Wednesday, August 05, 2009

Critical mass


The chart above is a weekly SPX chart with Fibonacci retracement levels applied. With the market rally of the past few days, prices have now retraced a Fibonacci 38% of the previous 17 month decline.

This observation along with the most bullish reading in sentiment among S&P traders (88%) since the beginning of the steep decline in October of 2007 convinced Robert Prechter to send out his monthly Elliott Wave Theorist a week and a half early today. After standing aside since covering his Short position on February 27th, 10 days before the absolute bottom of the decline, he is going back in Short.

Does this mean we are there, at the end of the summer rally and at the beginning of a merciless decline in the market?

Maybe.

As Prechter points out, prices are only at the minimum levels for a normal retracement and could go higher. But he figures it will be easier to get Short early, then get Short late. He also cautions that "getting paid" may be problematic in a Wave 3 down. That is to say that,

"....when banks go under and brokers' computers get overwhelmed with orders, as they will, formerly reliable presumptions about getting paid will no longer be warranted."
It's worth subscribing to Prechter's newsletter, just to read the gory details:

NEW ELLIOTT WAVE THEORIST | Due to specific markets entering critical ranges, Robert Prechter has issued his August 2009 Elliott Wave Theorist a week and a half early. A brand-new issue of The Elliott Wave Financial Forecast was just released Friday. With U.S. markets potentially poised for major moves, this is a perfect time to subscribe risk-free to our two most popular U.S. market letters. Subscribe now, and you'll get the 7 latest issues for just $29 total.
You can click on any of the Elliott Wave International banner ads to the right or on the bottom of this page to get taken directly to their subscription site.

Remember, this is a game of probabilities and for weeks now, the probabilities have been building for the beginning of the next leg down. These probabilities may very well be hitting critical mass this week.



A

39 comments:

Anonymous said...

there you go again pushing people to go short. Like the tobacco companies that say no, they never forced people to smoke, but they put out advertisements making it look cool or whatever...know what I mean? Regardless, another bunch of people are gonna lose their money going short cause of you.

Anonymous said...

Hey, he calls 'em as he sees 'em. Everyone should make his own decisions after calling his broker for advice on what to do.

- cramar

Anonymous said...

Serge: Very little chance for OPM and CVM..Sorry

Anonymous said...

Is that how real life works? If so, then why are people with lung cancer able to sue tobacco companies and win?

Anonymous said...

he only wants to read stuff

that reinforces his negative

outlook. the indian guru was really

scrapping the bottom.

Allan said...

I've been letting trough the comments that seem to disagree with my blog on critical mass, but that's all they do. Don't any of you naysayers have a reason why my analysis is faulty, or maybe an argument for the bullish case? It's easy to disagree with me, or anyone for that matter, a little bit harder to make your case for that disagreement.

Oh yea, one more thing, I use my real name and contact information, in part because I'm proud of my work and analysis, don't hide behind the anonymous veil. If you have something to say, say it with the conviction of signing your name to it, adds some semblance of credibility to your statements, if that's what you call them.

Anonymous said...

Allan, Thank You for all the information you give us.
Thank for your comments about Prechter. I like he.

Go short is a decision mine, only mine, and only I would guilty if I loss my money.

Thank you all again for your comment and your web.

From Spain.

Tom D said...

Today was the most bullish day for market-based stock market sentiment in 15 months. I was getting doubtful yesterday on the full moon fest at All Allan, but "they" blew it away on a go-nowhere day today.

It's rare for both Prechter and Neely to be wrong at the same time as has been the case recently, but Mr N has gone flat and expects higher while Mr P went short.

The shorts and sideliners are starting to get forced in, but it's got a while to go before it's done.

Allan said...

I can't entirely= disagree with you Tom, since this rally, whether it be a Wave 4 or a large B wave, can still go higher without invalidating the bearish case. Typical retracements are between 38 and 50 and 62% and prices are only not at the 38% level. If prices ascend already to 62%, the DJIA will be about 11,300.

But as I explained in the post tonight, Jake Bernsteins Daily Sentiment Index is at 88%, levels that in the past have market the end of an up leg and beginning of a down leg of primary degrees.

In addition, this scope of degree, one larger then occurred in the 1930's, has not been experienced in my lifetime, or yours. Unlike Precther, I am not going to short until my shorter-term stuff says prices are in a down leg. But I will short and short heavily at that point.

If this analysis is right, and neither you nor I can know that in advance, this will be one of the very best trading opportunities of our lifetimes. I am not going to miss it.

Tom D said...

Yup, no one can really know where the markets are going unless they are the ones that make them go there. Even then "they" must have sleepless night once in a while.

We've all been bruised at least mentally if not also financially by the events of the past two years. That takes a toll on our judgement in many things. I scare easily which saved my aXX in 2008 and this year so far, but I sense the tide is turning. As they say, "buy a ticket and see the show".

Anonymous said...

http://finance.yahoo.com/news/Is-This-Rally-Out-of-Sync-etfguide-2678982285.html?x=0

enjoy!
Ron

Richard168 said...

Allan, I really enjoy your site and thanks for sharing both Prechter and Neely's thoughts with us. I happen to be a subscriber to bother their newsletter as well. No matter whether both gurus are correct in their predictions and/or timing, the chart pattern and the technical indicators right now are pointing to a potential top (interim or the entire counter trend rally). This needs to be confirmed by breaking key support levels. For sure, this is the time that we should all be on-guard... Market crashes will typically come with little or no warning! Cheers, Richard

j k said...

Allan, props to you, your site and your opinions. Creative thinking needs time, effort and imagination. Criticism without reflection or substantiation is its polar opposite. I appreciate all your efforts to help others become better traders, a noble and thankless task - but appreciated by many. Personally, I think that sentiment requires a pullback here to embolden the bears and scare the crap out of the bulls (930-900) - then a move higher (1050-1100 depending on its speed) or at least a retest - then a fall into the fall (late Sept- early Oct.) to 825-800(50% of entire move)before a poss resumption of liquidity driven rally. Now remember, I don't know anything and am still a student of the markets... living in a van, down by the river.. (besides, I am a Blackhawks fan - strike 3)

met61 said...

Allan,you stated that the potential for a great opportunity shorting may lie ahead.Can you discuss what shorting strategies you will employ?
Thanks,Ron Rascati

Allan said...

met61:

A combination of leveraged and unleveraged ETF's, i.e. SPY, SDS, QQQQ, QID, DIA, DXD. At times I will add options on SPY and QQQQ and at times I will play the 3X leveraged TZA on the Russell 2000 index.

Anonymous said...

Allan
any stop loss preferred for remaining flu basket opk cvm?
serge

Allan said...

Serge, if you're asking, you should exit.

I don't mean to mean to be flip at all, but those two are not working as expected, so I would (and did a few minutes ago) exit and wait for next trading opportunity.

Anonymous said...

what's critical about this mass is how bad you're gonna look when the market rockets upward again after this lull. You'll get your big drop in the market.....when the next crisis caused by greedy mofo wallstreet aholes hits.

Bob Carver said...

Allan,

Just wanted to mention that leveraged ETFs underperform their bogeys by a huge amount. They should only be used for short term trading and not for long term positions at all. Prechter said something similar in this month's letter.

Allan said...

Bob,

You're right, they are not for B&H positions.

Leveraged ETF's are ok for use as day-trades, but not for overnight holding. For that, either short the indexes or individual stocks, or put options for very short-term B&H.

Anonymous said...

Is this true for both 2x and 3x or specifically in reference to the 3x ETFs?

Anonymous said...

Allan,

You mentioned to exit out of the "flu" stocks, does that include NVAX? Or would you be a buyer right now?

Thanks,
Ron

Anonymous said...

Here's my forecast....tomorrow, shorts are gonna get their balls busted again. Thanks Alan!

The Sound Center said...

The Return of The Anonymi.

Thank you, Allan. I appreciate it.

Hedged, with a -0.53 delta.

Anonymous said...

"A combination of leveraged and unleveraged ETF's, i.e. SPY, SDS, QQQQ, QID, DIA, DXD. At times I will add options on SPY and QQQQ and at times I will play the 3X leveraged TZA on the Russell 2000 index."

Surprised not to see FAZ among above

Serge

Allan said...

Serge:

FAZ is a sector specific ETF, I was listing general market ETF's.

Along with FAZ, I would add ERY and SRS, when the time is right, all will appreciate commensurate with their respective sector declines.

Anonymous said...

SPX touched 1015.31 this morning, is this it ???

Anonymous said...

now 1017.95

Anonymous said...

Allan:

Is there a violation tolerance of the fibonacci 38.2% that allows one to speculate that breaking 1014 was major and we should cover our short at 1014.

Allan said...

No. This rally wave can end just as easily at 40%. Shorting weakness might be best way to play it from here, rather then trying to pick a top.

Anonymous said...

If you use Renko to trigger you switch from TNA to TZA, why should it matter if you hold them for 1 day, 10 days, or 45? If the trend is this strong, you bag enormous profit by keeping good stops and profiting. This move from 869 has bagged a killer profit on TNA. If you are a daytrader may be you can move in and out, but for a working trader, this should be ok. Is my logic so off right now. Didn't you post a renko/3pt break example on TNA/TZA and using the renko to indicate buy on week, sell on daily?

Tom D said...

Fwiw today was also a tide turn day and the fibo noted above.

Personally I still think market-based sentiment, as opposed to polls and anecdotal insanity, isn't exuberant enough for a major rally top. But.....we did have two decent exuberant days this week, so maybe it's finnally kicking in.

If that's true then it almost certainly has further to go. One or two days of exuberance doesn't make a major top. So this week has bolstered the bull case in that sense.

In turn that leads to the possibilty that there will be no bigtime top. "They" have been pretty good at preventing too much exuberance so far, doubtless while "they" are loading up. Exuberance is for the chumps they need to recruit to buy at the top. (I am using "they" as shorthand for all the mechanisms at work.) If that continues then we may actually have a real bull market and not just a routine bear market rally. This is how sentiment works. As Don Wollie says, "think like a criminal" if you want to succeed in the market.

Mind you, I keep wanting to short this sucker too 'cause it's good to sell high after a run. But I'm too scared to short this sneaky market with no real exuberance yet.

TD

ZenDog said...

Dow 10,000????

Anonymous said...

I can't argue with the analysis of the wave 3 down scenario as stated by Prechter, but I agree with Tom D., there just are not enough bulls yet for the big drop we are discussing. I wish it would, so we could get on with our economy, but the death throes of the world's greatest economy, and the reserve currency, are not likely to end swiftly and mercifully.

The problem here is timing a very rare event. Prechter's customers demand that he predict, but he must be well aware of his predicament. If he pulls a repeat of the 90's, and is left standing in the pumpkin patch waiting for the Great Pumpkin while everyone else is out trick o treating in the markets, then he goes down in history as a blockhead.

In a field of technical analysis which is based on historical data like Elliot Wave, how can we trust that EW has enough historical examples to reliably account for these big super bears? There are only one or two a century and EW already has a large number of alternate wave counts as it is. How could EW theory be adequately tested with so few events to test? There could be a few specialized wave counts yet to be discovered for events like these.

Additionally, the meddling of the government in this economy would even make Roosevelt blush. What if there is an Obama wave count? Hey, everybody wanted change, there you go, things have changed.

Permabulls and market pundits are vicious little vermin. They will rip Prechter apart for heresy against their religion if he is even a little off on his timing.

Smiddywesson

Anonymous said...

you guys are all silly ...

you guys should be like Allan, trade the chart, not the prediction !!!

Allan said...

Do sentiment measures that were developed in bull markets, Grand Supercycle Bull Markets as the one western civilization has been in for the pst 200 years, work the same once those bull markets end? It is a leap of faith to assume they do.

My premise is that things are different now, what worked in the past has to prove itself before we can assume it works now. The hook that could cause most to miss the trade of a lifetime could very well be the non-confirmation of traditional sentiment measurements.

Is that thinking like a criminal enough?

Anonymous said...

Re: on CVM...

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=240336&t=01005698258648988900

Anonymous said...

Allan
Have you taken any short positions?
Thanks

Allan said...

No, haven't taken any short positions yet, other then day-trades as per my short-term models.