Spiky Market Triangulating on a Direction

Mother Market is a non-linear chaotic system that runs most efficiently at the edge of chaos, which it is doing right now. In more prosaic terms, the recent spikes denote distribution - movements from one opinion to another - with short squeezes and rapid pops along the way. That is how the edge of chaos looks. At some point it will find order and pick a direction, and I think it did that this morning - up! Duh ... 

Later today I will get some insight from Prechter et al. but I want to share a perspective of Tony Cherniawski in an email he sent to his followers. The chart shows us in a triangle. Triangles are useful indicators of order out of chaos, since they always come as the penultimate (the next to last) wave pattern. This one will be followed by a final break up, which again happened today, so Tony's pre-marekt call was spot on. (Overnight the emini had also signaled a strong open today.)

His target for the break before the open was Dow9785, which we crushed through, with a secondary limit of 9834, which we slightly broke thru and faded off. One possible count had been nested waves 1-2, but breaking that level broke that count. (Yesterday the STU had dismissed that count as unlikely since the inside wave 2 - the last four days - was too large compared with the outside wave 2 candidate.) Nevertheless the triangle would say this move is the final one. 

The major alt count is the drop off the recent highs was an X wave, and we are or soon will be in the early stages of a third zigzag up. The wave count is ambiguous as to whether X has ended. It may be Tony's triangle (which he notes is not that visible in other indexes, making it a questionable count) denotes a B wave of an ABC inside that larger X wave, and we could fade below the recent highs after the C ends. I find this count curiously interesting because it means Mother Market will fool the maximum number of traders: the bulls will pile on thinking Dow10K is again in sights, and the bears will have backed off their short positions. 

Comments

[vipul garg]

"Mother Market is a non-linear chaotic system that runs most efficiently at the edge of chaos, which it is doing right now. In more prosaic terms, the recent spikes denote distribution - movements from one opinion to another - with short squeezes and rapid pops along the way. "

very important post. must pay attention to.

[Mamma Boom Boom]

It's nip and tuck. Depends on what idex your looking at.

[Hank Wernicki]

100 % Short

Market is going to Tumble

Stop intraday high for the SPX !

Hank

[Mamma Boom Boom]

Hank, I was just combing thru individual charts. A lot of them in downtrends. Thought I'd pass that along.

[DG]

"Distribution", to me, says stocks are flowing from "smart money" to "dumb money". How do you discern that from charts?

[Mamma Boom Boom]

DG, I've asked that question myself. Could make a good topic. I've never found an acceptable answer.

[da bear]

DOW 10,000 would give some room for the dollar to put in a solid low and for gold to put in a solid B wave high.

da bear

[DG]

Ned,

There is one pattern in NeoWave that I think is a clear sign of "distribution" and that is a Non-Limiting Triangle, which is most common at the end of a Corrective pattern. The reason I think it is "distributive" is because, like most Triangles, it makes its high on the first wave up (wave-A). Waves C and E then allow the "smart money" to sell to the suckers who are looking for new highs. If one occurs on the way down, wave-A would be when the "smart money" covers its shorts and then is a buyer of the shares the dumb money sells during waves C and E, when the suckers expect new lows. That puts the shares in strong hands for the inevitable squeeze and reversal back up.

For a recent example of what I think was one of these patterns, look at the action from Thursday afternoon of last week to the spike bottom on Friday morning following the employment report. That's wave A. The rest of the day's consolidation with a slight upward bias is waves B through E. Then, the squeeze this week.

This, of course, is a conceptual model and I have no information on the identities of the buyers of those shares. Also, Non-Limiting Triangles can appear in places other than at the end of Corrections, for example as an x-wave, in which case they signal a continuation of the trend in place. It would be possible to link those patterns back to "accumulation" or "distribution", I think, in the sense that they are patterns that fool people into think a specific type of move will follow the Triangle, but a much more powerful-than-expected move is what actually happens, which would again throw the "dumb money" off-kilter.

Anyway, that's pretty speculative on my part, but I do see the term used and have not seen a concrete definition of it.

[Mike McQuaid]

The trend is up.

[Mamma Boom Boom]

I appreciate the response. I had a friend that followed the smartmoney/dumb money index, pretty close. (I think that's what it's called) It calculated trades by the time of day. I just never seen any evidence that it was factual.

[Hank Wernicki]

Ned:

Fractal was cofirmed at the close !

We Tumble starting tomorrow !

Hank

[Mamma Boom Boom]

Hank, thanks.

[Mamma Boom Boom]

Also, my AD3 went solid down, and below zero, at the close.

[Sherman McCoy]

Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”.

Did any of you bears make money, today? When was the last time you did?

[bears]

When was the last time you did?
1076 to 1013.

[Mamma Boom Boom]

Sherman McCoy, do you float?

Some does, some doesn't.

[teaf]

i quote the best technician i ever knew, "there will be no bears left when this market tops"

[DG]

Since we're doing real-time calls, I will say that while I see a retrace of the move up this week so far on tap, I don't see us going below last Friday's low at this point.

[DG]

Posted by: Sherman McCoy | Thursday, October 08, 2009 at 02:40 PM

I think you're looking for the "Barlett's Familiar Quotations" site. This is a trading site. Post something real-time or go home.

[DG]

i quote the best technician i ever knew, "there will be no bears left when this market tops"

Posted by: teaf | Thursday, October 08, 2009 at 02:54 PM

That's a bit overly dramatic, no? There's a class of perma-bear who wouldn't change their minds if we went to 3000 on the S&P. Or, if they changed their minds, they'd go long expecting like a 10% rally and then a 50% decline or something similar.

[bots suck]

Okay, web bots now see big event.

Tomorrow, washington dc crawling with little web bots clogging up traffic and falling down stairs because their legs are too short. Nasty, nasty little buggers.

[min]

funny

[yelnick]

DG, a lot of technical patterns show distribution. a H&S is a classic distribution pattern, when they work. with ewaves, the waves 4 and 5 of move often somewhat match the waves A - B or 1 - 2 of the change of direction. Bulls who bought at the top of 3 (and the start of 4 down) 4 on the way up often kick themselves when the break down goes below, worry during wave 5, and then wait to sell out after the inevitable drop and bounce off the top. This is why the wave 2's or B's of the flight down often hover near the 4th of the 3rd level. The nervous nellies sell when wave 2 or B of the down move gets back to their purchase level, counting themselves lucky to get out.

Whether they are smart dumping on dumb is a matter of perspective (or perhaps more precisely is only figured out in 20:20 hindsight), since (for example) H&S often fail, and so too the expected P3 down might not materialize. As now? So maybe buying on dips right now is still 'smart.'

The prime fractal of the market is a thrust and plateau. It is usually unclear if the plateau is a top or a pause. Plateaus by have to have some distribution going on, or they would break as a thrust. Interesting is that a thrust does not have to have accumulation, since a market can rise on decreasing volume.

I think what is not well integrated into ewave (although I think Neely has done a tighter job than EWI) is to look at the pattern or fractal as a multi-dimensional object, and integrate momentum measures in well. Right now it seems to be subject to discretion, and the momentum indicators are looked at but not coupled to (mathematically) the price/time fractals.

[DG]

yelnick,

I guess I want to define "distribution" in a way to link it to a traders' P&L, so that we can say that a trader who is "distributing" is taking profits ahead of a reversal that will stick over the relevant time-period for that trader (intraday, daily, weekly, whatever). Otherwise, it just seems like "distribution" is another word for a two-party trade in which neither party has an "edge" in the trade (which, as you know, is the hypothesis that many academics hold about the market in general), so there is no "smart" or "dumb" money. The same with an "accumulation" pattern.

You are right that in an Elliott Impulse one can make the case that wave 1 should show "smart money" accumulation and wave 5 should show "smart money" distribution.

I agree with your last paragraph and, as I have said probably too many times on this site already, one of Neely's most significant advances in wave theory was to more strictly define what makes a "real" impulse wave (and, by process of elimination, to define everything else as Corrective, with the corollary assumption that any wave that is Corrective has a high probability of being retraced a significant amount, i.e. is not a good trading environment unless you are prepared to trade against price extremes). The rules of which are exactly those mathematical time/price relationships (Extensions and the Fib relationship between waves 1, 3 and 5), as well as structural relationships (the Alternation Rule for waves 2 & 4 and the Overlap Rule for waves 1 & 4, as well as Subdivision, once one takes a longer-term view), which took out much of the subjectivity of Impulse wave identification. As I said yesterday, I think the main problem with Daneric and, by extension, EWI, is that they want to label every move as an Impulse. Then, since that is probably incorrect, those moves end up being nearly fully retraced, because they are Corrective, and the count must be reworked. I just get kind of surprised that this fact never has caused the people in question to take a step back and ask why this continues to happen and why its happening is limited to Impulse waves, i.e. hardly ever does one identify an Impulse as a Corrective wave. You hardly ever see anyone change a count from, e.g. wave-A to wave-1 or an A-B-C to a 1-2-3, but you see many counts shift from 1-2-3 to A-B-C. That fact provides information about the underlying probabilities of various patterns, in my opinion, and, the empirical analysis of the structures that remain 1-2-3s (and add 4-5 as subsequent market action unfolds) should be the basis of a set of rules to define "real" Impulses, which is what I think Neely has done.

[psycho_puppies]

Alcoa traded well above it’s daily average today after it’s earnings announcement. Of course, the announcement was less worse then was expected so the news claimed the market went up because of this. Anyway, would you all call AA being accumulated or under distribution based on the activity today. After all the noise AA went up a whopping .15 only to lose most of that after hours.

[psycho_puppies]

"Fractal was cofirmed at the close !

We Tumble starting tomorrow !"

Or we grind up some more on anemic volume. How accurate can fractals be when there are so few participants? I’m not arguing your theory I’m just wondering.

[yelnick]

DG, good comments as usual. I wonder if the simplification starts by dropping waves 12 and 45 as impulsive; the impulse is the 3 or an extended 5 (or A in a zigzag and C in a flat). The patterns around 45 in one direction and then AB / 12 in the other are often where everyone gets messed up counting. Also the time scales can fool. It is pretty easy to see the move since Mar6 is corrective, even if fast up; on monthly scale, it can look impulsive, but on the scale of the unfolding pattern (10 years) is still a relative blip.
One area in particular where I think Neely has added to EW but EWI still fails to use is the terminal pattern of 5 waves, which can looks an awful lot like a 45 to AB/12 topping or bottoming pattern, especially when the wave 3 hits its minor 45 ending. Little 45 + big 45 up + AB / 12 down breaks as a terminal when started at the end of 4 of 3. And as Prechter often points out, the subsequent drop usually hits the 4th of the prior 3rd level as a key point.

[min]

>>Sherman McCoy, do you float?
Some does, some doesn't.<<

Good one Ned.

I would bet he's the kind that floats.

Sticky, Stinky, Slurry, Slimy, Smelly Sherman Turd McCoy, has a good ring to it, right?

We gotta take it easy on him though, with a name like "sherman" you know he's had a cork up his a-hole all his life, so it's gotta come out somehow... poor fool.

[sucker]

sucker

[Wavist]

"Okay, web bots now see big event.

Tomorrow, washington dc crawling with little web bots clogging up traffic and falling down stairs because their legs are too short. Nasty, nasty little buggers."

ROFL