As you know I use Elliot Wave only as a general guideline to where markets are in their respective cycles.
While Elliot Wave is without a doubt one of the hardest techniques to master on a full time basis, it offers traders like us the best way of seeing where we should be in the current cycle.
With that in mind, the analysis of the market structure confirms to a tee exactly what our technical models are telling us. The market is at or very very close to a major low and a strong rally is eminent.
The rally we should get in here is going to tell us alot about the character of this market.
Do not expect the market to take off and never look back as the first move off the lows will probably be sharp and quick, but it will be tested back to the lows before the major rally begins.
This analysis simply confirms the fact that the market is in a buying area right now, not an area to unload your positions.
Take a look at the chart as it fits very nicely with everything we are currently seeing in the markets.
Imagine a place where you can type in any stock symbol you want and it will search for the highest correlation of stock prices over the last 65 days. It is quite incredible and such a time saver it is unreal.
The best part about all of this is that the correlation feature is but a fraction of the power the site holds. I won't go into details as it would take me quite a while, but I will tell you that they offer a one month trial subscription at no charge.
I encourage you to check it out as I am sure you will agree as I did as to how you ever got along without it.
THERE ARE SOME EXTENSIVE OPPORTUNITIES IN THE COMMODITIES MARKETS RIGHT NOW AND MOST LOOK LIKE THEY WILL BE VERY SIZEABLE MOVES.
TAKE A LOOK AT SOME OF THEM BELOW AND YOU DECIDE WHICH HAS THE MOST POTENTIAL.
*********************************************************************************** The 30 year bond is tracing out a bearish wedge on two time frames and has a small negative divergence to contend with.
We will know very shortly if a short trade will be put on the table with a break of the bearish wedge pattern.
This may coincide with a move out of the safety of bonds back into stocks, but we will trade these as they come our way and confirm accordingly.
Have the Hogs finally bottomed?
We will know for sure once we see the stochastics cross 45.
I am not going to take my chances with buying at the cross of 20 as I have been faked out twice
on the hogs and I don't intend on repeating for a third time.
Sugar finally made the move to the upside we had been looking for 6 months ago, but we did not get aboard this one.
There is still some potential for a short trade on sugar as we have a 50% retracement completed and a sell on the stochastics.
Large short positions by the commercials as well as large long positions by the funds and small traders spells the potential for a fairly decent decline much like cotton and lumber.
Sugar may be a little more difficult to trade however as it has been very volatile with this blow off move. Sugar has already crossed the 80 level on the stochastics twice and looks to move down again, so do not execute your trade on the short side until the daily stochastics cross with conviction which looks to be very soon.
We remain short March cotton with an average price of 71 1/2 so we are sitting a little behind the 8 ball on this one, but it looks like it is about to break to the downside, especially with the negative divergence on the stochastics and its failure to reach the 85 level.
Much like Lumber we have the commercial traders heavily short and the Funds and Small traders heavily long. A very nice set up for lower prices.
Our stop loss is a bit wider than we like, but the potential of this trade seems to be worth the extra risk with a wider stop.
Lumber has made a two day bullish pattern and once we see the slow stochastics cross 20 we will have a trigger to go long.
The commercial traders are very heavily long and funds and small traders are extremely short.
This is a classic set-up for a very nice rally.
We still need to wait for the trigger however and once that is accomplished and we enter on the long side we need to enter our protective stop loss order.
Considering the current state of the equity markets, the comment for this weekend is going to be quite extensive and in a nutshell will show why the odds remain very low that we are entering into a bear market and also why this is a superb time to add to your long term positions.
There is no doubt that the market has some serious technical hurdles to clear before we can really begin to get fully invested (40% allocated currently), the data I am getting not only from standard models but also from my own created models shows clear evidence that the current market correction is offering opportunity.
It is at times like these, that no matter how difficult it may seem, the environment is right for searching out equities that have been hammered and still remain strong viable companies that simply have gotten out of sync with their values.
THIS MODEL IS BULLISH AND WILL BECOME ULTRA BULLISH UPON TURNING UP
********************************************************************************* Below is a chart of the NYSE short interest ratio and represents the sentiment on the floor.
Typically I am not a very avid follower of this model as it is very fickle and hard to correlate.
However, when you see any model that does the things this model has done over the last 7 months you have to take notice.
Like I said before, this is a sentiment gauge and the absolute level is not nearly as important as the velocity at which it moves. This velocity tells us exactly how nervous traders are on the floor and high velocity certainly has dictated a climax in market movements before and this is how we are reading it this time.
Simply everyone is jumping on the short side of the market and we know what that means.
This model is Bullish.
Here is one of my inventions and a model that has been simply spectacular at pinpointing major turning points in the market.
This is another fear measurment and you can plainly see that the levels it has reached have been very indicative of a market at or very very close to a major low.
This Model Is Bullish
Below is the McCellan Oscillator which is a measurment of pressure either up or down.
You expect this model to make new lows as the market makes new lows and if it fails to do this, it creates a positive divergence.
There is also a McCellan Summation Index that puts this oscillator into a trending formation and this model also is not confirming the current lows.
Both of these Models Are Bullish
Below is a model that all of you have seen me use over and over again.
This is about as close as you will get to an intermediate term Holy Grail Model.
Currently we are waiting for it to turn up to signal the all clear to purchase equities hand over fist, especially with how deeply oversold it has become.
This Model Is Bearish Until It Turns Up
This past week I had posted the chart of the VIX with the wedge on it.
I had talked about what this was going to tell us once it broke either way.
Now it has broken, but is behaving like it may become a breakout failure which actually would be more bullish then had it simply worked lower and broke out to the downside.
However, we have to call a spade a spade and until this breaks back into the wedge and signals failure the VIX remains a negative.
For those of you who purchased the AMD April 7.00 Calls, you have a tidy profit and I am making the suggestion that you take that profit by the close today or the open on Monday.
The model calls for a small pullback of 2-3%, but that will be enough of a pullback probably to push the options back under 85 cents. We can always buy them back at that time. There shoulkd be a contraction in premium as this pullback is slated to take 3-5 days.
The action today brings the market right down into our maximum risk zone, an area that from a probability standpoint offers the best chance of being a major low.
Given the market action over the last few weeks you can see why we were hedged for 2/3 of the decline and moved to only a 40% allocation equities after we saw some stabilizing influences.
Looking at how the market has been acting, especially over the last 6 days, there is an apparent air of panic among not only the retail side of the tape, but the institutional side as well. While on the surface this may seem like a bearish thing, it actually is very bullish. The enormous amount of volume we have seen in that time frame as well smells of capitulation.
I am not saying that all is well on the equity front as the market still has much to accomplish to turn the current bearish trend around. What I am saying is that the current downward spiral in prices should be very near completion as most of the selling looks to have been completed.
Sentiment is another feature we have touched on recently and we will touch on this again.
As of today, the bullish sentiment hit its lowest levels in over 10 years sitting at 19.5% bullish. This makes over 80% of the market participants in the bearish camp and all of them positioned for further weakness in the markets. This is one of the reasons that sentiment indicators like this work so well, as once the vast majority of players are positioned on one side or the other there is no longer a driving force to push prices in their favor any longer.
While I continue to remain cautious and the equity allocation reflects just that, I also remain on the lookout for bargains and opportunities for the time this market finally turns around.
Remember, when you look at the market and your positions and you feel like you are going to puke, it is either time to add to those positions or know that the market is about to shift trends.
Here is a fairly high probability play that could really score some big returns on call options and all over a period of 3-5 days!
Below is the pattern we have been following on MENT and as you can see tomorrow we have a reversal day scheduled. These turning points are +or- 1 day so it could also come Friday.
Either way, if you see this pattern form on the daily chart of MENT then you have a fairly good idea what is right around the corner..... A quick and sharp 3 day rally that should expand the option premiums with a vengeance.
When I get the green light I will be purchasing the February 10.00 calls which currently are valued at .47 and trade right about there.
Here is the current chart of MENT, so you can see the correlation of the stock prices.
The action in AMD was just what was needed to keep the model on track. If you recall we needed a very sharp rally day either yesterday or today and we got it today.
This keeps AMD on course for another 10-12% before a meaningful correction. The April 7.00 calls closed at 1.01. Our cost basis is .53 so we almost have a double. Feel free to move your stop up on the options to protect some of your profits.
The airline index continues to buck the trend of the general market and the probability model calls for another 5 days straight of higher prices for this index. Currently we are sitting on a 60% gain on the call options so if you want to lock in half of that gain you can as I don't see the options giving up that much real estate even intra-day.
We continue to monitor what we refer to as the intermediate term holy grail as this baby has caught just about every intermediate term turn in the market.
If I could have only one timing tool forever, this would be it. I am actually working on a shorter term version in order to use it for short term trading, but the process has been very time consuming.
You will be alerted when this turns up.
The market made some positive progress today by forming a candle that shows an attempt at stability and trend change.
To finish this pattern, Thursday will have to be a decent up day and the lows of today cannot be violated. If tomorrow can put that together then it may well be time to bump the equity exposure up a bit more than the current 40%.
The probability model gives a 75% to Thursday being a fairly sharp rally day.
Caution is still the word of the day, but these seems to be some light at the end of the tunnel.
NOT A VERY PRETTY DAY TODAY AND IT CERTAINLY CONFIRMED MY RESERVATIONS ABOUT THE SHORT TERM THATS FOR SURE.
DOWNSIDE RISK REMAINS 1341-1353 AND A BREAK OF THAT LEVEL WOULD NOT BE HEALTHY FOR THE LONG TERM HEALTH OF THIS MARKET.
ALL OF THE DOW 30 STOCKS CLOSED LOWER TODAY, WHICH BELIEVE IT OR NOT DOES NOT HAPPEN OFTEN. THIS ONE INDICATOR BY ITSELF IS A GREAT INDICATION THAT SHORT TERM SENTIMENT MAY HAVE REACHED A BEARISH PINNACLE.
THIS DOES NOT MEAN THAT WE WILL NOT SEE LOWER PRICES. IT SIMPLY MEANS THAT THE SCENARIO I HAVE BEEN LAYING OUT OF A MARKET VERY CLOSE TO A LOW OF SOME MAJOR SIGNIFICANCE IS VERY CLOSE.
NO QUESTION THAT CAUTION IS THE WORD OF THE DAY, BUT KEEP IN MIND THAT WE SHOULD BE NEARING A MAJOR BUYING POINT AND TO KEEP YOUR POWDER DRY FOR JUST SUCH AN EVENT.
I REMAIN WITH A VERY CONSERVATIVE 40% ALLOCATION TO STOCKS AND UPON A CONFIRMATION OF A MAJOR LOW BEING PUT INTO PLACE I WILL BE MOVING THIS UP QUICKLY EVENTUALLY HITTING 150% IF ALL LOOKS WELL.
THE CONTINUED STRENGTH IN ADVANCING ISSUES OVER DECLINING ISSUES AS THE MARKET CONTINUES LOWER.
THIS IS ONE OF THE REASONS I HAVE YET TO TURN BEARISH ON THE LONGER TERM.
MUCH LIKE THE NYAD, THE M.O. CONTINUES TO SHOW AN UNDERLYING STRENGTH TO THIS MARKET AND UNTIL THIS CHANGES I SEE NO REASON TO PANIC AND THROW IN THE CARDS.
REMAIN CAUTIOUS, BUT CONTINUE TO MONITOR FOR A LOW AS WE SEEM TO BE GETTING VERY CLOSE TO THAT POINT.
THE CHART PRETTY MUCH SAYS IT ALL ABOUT THE CURRENT STATE OF THE EQUITY MARKETS.
The market this morning is not in a bullish light to say the least with the NASDAQ looking to open Down 28 points.
Before we jump off the deep end though, keep an eye on the 2456,2449 and 2441 level for clues as to the possible fallout from eminent lower prices. It is very possible that this may simply be one more shake-out before the market moves higher.
I continue to remain very cautious in here with under a 50% allocation in my Aggressive Equity Trading Accounts. Typically if I were a flat out bull I would be sitting on a 100% to 150% allocation exposure and that is not including the leverage from options.
However, if we begin to violate these support levels, I will not hesitate to go to 100% cash and wait it out. The downside risk from here looks to be limited to 4-6%, but you never know.
These are not the times to have your portfolio dollars on cruise control that is for sure.
Below is the current chart of AMD as it has been following the model very well.
This chart below is the model of price and has a test on it's way with a strong rally day scheduled within the next couple of days, preferably tomorrow.
You can plainly see that the model dictates at least another 25% rally in the stock, so should it pass the test in the next couple of days and you did not get aboard when we first talked about it, then you will be afforded another chance.
THE AIRLINES INDEX MADE A 2% MOVE TODAY AND IF IT CAN BREAK A VERY NICE TEXTBOOK INVERTED HEAD AND SHOULDERS SHOULD MOVE MUCH HIGHER.
AGGRESSIVE TRADERS PURCHASED CALLS THIS MORNING. CONSERVATIVE TRADERS SHOULD WAIT UNTIL THE NECKLINE IS BROKEN AS THERE SHOULD BE A FULL 5 POINTS MORE RALLY LEFT IN THE INDEX ONCE IT BREAKS THE NECKLINE.
There are quite a few currents with strong presence in the market right now and each is exerting its own force.
We really have been at the crossroads now for about 7 trading days and we keep getting closer and closer to the pinnacle.
The good news is that we know the market is at a juncture we can take advantage of on both sides. Also we know that if this action culminates into a break lower, the risk should only be down to 1340-1355 on the S&P 5oo cash, which represents about 5%.
There is plenty more information about where exactly we are in this market cycle and exactly what to expect in the very near future, so read on!!
It is quite common for a market in some type of turmoil to waver from bullish highlights to bearish highlights and it is at this point that we stand.
There are some serious questions about the intermediate term health of this market, regardless of the rally we saw today.
The market must make its move higher NOW or risk the downside risk to 1340 on the S&P 500.
I would remain quite cautious about this current market and let it prove itself before making any type of increase in equity positions. This proof will be forthcoming in short order, so we will not have to wait very long.
The hourly chart clearly shows that it is very close to put up or shut up time for this market.
It continues to struggle higher and really needs a powerful push higher in order to not only remain bullish on the short term, but the intermediate term as well.
***Lets talk a little about the value measurement of earnings yield.While this measurement is being more widely followed, it remains a very key tool in obtaining the true value of a security.
***The earnings yield is nothing more that the opposite or reciprocal of the P/E ratio.It helps to put value in a more easily understandable light as it can be measured againstthe prevailing 10 year note yield.The premise is that if the earnings yield on the market or whatever stock you wish to measure is greater than the 10 year note yield then the security is undervalued.
***Now this is a gross simplification of the theory, but it gives you a reference point.Don't forget also that the 10 year T- note yield is a before tax measurement and the earnings yield is an after tax measurement. Therefore even if the earnings yield is less that the 10 year note yield, there is still a possibility of a security being undervalued.
***This gives you a very strong starting point as to where to go from here with the tool. Especially the after tax aspect of the earnings yield.Here is an example of the calculation for the earnings yield on a stock.Let us suppose a stock has a P/E ratio of 12. In order to get the earnings yield we just invert the 12/1 fraction to 1/12 and the yield comes to 8.33%. Compare this to the 4.5% 10 year note yield and you have quite the undervalued security. Maybe even more so than the 8.33% dictates as this is the after tax yield. To convert it to the before tax yield simply multiply the 8.33% by 1.33 for the 33% corporate tax bracket. The before tax yield becomes 11.08% which makes this security very undervalued.
***You can also use the earnings yield of an entire index such as the S&P 500 to get a feel for the current state of value in the market. Above this post you will see a visual of the current earnings yield model that shows the S&P 500 to be quite undervalued. This does not take into account the after tax effect which would move the target for the S&P 500 even higher.
***The earnings yield is a great tool and should be in every good investors toolbox.
Currently an electrician by trade I have been involved in both the equity and futures markets for over 20 years. I have learned alot over the journey with the highlight being you never stop learning.
I am always looking for new and innovative ways of analyzling the markets.
I really want to get the investment message out to the young adults and encourage them to save, especially while they have little to no liabilities.
You Can Have the Greatest Trading System in the World, But, If You Lack The Proper Mindset to Trade the Markets You Eventually Will Be Doomed To Failure.
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