been drawn between the song ‘Castle Walls’ and the film sound track in John Carpenter’s seminal horror film ‘Halloween’. Is it any coincidence that in Greek mythology the ‘River Styx‘ formed the boundary between Earth and the Underworld? Perhaps we are witnessing a similar battle as America faces its divisive election next week. At the same time, it offers us the opportunity of rebirth and regeneration.

You’re probably asking yourself what this has to do with trading or the markets. A lot, in particular if you believe in Elliott Wave Theory. Astute traders will look for trend changes (valleys or peaks in popularity) as evidenced by signals in the media. The first time I had the opportunity to really put this into practice came in the 2001 decline. When popular consensus becomes so strong that it results in front page news or magazine covers, astute observers will instead consider this a signal that a massive trend change is about to occur. This happens both at market tops and market bottoms. On March 22, 2001, several magazines (Newsweek, USNews, and Time) all prominently featured a bear cover right as the markets completed a wave 5 lower impulse. The intermediate term trend was dead, although the worst of the recession and decline was far from over, it produced a very tradeable rally.

Another example is the recent housing crisis. The real clincher was on February 19, 2007 when Fortune Magazine begged the question “What’s your House Really Worth?“. A picture of multi-million dollar waterfront homes was proudly displayed and encouraging the public to flock to zillow.com and play voyeur on everyone else’s real estate holdings. In terms of the current market juncture, isn’t it poetic that Barron’s magazine release on October 27, 2008 featured a bear with chainsaw? At my local supermarket, stacks sat on the shelves as nobody dared to pick up and buy this reality check. Markets have since rebounded from 15-20% in a period of five days. Big thumbs up for the market and next week’s edition – that last one was our Halloween edition, right?

Not that there’s too much in a name, but my favorite Australian rock bank ‘Rogue Traders‘ announced that they officially dissolved on June 25, 2008. At almost the same precise time, the Aussie dollar took a plunge from precipitous heights as risk-averse investors pulled funds from Down Under ten times faster than they had done for past seven years. ‘Voodoo Child’ started their careers (sampled from Elvis Costello’s ‘Pump it Up’), and was even featured prominently in the 2007 “Dr. Who” episode during the climatic final scene as cannisters are dropped and the Master sets his plan into motion. Often I have wondered just how much ‘Way To Go’ expresses a commentary on the modern foreign exchange traders and lyrics inspired by the likes of CNBC. Although the songs chronicled the stormy relationship between lead singer Natalie Bassingthwaighte and band member Cameron McGlinchey, it also reflected investors love and hate relationship with the Aussie dollar, and traders will find truisms peppered throughout their lyrics. Never mind this is where most of the carry trade money congregated earning 7.5% interest while shorting the yen.