It's my judgment we're going paint a significant top over the next week, and so I've highlighted below, in Elliott Wave terms, what will likely be the general labeling of the next leg down (i.e. THE big 5-wave move down).
Wave 3 is not shown but you can imagine what it will look like ;)
SPX Forecast
I promptly exited one-half of my long exposure (at SPY 106.40) and am riding the other half as far as I can. Long exposure at these levels is a risky undertaking - regardless of position size.
Here is the intraday forecast:
Intraday ES Forecast
Lastly, take a look at the now-infamous $GOLD/$SILVER ratio. It's been creeping up since September 16 which is a few days prior to when the SPX topped at 1080. It's foretelling an important shift in psychology.
Gold/Silver Ratio
Monday, September 28, 2009
Hi Everyone,
I'm writing this from my iPhone after my brief stint away from the computer. The forecast continues to point up into Wednesday and then pullback into Friday. I will be exiting my longs on Wednesday simply out of precaution.
I will have a more comprehensive post tomorrow. My hope is that many of you did well today.
This will be my last post today. I've scaled the forecast as best I can to show where we may be headed next week. I am long near the SPY 104.70 area but position size is small. I don't feel comfortable taking overnight risk on the long side.
I could go on and on about how astounded I am at the '38 fractal as you all know, and while my forecast says up into October 7, I am weary going long - particularly over the weekend.
The correlation between 'now and then' continues to increase and more downside is absolutely possible, so be careful with any overnight longs (i.e. position size is important!).
The chart below shows what could happen over the next few trading days (8 to be exact).
Correlation Chart (1938 vs. Present)
However, a long position is warranted based on the forecast (obviously!) and the simple technicals I use (RSI(9) on 120min bar chart).
Intraday SPY Chart (60-day, 120min bars)
What I'm saying is (a) be smart about your trading and (b) be willing to take the loss if we gap through that trend line on Monday.
I'm going to be busy for the next few days so postings will be infrequent.
I had planned on putting together a comprehensive video of what my strategy is going forward but I'm working on a lot of trading projects that require more of my time. In short, I expect a big move to the upside into October 7 followed by a big, big move down thereafter.
I would be careful getting long too soon, however. We could easily see ES 1030 tomorrow as per the ES forecast so be patient.
Well, the week's Big Day has arrived - Fed Day. Other than my current short position (which has been drastically reduced as of Monday morning) I'm not touching this tape with a 10-foot pole.
Here is the intraday ES forecast for those interested parties.
One of the often-sited, yet hardest, disciplines to master is to "Plan your trade and trade your plan."
While today's tape is reminiscent of what we've seen as of late, my bias continues to be to the short side until Mr. Market proves me otherwise. I have a methodology and follow it without question (hence the 'trade your plan').It's easy to fall into the trap of listening to others who you think may have a better read on the tape, but my experience behaving (and trading) in this manner is that it simply ends up screwing with your psychology - big time - because you begin to question your every move.
If the market decides to ramp up I will cut my shorts faster than a bullet. I have no patience to hold onto losing positions.
1938 CORRELATION
The 1938 correlation I displayed in one of my previous posts - INDU Structure - continues to impress. In fact, after updating the data to today's close we now sit at a coefficient equal to 0.80 (up from 0.765).
Dow Jones Industrial Average
(Series 1: 2/23/1938 - 11/10/1938, Series 2: 1/2/2009 - 9/21/2009)
What's interesting is where we are in terms of the 1938 fractal. Check it out...
Dow Jones Industrial Average - 1938 Literally to the day. Right at the top. Absolutely beautiful!
I realize price means everything but if this isn't enough evidence that we are topping, then HERE is more.
POSITION
I cut my delta exposure down 50% in light of the Power of 9 low at ES 1051. Had we broken those lows, I would have added it back. Better to be safe than sorry as they say.
Sorry for the late video. I got caught up in a meeting that went on for far too long so I was unable to upload the video last night. Here is the post....and video.
Admittedly, I have been 'wishy washy' about the market as of late and I apologize if this may have come off as a bit confusing. Declaring I think the market is going up to the heavens one day and preaching it is going into the tank the next is no way to trade, let alone write a financial blog. It's for this precise reason why I have been reluctant to go EITHER heavily short or long overnight - my opinion keeps changing. In short this rally has taken nearly everyone (professional and non) by surprise.
I feel, however, we are finally at a point (or at the very least another point) where shorting is a high probability trade. I put together the following video that addresses the reason(s) for the short case. Enjoy.
As most of you recall, I set out to compartmentalize the 1938 fractal - INDU Structure and Up, Up and Away! - with us currently trading in Section D.
Tim Knight at Slope of Hope has a GREAT post that complements my own work. I absolutely love it when people approach the same problem from different angles to the benefit of everyone. I highly suggest you check it out - HERE.
Dow Jones Industrial Average - 1938 (Source: Tim Knight)
Dow Jones Industrial Average - Present (Source: Tim Knight)
To be frank, I have been weary shorting the market but this adds to my conviction. Up until I saw this analysis, I hadn't thought about shorting on Friday (as previously discussed) but I may change my mind by tomorrow.
One the other hand, gannsecret suggests we have more upside into the 25th and he's been right for a while so I'm paying close attention to his analysis. Dilemma, dilemma!!
I've always liked using simple technical indicators to confirm my forecast, and the McClellan oscillator has done a pretty decent job as of late confirming whether we're more on the oversold or overbought side. It works quite well in comparison to other indicators because it doesn't get oversold/overbought very quickly. This avoids micromanaging position trades.
You can see from the charts below that anything above/below 60/-60, respectively, usually provides an excellent confirmation that price action is pushing the extremes.
McClellan Oscillator (Tops)
McClellan Oscillator (Bottoms)
As you can tell, I've separated the times when it's been above/below 60/-60, respectively, so as to not confuse you. We've crossed into overbought territory so overnight longs are ill advised.
It is worth noting the signals for bottoms has been quite reliable and will be worth keeping an eye on going forward.
Remember to keep your trading as simple as possible (i.e. K.I.S.S.). Don't get too hung up on indicators, analysis, etc. Your psychology with respect to your methodology is what is vitality important to your success. Everything else is fluff.
The options market can be one of the most informative, yet mysterious, markets but you have to know where to look to gather insightful information.
For the longest time a very esoteric concept had eluded me, but upon some thorough research and speaking with guys that really know their options, I finally discovered the answer. It would be impossible for me to cover all the details so I'm assuming that if you are even remotely interested in this post, that you have a decent grasp of options theory.
The esoteric topic is this:
The pricing of jelly rolls on indexes can tell you where the indexes may settle on options expiry.
Notice how I say 'may'. Nothing is perfect, of course.
A jelly roll is the difference in pricing between a call and put calendar spread. At the moment, due to a dividend payable on the SPY in September, the put calendar spreads are trading above their call counterparts.
When the front month jelly rolls collapse in value, the market is typically looking for a mark-up in price. That's basically it.
Caveat: I don't understand the 'why' behind the collapse in pricing but it's the collapse itself that is important. Seriously, if you don't understand I apologize that I can't explain all this in big detail - it would take an awfully long time. Also, the markets today are very efficient so I'm not suggesting there is an arbitrage play.
Anyways, here is a chart of the SPY Sept/Sept Quarterly roll values. A move to SPY 108 to 110 is being priced in which is close to DOW 10K.
SPY September/September Quarterly Roll Values
The guys in the pits are also looking for a move up, followed by a HUGE correction to SPX 900. Pay close attention to this video as the gentlemen speaking is a very large SPX trader. He foresees a move to SPX 1108 (or equivalently, DOW 10100).
I covered my short positions on today's dip and am 100% flat until we see some weakness. There will be ample time to get short AFTER the market displays weakness which will likely occur next week.
I don't have much to say at the moment, plus I've got quite a bit going on tonight. I'll simply post the forecast and leave it at that. As usual, everything left of the green line is transposed, everything to the right is untouched.
Have a great evening.
Intraday ES Forecast (Updated 9/16/09 @ 7:33am PST - had green line incorrectly drawn)
My fascination with the 1938 fractal continues and there is a better-than-even chance of new highs by the end of this week (well, this already occurred today!), particularly in the context of it being options expiration which is typically bullish anyways.
I took the time this weekend to further examine the 'sections' of the 1938 fractal as outlined in one of last week's missives - INDU Structure - and compared them to their 2009 counterparts. For reference, here is the chart I used:
Dow Jones Industrial Average - 1938
To summarize, the durations of each section were as follows (Note: I realize there could be some ambiguity with respect to the dates that encompass each section. Also, there was some overlap from one section to the next):
Section A: 2/23/38 to 3/31/38 (27 trading days)
Section B: 3/31/38 to 4/18/38 (12 trading days)
Section C: 4/11/38 to 6/17/38 (48 trading days)
Section D: 5/27/38 to 7/22/38 (39 trading days)
Section E: 6/30/38 to 9/28/38 (63 trading days)
Section F: 9/28/38 to 11/10/38 (30 trading days)
Notice the lack of consistency (or a pattern) in the duration of each section and compare it to the duration pattern for 2009:
Section A: 1/2/09 to 3/6/09 (44 trading days)
Section B: 3/6/09 to 5/8/09 (45 trading days)
Section C: 5/1/09 to 7/9/09 (48 trading days)
Section D: 7/9/09 to 9/15/09* (51 trading days)
* Assumption, as per SPX forecast
Now notice that each of the 'sections' in 2009 were in the 45-days-ish range with the exception of Section 'D' where I've assumed we continue upwards to new highs into Friday. But this would fit the pattern, so to speak.
Beginning 9/21/09 (and not a day sooner) is when I think we'll move into trading a similar tape to that of Section 'E'. (Btw, it's worth commending Mr. gannsecret who for the longest time has been clamoring for a bull run into 9/21).
Erroneously, I labeled us currently trading in Section 'E', which was a bit premature. So for completeness sake, I've relabeled things as follows:
Dow Jones Industrial Average - Present
ES FORECAST
Neither 'amazed' nor 'floored' begins to describe my feelings of how well I think the forecast is tracking price. Just amazing ;)
Again, everything left of the green line has been transposed. Everything to the right is untouched.
I myself hate when people massage their data to make it look as if their analysis is correct, but I can't help by being amazed at how well the forecast is matching price (transposed and non!).
In the chart below, everything left of the green line is transposed ES data. Everything to the right has not been touched. I've eliminated the price axis to avoid confusion - just focus on the price behavior.
We'll likely get a correction into Tuesday, followed by one more rally into the 18th - which also happens to be my birthday!
ES Intraday Forecast (Transposed and non)
For what it's worth: Take 9/18/09. Month 9, 1 + 8 = 9, Year 2009!! Just sayin'!! The Power of 9!
Upon thorough review last night, I decided to cover my position shorts this morning. Yes, I know we are 'overbought', but it's the most prudent thing to do right now.
In hindsight it was not only an amateur-ish move to short such a strong market, but to stay with the position was simply stupid and is not what a professional trader would do.
As a percent of total equity, the loss wasn't that bad but on a percent-at-risk basis, the loss was more than what I should have taken. I learn a lot more from my losses than I do from my winners.
The similarities between today and 1938's Section E (see prior post - INDU Structure - for reference material) are too striking and I'm feeling comfortable - on intermediate term basis - being short.
Not only do we have similarities in terms of price structure, but even technical indicators such as RSI(9) are also diverging.
INDU RSI(9) Divergence - 1938
INDU RSI(9) Divergence - Present
Also, my forecast is clearly pointing down into late September and October.
SPX Forecast
I am not adding to my short positions just yet but I'm not covering. It's going to take a huge run up for me to cover my current positions, and even if I do, the position (at the moment) is 20% of my total acceptable negative deltas so the loss still won't too bad.
You guys are going to like this one!! I'm super excited about this post which is courtesy of my subconscious mind. Anyways....
I've touted on numerous occasions about the similarities I see between now and 1938. However, my main argument to support the 1938 likeness (up until now) had been with respect to the turning dates, and not necessarily the price structure. In retrospect, that was a flaw in my analysis, but upon a fresh review of the 1938 fractal, the likeness now takes on a whole new meaning. Let me show you what I mean.
Consider the following charts of the Dow Jones Industrial Average:
Dow Jones Industrial Average - 1938
Dow Jones Industrial Average - Present
where,
Section A = Price falls precipitously and marks the end of panic sell off
Section B = Sharp and powerful 'V'-shaped price recovery, catching most market participants off guard.
Section C = Price consolidation that digests Section B's rally (fake out included!)
Section D = Sharp 'day-after-day' rally subsequent to fake out
Section E = Consolidation with downward bias
Section F = Final sharp rally that ends bull run.
Note: Take the time to study these 2 charts in detail - they are HIGHLY important!!
Even minute details are visible such as the 'fake out' that occurred in Section C and the 'day-after-day' rally that occurred in Section D of both years (does "failed head & shoulders" ring a bell?). In fact, the correlation between now and 1938 is an astounding 0.765 which indicates moderate correlation.
Present vs 1938
Tell me this isn't very interesting! In case you're wondering, the correlation when matching the bottoms in March 1938 and 2009 is a respectable 0.722.
Present vs 1938
Where are we now you may ask? Well, despite the markets being very strong, I am still of the premise that rallies should be shorted on an intermediate basis, although how high we get between now and 9/18/09 is tough to say. My forecast calls for a lot of chop over this period which is consistent with what occurred in 1938.
This market has ZERO sellers right now and while my short deltas are not huge, this tape is frustrating the hell out of me. I can't stand to go long overnight and every time you short the market it just screws you. This has been going on for months and months and months. At some point it'll end but the question is when? I can't bring myself to keep adding shorts when we've got tons of fiat money coming into the system.
As prevously mentioned in my last post, I'll cover my current short positions if we CLOSE above the highs. Until then I'll have to be patient.
Assuming we don't breach the highs, I will continue to add shorts from here until September 18th while trading ES intraday on the long side as a hedge.
No ES trades today, even though there were plenty of opportunities.
Days like this are exactly why being a bear royally stinks. However, does this chart look very bullish to you, other than the fact that it's trending up??
Dow Jones Industrial Average - Daily
To me it seems momentum is waning.
Also, the average daily SPY volume is around 200M shares, yet we've only had 6 out of 25 trading days when we exceeded this level.
SPY Volume Distribution
Being a bear is very frustrating. I started a few days ago adding position shorts but if we close above the high at SPX cash 1039.47 I'll be forced to cover at a loss. Trading ES is way more profitable.
I follow an intermediate term cycle on the Diamond Trust ETF (DIA) which comes in handy every now and then. However, a word of caution: it should be used in conjunction with another timing methodology you may use.
The cycle I'm referring to is an 11-week cycle, and like all cycles it moves in and out of good/bad times but overall it is pretty reliable. Following are charts going back to 1998 that clearly show this reliable periodicity.
DIA 1998 - 1999
DIA 2000 - 2001
DIA 2002 - 2003
DIA 2004 - 2005
DIA 2006 - 2007
DIA 2008 - 2009
Its recent turn date occurred precisely on August 25th, 2009 which nearly marked the top of the bull run we've as of late. Whether this top holds for any significant amount of time is anyone's guess.
ES FORECAST
My transposed ES forecast continues to defy logic but is performing very well...in an inverted kind of way ;)
ES Transposed Forecast
I've adjusted the scaling so that the impulse move up we've seen from ES 991 to ES 1027 (which, ahem, is EXACTLY 36 points....9 x 4 Power of 9) lines up. If this scaling is correct, I would expect a move down to the ES 1005-1010 area, followed by more rally.
50 CENT
I saw this great video clip (HERE) of 50 Cent on the CNBC website shortly after the close that really struck a cord so I ended up buying his new book The 50th Law. I am an avid student of success and will pick up a book on the most successful people in any industry if I can get my hands on it. Emulation is key, even in trading.
One of my more long term goals is to reach a level of trading when I don't have sit around the computer all day long. This is precisely why I've focused a lot of my efforts on trading options.
One of the many advantages of using options is you can control risk in ways you can't with stock or futures, and to be honest, the trading of options can be more fulfilling because of the dynamics involved.
I learned a lot of the principles behind position managing options around stock from a very savvy gentleman who labeled his technique as a 'Box Trading Method'. It would be impossible for me to cover all the principles behind the methodology as you can probably imagine, but if you could picture it it would like something like this:
'Box Trading' Method
It involves a lot of practice but it comes down to rolling options in/out in time and up/down in price, as well as buying/selling stock in between. Over time, you create a giant calendar spread of sorts with huge break even points. It's a very dynamic process but when you see it done very well (as he does), the results are quite good. The only caveat being that it requires:
A lot of patience
A lot of planning
A thorough understanding of option greeks
ThinkorSwim has very good tutorials on the basics behind the process which you can find HERE.
Over the past 2 trading days, I've started to build such a position on SPY because I think we're entering a very volatile environment and the opportunities are going to be tremendous, regardless of whether you are a bear or bull.
On an intermediate basis the action we're going to see over the next 1-3 months will be a consolidation phase, followed by one more move up into Q1 2010. Many pieces of evidence such as my own forecast, cycles and the Bradley Siderograph also point to consolidation over the next few months.
Bradley Siderograph 2009
Bradley Siderograph 2010
Say what you will about the Bradley Siderograph, but the reality is that it provides a very good proxy for important turning dates on an intermediate basis and it just so happens that it closely matches my own forecast in terms of direction.
Generally speaking, my feeling is we could see some buoyancy to the market from now until September 15-18. Then and only then would we see a significant sell off, albeit short in duration. It's going to be a traders market.
The time to really load up on the short will be next year. The gamblers that are loading up on puts out to March 2010 (you know who you are!) stand a very good chance of being disappointed in my opinion. As always, I can be wrong but my strong feeling is I'm not (this time).
FORECAST
When I posted my transposed forecast I understand how people could think 'Well, if his forecast is wrong, then obviously an inverted forecast must be correct'. But to me it seems awfully eerie that we are matching turning points TO THE TEE on this inverted forecast. All technicals as well pointed to a sustained rally beginning yesterday/today and we've seen exactly that. If the inverted forecast continues to be correct in terms of its timing, I would assume a rally to 9/18/09 is absolutely in the cards. We'll see.
Transposed Intraday ES Forecast (Transposed from 8/21 onwards)
I suspect a big move up in the US dollar is coming over the next couple of weeks as evidenced by the USD/CAD currency pair. Note the overwhelming lack of overhead resistance.
Alexander Grant is a professional options trader with 10 years work experience in both the actuarial and investment fields.
Alexander has held the title of Registered Trader with both the Toronto Stock Exchange (TSE) and Vancouver Stock Exchange (CDNX) at one of Vancouver's prestigious investment boutiques - Haywood Securities.
He is a graduate of the mathematics department at Simon Fraser University with a specialization in Applied Mathematics (BSc).
