Friday, October 13, 2006

Intermediate Term market thoughts

My system genearated a Weekly buy signal on the SPX on Aug 6, which i posted on

There were a lot of disbeleivers then and the disbeleivers in the current rally continues. I have been playing the long side since then, but now the IT is getting long in the tooth. So the free ride is essentially over and the risk of an unexpected selloff increases as we complete this topping process. In the VST, i expect a selloff to near 1240 and then another leg higher. The 120-min momentum needs to rollover for the 1240 scenario to work. Otherwise, we could blow off straight towards 1288.

To get a perspective of what's happening. Wave A from the 2003 lows ended in March 04. Since then we have been building this massive upward sloping siwdeways flag, an irregular flat in elliotwave terms. This massive sideways flag which we most likely finished with that plunge in May-June 2006, was the wave B. Now we have very likely embarked on an intermediate degree wave C which should go up and eventually take out the 2000 highs on the SPX. Initially i thought that the wave B was not finished and we would move down and retest the June 06 bottom to fill all the gaps. It still is not beyond the realm of possibility !

My latest thinking is that we are very unlikely to retest the June 06 bottom anytime soon. The recent advance has been the fastest (not yet the largest wave), since the corrective wave begun in 2004. Now the speed of this advance and the angle of ascent is loudly saying that a new impulsive wave to the upside has begun. The design of the wave C is unknown at this point and could either be a true impulse i.e 5 waves or a terminal wave C. More time and price action will be required to confirm the structure of wave C.

As for the near term, the IT advance from June lows is now getting long in the tooth. We are bumping into some serious resistance from the channel containing the corrective wave from 2004 as well as the resistance from Dec 2000 monthly high. Look how nicely they are converging near 1388 SPX cash. Gotta love TA. This twin resistance will prove formidable to overtake on the first run. So essentialy we are in a topping zone from SPX 1365 to 1388. A reaction could start anytime fom this topping zone. How low the reaction would take us, is a crapshoot at this point. It could find support at either the 38% or 50% Fib retracements to the June lows. So our support zone for any reaction here should come between 1300 - 1320 SPX cash.

It's amazing how sentiment works. All these days when we were miles away from all these formidable resistances, there was so much scare in buying the dips. Now that we are approaching the same resistances, there's no fear. It's all about parabolic rises, primary degree wave 3 of 3(which is a baloney IMO -will post more on that), epicenter, blah, blah, blah. Show them a 20 point reaction and all the parabolic talk will change to Nikkei crash, 87 crash, 29 crash.....