Tuesday, September 30, 2008

End of Day Market Analysis Sep 30, 2008

OK. Yesterday I said that I thought after the stunning decline that we could see a positive day in the broad US equities markets.

I was right. We were up somewhere in the vicinity of 4-5% depending on what market you were looking at.

So, where do we go from here? Good question. While yesterday it "just seemed ripe" for a rebound, today I have to give credit to "Genesis" at tickerforum.org for pointing this out.

Here is what he pointed out, and I'm also seeing setting up technically - by "technically" that means that i'm just looking at price and volume action and ignoring all the "news items" and fundamental factors because:

1.) i don't have time to parse and sort them

2.) i don't believe them anyways since they are all filtered through entities with ulterior motives (i know that sounds tin-foily, but trust me, when you are a trader you can hear the bias in the voices of the news anchors and their comments really really easily -- especially if your trade happens to be on the other side of their bias)

First an Introduction to Elliott Waves.

You could hold my knowledge of Elliott wave in a thimble. My understanding is about as deep as a parking lot puddle. But i'm going to tell you what i think i know nonetheless. :)

The basic idea (i think) is based on fibonacci mathematics, the symmetry (and ubiquity) of the spiral in nature and the mathmatical ratios that it produces.

In that theory it predicts that the market will move in "waves"

To make a long story short, 5 waves in the direction of a main move, and 3 wave "retracements"

In what length? (you might ask)

where this is where it gets tricky. In any length, basically. Like the spiral in nature, the theory is that the math is fractal in nature -- meaning you'll see the same pattern at any degree of "zoom" that you care to look at the markets.

What's this Have to Do with the Markets Today?

Click on and zoom in on the following image. This is the ES (s&p futures) since Sunday night. Each bar represents 1/2 hour of trading.

I tried to label these to make it clearer but i'm a doofus with my charting package so squint and maybe you can make out 1,2,3,4,5 and also a 1A, 2B, and 3B at the minor turns this candlestick chart shows.

Coming off the top as futures opened on Sunday night, you can see that the market did wave 1 (down), wave 2 (up) before the announcement that the bailout bill would not pass. After the bill failed, we saw wave 3 (down) , wave 4 (sideways), and wave 5 down before the closing bell.

Click on the image above to get a better view.

Now, overnight, the troops rallied, floated some rumors, started working on a new bill, announced possible accounting changes (cuz we really need more lies and leverage- NOT) and got the president to speak.

From Monday's close on you can see wave 1A (up), 2B (down) and wave 3C (up).

Now, remember what i said about Elliott Wave -- 5 waves in direction of movement and 3 in retraces.

But what about direction changes?

ah...that's the problem....until this resolves to either go ABOVE 1179'ish or below 1154'ish with conviction (with volume during trading hours) we won't know for sure if the three wave retracement is over and time for another big leg down


there is one more (5th wave) up.

So, what to do?

Notice that these breakout price points are also the predicted fibonacci retrace numbers of 38.2 and 61.8%--amd further notice we closed out the day almost dead on a 50% retrace of yesterday's move.

A reasonable trade is to go short or long at a break through of those points and to set a stop a point or so under it in case you're wrong.

At times this doesn't work and you get whipsawed, but right now the S&P market is "counting" from an elliott perspective pretty well it would seem....even with all the news/"event risk" out there.

Happy Trading,
Uruguay Guy

No comments: