The Deviant Standard

Traders' preparation for volatile markets.

Browsing Posts in Market Commentary

We anticipated the current downward move, and while we might have expected some more significant upward retracements since June, 21st things are going mostly according to script.  As expected in a third wave, continued selling pressure is now battering bulls into submission and will continue to do so for as long as they attempt to buy the dips.  That’s what third waves need to do: convince people that what had worked before doesn’t work now. 

As more traders begin to pile into the short side, the risk to bears will no longer come from dip buyers but from short-covering rallies.  We don’t expect that any such pops will alter the longer-term view, but they can develop quickly, move a long distance, and cause lots of pain to short-term positions.  So while a nice bounce might be welcome as a milestone to benchmark wave progression, it would be unwelcome to traders with short-term traders unable to take the heat of a several hundred point run.  Keep in mind, some of the biggest up moves can take place within bear markets.

The overall point here is to be aware that relentless selling we’re experiencing should naturally lead to a short-covering rally at some point even if we cannot predict when.  The trend has shown itself to be down and we should trade accordingly, but those trades also need to contemplate swift, surprise bounces.

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With prices pausing at the 61.8% retracement of the recent move up, we’re looking for any possibility to count a completed correction.  The one that emerges is a possible double zig-zag shown in cyan on the chart.

The Euro is testing snowline resistance.  If it holds then we could see more downside for U.S. Equities.  A quick turn lower in the Dow to take out the 6.18% retrace would keep new lows on the agenda.

[Click image to enlarge]

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The chart presented shows the Elliott Wave count that we (and many others) are presently presuming for our broader perspective.  Assume we (collectively) are wrong and that the move up from March, 2009 lows represents wave [1] of a new bull market following a correction instead of the corrective count shown.  In that case markets would currently in a primary second wave down.  Even a modest correction should take the Dow below 9,500, with reasonable targets in the 8,800 – 8,300 range.  Taking a step back makes it hard to be bullish.  It seems hard to look for much upside before attempting 9,500.  Then we can test the assertion that we are headed to new lows. 

[Click image to enlarge]

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This morning was a chance to revisit the count of the move down from April highs.  As ususal, we are presented with several possible counts.  Presented here is the most bearish that is consistent with the possibility that the move up from Dow 9.758 is unfolding in five waves that we discussed in last night’s issue. 

In this scenario, five waves up would complete wave 2 in a flat correction, likely from near current levels, and leading to a significant selloff.

[Click image to enlarge]

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Having taken out the swing highs that we previously identified as wave 2, we are now in a position to revise our count. Look for ideas in tonight’s update. For the moment, nothing alters our overall bearish view. To do that, we’d need to identify a larger degree upward impulsive move.

The most obvious way to count a possible larger five up is shown in green on our 10 minute chart. For the time being, it shows divergences on both the Elliott Wave Oscillator and MACD at today’s intraday highs. A good impulsive move up should give us higher highs on these indicators. So a bullish view would require green [iii] to continue extending upward to new highs and put in new highs on our technical indicators.

We need to watch these indicators closely, because there nothing that prevents prices from heading up and doing just that. A break below Dow 10,150 would help rule out this poissibility, but wouldn’t prevent higher prices from a more complex correction than we currently have counted. At the moment, no down move is confirmed; just possible.

[Click image to enlarge]

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Overnight France committed to a massive austerity plan aimed at reducing its outsized budget deficit to a mere 3% of GDP by 2012, downfrom its current 8%.  Half of the reduction is to come from spending cuts, so the other half follows automatically from the tried-and-true economic concept of cutting to prosperity.  When asked if he thought the Euro would reach parity with the U.S. Dollar and spur export demand, Prime Minister Fillon commented, “as a policy we do not like to benchmark ourselves against any currency featuring George Washington, France always preferred men like Thoman Jefferson.”  He went on to cite several signs of economic activity, including strong 2012 hotel bookings in Brittany as France tries to woo Olympics fans to their side of the channel as well as a large pending Airbus order from Mattel.

Just as texbook authors are hurrily trying to update Introduction to Economics texts to replace the discussion of ’supply side stimulous ‘and ‘demand side stimulous’ with coverage of the ‘other side of the rainbow stimulous’, they’ve decided to remove the long standing example of guns vs. butter.  The new gold vs. opium discussion was prompted by an overnight announcement that nearly $1 Trillion in mineral deposits have been identified in Afghanistan.  Also overnight, a Bureau of Printing and Engraveing spokesman announced that once again, U.S. nickels will be produced primarily from nickel. They expect to maintain the current design featuring Thomas Jefferson. 

And one last thing…

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As waves continue to emerge, there are more and more strucutres that have fib ratios consistent with a target near our 10,184 FibGrid on the Dow.  Having those proportional structures show the markets inherent knowledge of these levels.  However, in itself, it doesn’t indicate a likelihood that the market will go up. 

However, the levels themselves have a sort of gravity, especially the important ones; there isn’t a level more important than 10.184.  So having popped this close, one last touch may be in the cards.

All speculation at this point. I’ll try to cover the ratios in more depth tonight.  However, this next issue might be abbreviated.

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If we keep pushing up then this (link to image) could be the count.  It is a reasonable double zig-zag with [W] = [Y] and A=C within [Y]

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Have you had Skyline?  The Cinicinnati chili, I mean?  Sure it tastes great, but I can’t imagine it’s good for you and it can give some nasty heartburn.  So while the Dow took a big bite out of the 10,120 skyline this morning, perhaps indigestion is why it’s having trouble on a retest.  It’s retreat from those levels looks corrective, ocurring in three waves.  However, attempts to push back up have been rebuffed.  If it decides to weather possible stomach discomfort and head on up, then I’ll keep looking at that 10,184 level.

Continued chopping here might lead us to try and count a fourth wave triangle if it has the right look.  If such a pattern develops then it would help give clarity to the wave structure and help us identify a possible turn down.

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One of the problems with gaps is that they obscure our view of the wave structure.  It also messes with the technical studies we use.  That makes it harder to figure out when a wave is likely to be complete.  If (and it’s a BIG if) this current move is complete then it COULD count out like this:

At the moment it doesn’t look like that count has much chance of standing.  The current move down from the point labeled [5] (likely incorrect) seems to unfold in three waves and being overlapped by a move upward.  This is definitely a wait-and see moment.

In these circumstances we can find guidance from larger proportions.  Our FibGrid levels help as do Fibonacci relationships with larger waves.

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