A Symmetry Set-up for Next Week
I said in the last post that I would watch for an ABC correction (down-up-down) down to at least 1630. So far so good. The market sold down to 1635, bounced to 1674, and sold off again to close today at 1631. Of course, there are no guarantees that this is just another minor correction and we’ll be off to the races in a week or two (for the expected wave 9 that I mentioned on 5/15), but if it wants to do that then I think it makes sense to figure out where it might bounce.
One thing that’s good to watch for in the market is symmetry. One form of symmetry that occurs frequently is when different waves have the same length. For this current move down (the last couple weeks), there are three places to look for symmetry: (1) the last correction in early April; (2) the first push down of this correction (the “A” wave); (3) the first push down of this “C” wave (which itself might print an abc down pattern). In the chart below, the first red line is #1, the last correction. The second red line superimposes that move onto the market peak from 5/22. The first yellow line is #2, the “A” wave down, and the second yellow line superimposes this onto the “B” wave peak. Finally, the first cyan line is #3, the “a” wave down within the “C”, and the second cyan line superimposes this onto the “b” wave peak.
Thus, we have three separate symmetry targets, and in this case they all end in the 1622-1628 area. This is very nice confluence. It also lines up with a small congestion zone from 5/8 to 5/13. This looks like a nice setup, but of course there is no guarantee that the market will not just sell right through this area to test 1600 or below. So if you take this long trade, where would the stop go? The wisest option would be to wait to see if it puts in a strong bounce off the bottom (gap down or sell hard down into this zone then ramp higher the rest of the day, or something like that), then buy it with a stop under that low. This entire move since November has done of great job of not quite reaching downside targets where the shorts want to cover and the bulls want to buy the dip; when it reverses early then shorts and bulls alike are all scrambling to buy. Of course, a gap up and ramp Monday would accomplish this trap even better, so that’s possible too.
The ostensible bogeyman for this move down is rising interest rates, so keep an eye on the 10-year T-note (1.64% on 5/1, 2.16% on 5/31) and also some (faux or not) news about the Fed not tapering QE Infinity until at least the end of the year.
Pullback
There was a nice blow-off top yesterday morning followed by a hard selloff. So far this is all in line with what I was looking for in my last market update. I don’t have a ton of confidence in the short-term wave count, but my baseline expectation remains for this to be a reasonably quick pullback, followed by another wave to test the highs. It has bounced pretty far off this morning’s lows (S&P low was 1635, now 1653) and it’s possible that will be the extent of the downside, but I’m hoping for another push lower (to form an ABC correction pattern and to reach at least the 38% fib retracement of the prior move). It would be prettiest if it bottomed somewhere in the 1593-1630 area, and my guess would be for the higher end of that range. S&P 1625 and Dow 15097 look best to me, but I’ll try to wait for other signals before jumping in.
AAPL has been holding up well. The exit plan of half off in the 440s and let the other half ride still looks solid.
Almost There?
Here’s the local map:
It finally looks like we are nearing the completion of this move. If this is correct, we should now be in yellow subwave 5 within red wave 5. For targets, one thing that often happens is that wave 1 is the same length as wave 5 (wave 3 is usually the longest, often 127% or 161% of wave 1). Since we are now working on both red wave 5 and yellow wave 5, we can get proportionality projections (called measured moves) from both of them. 100% of red wave 1 measures to 1589, and 100% of yellow wave 1 measures to 1574. The Dow waves count the same, but have slightly different lengths, so the target range is a little tighter: 14678 to 14746. Of course, there’s no requirement that we get a top in this area, but the market does like to have proportionality and prettiness.
If we do get a top in this area, what then? Well, what we would be looking at correcting is the move from the November lows (S&P 1343, Dow 12471) to the highs. A nice-sized correction would last 2-3 months and take us under 1500. 1465 should be supportive, so any pushes under that level should be reversed very quickly. First things first, though, let’s see if we top out where I expect.
My best read on the longer-term situation is pretty bullish, as it looks to me like we’re getting an extended 5th wave within an extended 3rd wave. (An extended wave is one that is disproportionately large relative to the other waves, with the subwaves of the extended wave actually being more proportional to the other primary waves.) Here is my best-guess count of the big picture:
This doesn’t follow formal Elliott Wave numbering conventions, but hopefully you get the point. The light purple numbers represent the first two waves of the light blue extended wave 3. The green 1-2-3 are part of extended yellow wave v. If correct, this numbering is long-term very bullish. The coming correction is only for that green wave 3 (the move from the November lows), so not that much in the grand scheme of things. After the green wave 5 higher completes, on the other hand, then we have finished the green waves, the yellow waves, and red wave 3, which is a bigger deal. Again, this is looking pretty far ahead and is pretty speculative, so it doesn’t make much sense to think about it too hard right now.
I hope this makes sense. I might have other things to say, but I’m sleepy and ready for bed.
Two Options
Well, it bounced hard off that nice ABC corrective pattern and zoomed right back to the highs. The Dow set a new high, but the S&P did not. That correction down to S&P 1485 was very quick, and a little shallower than I would have liked. This suggests one of two options to me:
(1) The market is very bullish and wants no part of going lower. Red wave 5 up has begun and its proportionality target is the S&P 1550-1590 range (the all-time high is 1576).
(2) The red wave 4 down is not over yet. This is the “X” part of an ABC-X-ABC double move that will give wave 4 a little more heft. Target remains the 1450-1480 area.
I lean toward option 1 being correct, but I don’t feel strongly about that. I was lucky to catch a swing from 1487 to 1524 (nearly the whole move, but just a partial position size as I was scaling in), but have exited it now. If we chop down toward 1500 again I may reenter, perhaps with a stop under 1495ish.
The sequester adds some uncertainty to all this, as it’s not a huge real negative, but can’t help but put a damper on positive sentiment. Some sort of can-kicking, however, could give the market another little nudge higher.
Waiting
I’m not seeing any reason to enter swing trades on either side right now. If the Republicans do indeed pass a mini raise of the debt ceiling (pushing the default date back to May or so), that removes the main catalyst for near-term weakness, IMO. Valuations are getting less attractive than they have been the last couple years, so I’m not expecting upside above the low 1500s (S&P) unless there is some surprising economic strength. The tax hikes in the fiscal cliff deal and the spending cuts (hopefully) in the coming deal should provide a meaningful drag on economic growth this year, which in turn should cap both top- and bottom-line corporate results.
Short-term, we’re pretty extended on the upside and could use some consolidation, but S&P 1500 and 1524 or so remain targets above.
Caution?
It got close enough to my 1396 that I increased my allocation to 50% long on Friday’s close, and I already dropped back down to 25% long as of today’s close. I have to hold that position for at least 30 days, so I’m hoping the market squeezes out some more upside. The market is back into an indeterminate zone for me, so I’m being cautious and focusing on daytrading. The chart below shows the pattern since the October 2011 lows: retracements have held around the Fibonacci 61.8% line, followed rallies to new highs. If this pattern continues, the first target is the 1510 to 1524 area. My primary issue with trying to stick around for this target is that there has already been a nice 5 wave pattern higher, so arguably there should still be a deeper retracement of the whole move off the lows (as opposed to a retracement of only the last push higher). Under this scenario, we already completed A down, now we should soon top out in the B wave higher, then get a large C wave down. If you are inclined to short, one way to try it would be to short against the 1475 (S&P) or 13,662 (Dow). If those levels break, then there is a decent likelihood of reaching the 1510 to 1524 area.
Fundamentally, I can see arguments for both 1500 (if the Q1 earnings outlook is strong, the world economy looks perky, and interest rates are expected to stay absurdly low) and 1400 (if the earnings outlook is weak, there is angst about the coming debt ceiling drama, or the economy looks strong enough that investors think the Fed might lighten up on its easing).
Mostly, this is a question about how to be positioned for January. I would NOT be very exposed going into February and March. The debt ceiling will not be raised without a lot of drama that should be a pretty big damper on market enthusiasm.
Nice Bounce
It bounced right where it was supposed to (over 80 S&P points so far off of 1265, which was almost the exact bottom of the 1267-1290 bottoming range I mentioned). For the big picture, I am still looking for an important top to be followed by a major correction of the entire move up from S&P 666. What I still don’t know is whether that top is already in (making this a wave 2 up in the early stages of a larger move down), or whether we will still have that one more poke higher that I’ve been looking for (making this wave v of 5, in terms of the labeling in the previous post). If it is a wave 2 higher, then it will likely top soon, as we have an ABC up structure already in place and we’ve retraced a decent chunk of the prior move down. Whether it pokes a new high first, or turns lower right here, it seems to me like a bad spot to add any new long term investments. I am not aggressively short, but I have lightened up on longs again and put my index hedges partially back on. Save some cash to buy lower, in my opinion.
Some Large Cap Stocks
My assumption is that wave 4 is now over and we have started wave 5 with targets at new highs, followed by an extended major pullback into the second half of the year. I will not be chasing longs here, though. If we get a nice push in the next month, I will be looking to hedge or sell long positions and possibly short the indexes. Once earnings season is over in a few weeks, I don’t know what the catalysts for a move higher might be, while European problems and the “sell in May” phenomenon are obvious catalysts for downside.
Last month I gave a few speculative stocks that should move quite a bit higher if they can hit next year’s earnings estimates. I looked at some big safe stocks today; here are a handful I like, along with reasonable targets going into next year:
INTC (27.99) target 32 with 3% div yield
AAPL (607) target 700 with 1.73% yield
CAT (103.25) target 120 with 1.76% yield
JPM (43.72) target 50 with 2.74% yield
GE (19.45) target 21 with 3.5% yield
Note that there are also quite a few more speculative high yielders paying dividends of 8-10%. Without doing much research, I bought this basket on Tuesday: MPW (8.87), BKCC (9.36), NCT (6.86), and HTGC (11.12). I will look to buy BBEP on weakness, although I already missed the nice dip.
Also note that, of the four speculative stocks I said I liked last month, only STX has support from strong earnings right now. The appreciation of the others is mostly dependent on what will happen next year. That means they could easily suffer if the overall market is weak into the second half of this year. I expect to just hold VELT (even though its next two quarters are expected to be only breakeven and the stock could be weak), but wait on FSII and SCLN.
Wave 4
So far this is following the map nicely. I was looking for a top in the 1407-1447 range, and the top was 1422. My expectation is that this is wave 4 down, to be followed by a wave 5 up with at least minor new highs. Classic action here would be some sort of ABC down to finish wave 4. I don’t have a strong feeling about how low it will go, but 1340 seems like a good bounce area. If it goes deeper, 1320 is also decent. I do not expect it to break 1290.
If the early earnings reports (which are starting now) come in strong, it’s also possible that the 1357 was the low. That would not be typical behavior, though, since corrections usually have more structure than simply a single hard push down. I mentioned on March 13th that proportional waves 4 and 5 would give us 70 down and 110 up. 1423 to 1357 is 66 points, so we did go far enough in price though it was quite short in time.
The Near-Term Picture
The nearer-term picture appears clearer than the bigger picture. Here is what has happened since early October, with a guess at a bullish wave count:
This is pretty straightforward action for an impulsive wave upward. If this labeling turns out to be accurate, it suggests we have several more squiggles before we get an intermediate-term top. This has nice waves and nice proportionality so far, so if it continues to play out we should have a solid heads-up that we are entering the danger zone (this should be months away). In the mean time, it appears that we should be pretty close to finishing blue wave 3, then we need blue wave 4 down and 5 up to finish red III. If these are proportional to the blue waves 2 and 1, respectively, then they would be about 70 S&P points down then 110 up. Finally, the bigger red IV and V would come to finish the entire move up. The proportionality for these suggest 130 down and 220 up, with an ultimate top over S&P 1510.
Here is a slightly different alternative which suggests we are a bit further along:
Summary: This wave count suggests that we are fairly close to a short-term top, but not an intermediate-term one.
Pushing the Edge
The Dow and S&P got right up to the edge of where I was willing to hold on to my short. The Dow hit a high of 12,842, not far from my stop-out level above 12,876, and the S&P hit this big downtrend line:
From those highs, it has pulled back a little bit. This morning it gapped under the lower line of the rising channel that it has been in for a month, then bounced most of the day to backtest the broken line:
This looks to me like a near-term inflection point: strength above today’s highs brings us back into the channel and makes this look like a routine ABC correction, with a test of the highs on tap. Conversely, weakness tomorrow under today’s lows would make it a five-wave impulsive move, which would suggest more downside will follow.
OK Shorties, Let’s See What You’ve Got
This was the push higher I thought we might get to very nicely complete the correction pattern. The S&P hit its target 1293 (high today was 1296), and the Dow is still holding under its 2 important trendlines. I entered the last 1/3rd of my swing short position. There is room for a wee bit more upside if it wants, but we should be really ripe for a top now. There is nice proportionality on the big red ABC, the little purple abc, and there’s now five little waves in that last purple c. She’s a beauty if she turns down now.
Trust the Dow or S&P?
I stopped out the QQQ short pre-market, now I’m watching again. The Dow is coming into that very nice shorting area that I’ve been waiting for, with a couple important trendlines just above and nice wave proportionality if it tops out fairly soon. Unfortunately, there isn’t the same pretty convergence on the S&P, which looks best for shorting a little higher. I tend to trust the Dow more than the S&P in these matters, but we’ll see. Other reasons for caution are the potential bullish breakout patterns, as well as decent economic news (quite a few countries posted slightly-better-than-expected manufacturing numbers). Unless some surprising weakness shows up, I expect to give this more time for the bullishness to peter out. A conservative entry trigger I might use is to wait for the indexes to take out a prior day’s low, which isn’t likely to happen for at least a couple more days.
Daily Wave Count
Here is my wave count on the daily chart. I believe wave 2 up (a “double zig-zag”) is nearing an end and we should begin wave 3 down pretty soon. The bullish setups noted in my “Annoying Bullish Setups” post do trouble me, though.
Annoying Bullish Setups
As I mentioned in my “2012 Outlook” post, I like the Dow 12,400 to 12,600 range for short entry. The charts below, however, makes this area tricky because any strength above all these trendlines will look like bullish breakouts with targets significantly higher. The Nasdaq 100 (QQQ), like many international indexes, has a triangle pattern, while the Dow (DIA) and S&P 500 (SPY) have inverse head-and-shoulder patterns. I shorted the QQQs on Friday just in case these trendlines hold and we enter the new year with a thud. If the markets start the new year with strength and this trade stops out, then I will be patient with a short re-entry: I will wait for either weakness to develop, or another pattern with a tight stop-out level (like the QQQ triangle top line that I am currently using).
Loroz Trading 