Breakout, Shakeout or Fakeout?

The market fell as expected: the coiled spring of a nested 1-2 pattern sprung a gap down at the open. Wave theory was clear last night that if we gapped down we would break the recent low at 1182, which we did. We ended the day in what looks like a sideways minor fourth wave, with a fifth wave to follow. Some scenarios have Sp1045 (the Feb 5 low) as the eventual target, not necessarily tomorrow, but more likely the 1150 level proves support, which would mean a small drop, then a larger correction, then the final drop. Here is what is running around the wave-o-sphere:

• Breakout: Nic Lenoir of ICAP says "we are not done", since whether a 3 or a C wave down, it has more to go (ie. the fifth wave). He sees confirmation in forex, where the Euro broke $1.30 and the AUD fell almost $2, resting on 2000 DMA support. The aggressive breakout scenario says the top in and we break Sp1144, the Feb5 low, with more downside to follow
• Fakeout: Carl Futia mid-day thought we could bounce off 1180, but we ran right through that level. I am riffing on his headline above. He is likely in the fakeout camp, that the run back up to Sp1320 is still about to happen, and this drop could turn into a bear trap
• Shakeout: Kenny, Market Thoughts, EWTrends and a few others have the double correction shakeout, a sideways ABC-X-ABC that fools bulls and bears alike (see chart), with EWTrends and EWP giving a possible target of Sp1153 (a 38% correction of the whole rise off Feb5). The second correction, which we are in, may break as a triangle over more than a week, annoying both sides in the market. Market Thoughts has a good chart showing conceptually how the shakeout then leads to the final wave up

Comments

[Wave Rust]

It's a 4th and it has been. it needs another pop and drop intraday move tomorrow to complete.

buy the drop and hold on because it's going to be a wild 11 days.

take stock profits by the 19th then short by 26th

wave rust

[nspolar]

Yelnick, will send you an email. BP is starting to come loose with a bit more info. Most of what was first transferred and posted on this seems correct.

Here is an excellent picture that portrays the leaks.

http://tucsoncitizen.com/wryheat/files/2010/05/Gulf-cross-section-oil-spill.jpg

There are three leaks ... end of drill pipe sticking out of BOP/riser, end of riser, and crack in riser.

All rams in BOP have been activated, still leaking, apparently due to damage. BP is planning some remedial measures in well head area (complicated), in addition to drilling of relief wells.

ns

[DG]

It's a 4th and it has been.

Nope.

[Bird]

If the high of the 26th does not hold (except maybe a double top), then we are up until September.

[Mr. Panic]

I am beginning to believe more and more that the Major Top is in. I was a little reluctant to believe so because new highs had topped with the Dow back at its high but some information that I have come across as well as a tricky little stealth Dow Theory non-confirmation has convinced me more and more that we have seen the high. Yesterday, Dow Transports made a new high unconfirmed by about every index. Thus maybe we can apply the new highs rule to the new $DJTA high and thus we get nonconfirmation with the number of 52 week highs. Yesterday, was also the recurrence of a trading day cycle that has marked important turns(almost everyone) going back to last March's low. Some say it failed at its last occurrence but it did mark a low before the stock reaccelerated higher and I noticed that some of its proponents have given up on it or are no longer promoting it. Last week's Investor's Intelligence bull-bear spread ratio at 54%bulls to 17% (16?) was also of major top quality level with bears % aprroaching the 15%level seen at the January top. Hulbert also came out and said his sentiment readings were net 80% positive among Nasdaq traders last week, one of the highest readings going back to tech bubble days.

EEM was down 4.59% today and has dropped below 89 EMA, which some use to delineate the trend of a stock or average. $nya, new york stock composite,
has dropped below its January highs (actually most of January's lows also except the first day). McClellan Oscillator is midly negative so there is still room for plenty of downside action. FXB, British Currency ETF, looks to be gradually breaking down.....look for a crisis event to emerge from the UK soon.

[yelnick]

Panic, Bird - interesting to me is that a "Martin Armstrong" day, Apr 15, may be the orthodox top. It shows up as such in the NYA. The Apr26 top is then an irregular top, which is an original Ellliott concept that Prechter disdains, but we saw it in 1928/9 and 1999/00. If this turns out to be a B wave with a final C to go, the irregular top will count as an expanded flat of a complex corrective B wave. Since the STU got themselves into a triple ZZ formation, they are a bit stuck if the top is in, as their third ZZ counts poorly. They would be better off with the B wave! This leads me to conclude the odds are higher that this is a B on the way to a final high in August +/- a month.

On the other hand, a huge Neely triangle off Nov2008 re-emerges, which says the top is in:
- A to Jan09
- B to Mar09
- C to sometime in the middle, probably Nov16, but that top can shift backwards a bit or forward to Jan19
- D to Feb 5
- E to Apr15 or Apr26

[DG]

http://yfrog.com/0yspydailymay2px

The answer to the question is "Nobody knows". I don't think any of those counts are correct and that even if my count is correct (of course, I think it is, otherwise I wouldn't have bothered) all it means is that we are going to get a "larger and faster" correction than any since the February low and that it SHOULD retrace at least 30% of the pattern in price and/or time. Time-wise, that's about a 3-week correction and price-wise that means the minimum has already been reached. Maybe this is an x-wave Flat and we'll rally back toward the highs and then come back down to retest the lows? That would enable us to waste time without any more net price movement down.

As long as the late day lows hold on the SPY, QQQQ and IWM, the trade is long above 117.77, 48.62 and 71.11 (already hit) by 11 AM ET.

[nspolar]

Respected DG; so are you calling for a higher 'B' top here? Or a double top? Or a higher top? It seems you in any event are less than certain.

I am unclear on what you are saying.

ns

[DG]

It seems you in any event are less than certain.

Which is exactly the right approach to have in this market. However, I am 100% certain of my trade entry and exit strategies. The wave count will take care of itself.

I am unclear on what you are saying.

I'm saying that a pattern ended, as I suspected one was about to. From here, all the options Yelnick mentions (breakout, shakeout, fakeout) are still "live". If it's going to be a "fakeout", we could start toward new highs immediately because the minimum price requirement has been met. If it's going to be "shakeout", the minimum obviously won't suffice and we could retrace almost all of the rally from the February low (this, incidentally, is Neely's view, but I have an issue with the time factor in that scenario). It could be a "breakout" but there is no evidence of that for sure yet, so there is no point in worrying about it. If someone wasn't short, the time to go short was today's open and your stop would already be better than breakeven. There was also a long trade triggered, but that got stopped out. If a person were trading that correctly, there was a point at which the initial stop could have been moved to reduce risk by 83%.

Given that backdrop of uncertainty, the only logical trading strategy is to go long when the next "largest and fastest" rally occurs, relative to the decline from yesterday's highs. That already happened in the IWM when it hit 71.11 after dropping to 70.53 and it will happen in the SPY and the QQQQ if they hit the prices I mentioned by the time I mentioned.

[nspolar]

Respected DG, thank-you your answer is of assistance.

As you know I am recently short commodities, and more importantly today I took a tippie toe short in GLD (GOLD). I may be early.

It is interesting to see and hear of all the counts here on Yelnick's thread. Too Many? Between, what may be more interesting is where folk who post here seem willing to put their money, or put their mouth where their money is. Or maybe it is put their money where their mouth is. I get confused on that part.

I am sure you understand.

ns

[DG]

Too Many?

Yeah, two is one too many, since there can only be one real wave count.

[nspolar]

"...since there can only be one real wave count."

We can agree on that one DG.

ns

[trendlines]

Hi Yelnick,

Update on the Shanghai Composite: The Broader Triangle

http://trendlines618.blogspot.com/2010/05/shanghai-composite-broader-triangle.html

Still Bullish in the medium-term, and bearish on the long-term. Cheers

[Tony]

Hi DG,
Please answer a question that has been bugging me. A couple of threads back someone asked you about your stop management. Basically from what I understand you have a wider intial stop and narrow it once a price target has been hit. The question was why not just wait for the second target and then have a larger position. The bit I didnt get was how your method protects against getting stopped out once the second target has been hit- would be grateful if you could help me with this as I have been leaking money with poor stop management.
thanks

[patrick]

quick note Feb bottom was 1044 not 1145

Thanks love your site

[DG]

Tony,

No method can stop a trade from getting stopped out, but what I have found is that this particular method enables a very high level of risk reduction relative to the size of the initial trading position very quickly. In an uncertain environment, this is the top priority for me.

The point of raising the stop once the initial resistance or support has been overcome is that the market has provided an additional level of confirmation that the direction I am trading in is the "path of least resistance" and the the high or low which has now become my stop is of actual, not assumed, significance.

Conceptually, when I enter a trade, my hypothesis is that the market may very well move against me initially, but I have a limit beyond which it should not go. That is my initial stop. When resistance is overcome or support broken after I'm already in a trade, my hypothesis shifts to the market has provisionally confirmed my initial hypothesis but if that confirmation is real and not a "false positive", it should not move beyond the new stop from here on out. It can't eliminate "false positives", although further research into what creates a "false positive" trade where even though I move the stop it still gets hit could be worthwhile. It's a two-step confirmation process until I can have some confidence that the bottom/top I'm looking at is something meaningful that won't get surpassed by what appears to be random noise in the market. Most wave guys only look at one step, which is, does the bottom/top seem to be where it should be. In this kind of very complex wave environment, that is not sufficient. Even Neely does not set his stops correctly for this environment and his trading results suffer because of it, as I've said many times.

Just one final caveat is that this method works well in this type of market environment on using Hourly charts to get the set-up and set the initial stop. It does not scale up to Daily or Weekly charts, though. The market feature it is designed to exploit is not strong enough on those timeframes to make this method workable.

Stop management is definitely an area which gets neglected in a lot of trading literature, so that the writers can focus on entries. This has also been a difficult environment with lots of overlapping bars on an intraday basis. For the past three months, I've been basically flat, performance-wise, precisely because I don't want to lose discipline in trade management. The last couple weeks have been better, though.

[Michael]

Am getting long some energy names here like CLF. Also bought some LLL and LMT.

[DG]

Long trades triggered on index ETFs.

How the market does on this retracement should provide clarity on structure.

[Michael]

CLF already 3.70 up off the lows. Hope everyone caught that "gift" on the opening.

:)

[Michael]

Gotta love the COAL stocks like ACI, BTU, CLF, CNX and JOYG.

Truly spectacular trading vehicles. None better!

[TC]

CLF is now $6.00 off this morning's low. Nice call!

[Account Deleted]

Yelnick !!

Can u elaborate on the NEELYs Triangle a little bit more.Becos its quite a wierd looking Triangle if we consider the end points mentioned.Wht triangle is this.Also where does this Triangle fit into NEELYs Long term count of a NEUTRAL TRIANGLE since 2000.I mean what leg of this long term NEUTRAL triangle would the current Triangle(up move) be part of. Can u just elaborate more on this.

Regards
VB

[MHD]

Scotty.... prepare the warp printing presses for ludicrous speed. But captain, she can't take ludicrous speed... she'll fall apart. Scotty, ludicrous speed now, or you're fired!

[TC]

CLF is the biggest trading BEAST known to mankind!!!

Wow.
Just Wow.

You better have a very fast electronic trading platform and data-feed if you are going to trade this BEAST - - - That's for sure!

[Alex]

10 week cycle low coming in late....

http://img706.imageshack.us/i/hurstspx1020weekcycles.jpg/

[JT]

"It's a 4th and it has been. it needs another pop and drop intraday move tomorrow to complete.

buy the drop and hold on because it's going to be a wild 11 days." - Wave Rust

Agreed 100%

[Wags]

Investor's Intelligence just came out with 56.0% bullish newsletter writers, up from 54% the previous week. Bears at 18.7%

[Mamma Boom Boom]

I certainly miss all those loud-mouth pip-squeaks that been showing up and calling people idiots. Funny how fast they can slither away.

[yelnick]

Patrick, thanks for the comment. It is an rounding issue: 1044 rounded down was Feb5 low, 1045 rounded up. Since the target comes from above, if it hits 1045 it will be close enough to bounce without breaking below. Hence I picked that number. In the scheme of things, such precision is not important for the market.

[yelnick]

VB, it was an older count of his that he has moved off, but he has been flipping back and forth on this count for a while and it may come back!

I have seen it still extant on some ewave sites, although not often as a Neely count vs just as a big bearish wedge: For example:
- here from Shanky: http://3.bp.blogspot.com/_l8gHrhQiXlE/S-CDxA10FsI/AAAAAAAACO8/FcPn9KlUu3E/s1600/2010-04-16-PROPHET.png
- or here: http://1.bp.blogspot.com/_mNgsiAj3Xko/S-F5d1pyW6I/AAAAAAAACL0/jhPtdXU6s_s/s1600/fib-5.png

I am intrigued by this since I think Neely's ideas around Terminals and big triangles are interesting, if not orthodox ewave. The upper trendline of the Big Bear Wedge has proven resistance all the way during the Hope Rally, and provides a good slope for determining if a break down is the breakout vs fakeout: it must move faster down than that slope up.

The lower trendline of the wedge off Mar2009 has not been useful, but a different trendline drawn off the Nov08 low has touched the July 2009 and JFeb 2010 lows. We have NOT yet broken that lower trendline. It eyeballs around 1150 over the next few days.

[yelnick]

Patrick, my apologies, you were not referring to 44 vs 45 but 1145 vs 1044. Me bad, my mistake, thanks!  I corrected in the main body.

[Alex]

New moon is 8 days ahead. Summer solstice is only 46 days ahead.

This New Moon will very likely cause a bullish rally (fooling the premature bears).

Any moon shoot out of these 5/10 week lows would put a LEFT justification on the charts suggesting a bearish cycle into June.

[DG]

"I certainly miss all those loud-mouth pip-squeaks that been showing up and calling people idiots. Funny how fast they can slither away."

I don't. I hope they all fell in the shower and are now trading the great market in the sky. And losing.

[From The College Kid in The Back that Always Raises His Hand]

"I certainly miss all those loud-mouth pip-squeaks that been showing up and calling people idiots. Funny how fast they can slither away." - Mamma

Care to offer a specific trading recommendation, or do you just like seeing yourself post the typical "drivel" that you do?

Last week, I seem to recall someone asking you which commodities you are short and from what prices and yet you never posted anything.

Do you actually trade???
If so, what are your current positions and exit points?

[Account Deleted]

Respected Yelnick !!

I got the triangle thing.But where does this Triangle fit into the larger structure since 2000.Or has Neely even changed his NEUTRAL Triangle view on the larger structure and shifted it to FLAT.So effectively we would be in impulsive C wave of the FLAT since 2008 and are in the process of completing the WAVE 2 followed by Wave 3 4 and 5 leading to disastrous lows going forward.Becos the way this Triangle is structured with a very big B wave it just implies that we could see even lower lows.

All this seems to be way too confusing to say the least.Can u throw some light on this.

Too much Flip Flopping for ones comfort and credibility.

Regards
VB

[Michael]

Cramer just came on CNBC and said that the market has become so "volatile" that if you came into CLF short, you lost money. And that if you came in long CLF, you lost money.

I'm sorry, but he has no idea what he's talking about.

Too funny.

:)

[FBI Special Agent: Pedophile Division]

Dude, what is your OBSESSION with "college-age kids"?

Seriously, it's spring-time, you think college-age kids are going to be on some message board with a bunch of guys?

THEY ARE ALL DOWN AT THE BEACH CHASING TAIL, MORON.

[DG's Dad]

I think you are WRONG.

There are a lot of nerdy wanna-bee's like my beloved son "DG" that have no chance at getting any tail because they are so ugly and socially inept.

As a result, my son spends a tremendous amount of time making posts on this blog - - - trying to look like he is doing something "productive" with his life.

My apologies to all.

[marketman]

The market just hit the 1161 handle in the SPX where Wave (5) = 61.8% of Wave (1).

Time to get long???

[Account Deleted]

DG !!

The mkt action in last few days suggests more of an impulsive down move than a corrective b wave in the assumed last third combination from the March09 Bottom.In short it seems more like the C wave of a FLAT (since Mar08) tht u r assuming.

Regards
VB

[Mamma Boom Boom]

>I don't. I hope they all fell in the shower and are now trading the great market in the sky. And losing.<

Of course that's what I really meant, I was just being a smarty.

BTW, I smoked one out "Posted by: From The College Kid in The Back that Always Raises His Hand" |

[DG]

Posted by: DG's Dad | Wednesday, May 05, 2010 at 11:56 AM

I know you have this entire series of fantasy constructs about the people who post here.

I will only say this: I hope your trading is as accurate as those fantasy constructs. Dig?

Keep in mind that this statement is coming from someone who'd enjoy nothing more than drop-kicking you in the face with a pair of steel-toes fitted with iron spikes. You can imagine just how successful I want your trading to be.

[DG]

VB,

I am always cautious about labeling something as an Impulse. I just don't think I have enough information to make that call as yet.

[DG]

"Of course that's what I really meant, I was just being a smarty."

I figured as much. I love how they (well, he, actually) talks about being such a serious TRADER, yet 90% of the crap he posts is non-market-related.

[Dratler]

Anyone want to be that Neely has to change his current count?

[Hockthefarm]

Bill Gross hits the nail on the head:

"Serious debt restructuring in Greece, Portugal and Spain within 12 to 24 months.

Gross also mentioned that the ratings agencies were worthless. Nothing new there. But he went on to add that the ratings agencies basically have worked for the investment banks for years. Pretty much tells the tale.

Hock

[Hockthefarm]

"Cramer just came on CNBC and said that the market has become so "volatile" that if you came into CLF short, you lost money. And that if you came in long CLF, you lost money."

I'm no Cramer fan, but he didn't say that at all. I saw the interview.

Some people only hear what they want to hear. Not very objective imo.

Hock

[yelnick]

VB, great question: "where does this Triangle fit into the larger structure since 2000?"

Scenario 1: Nov08 finished a flat off 2000 and the trinagle is an X wave with a second corrective structure to follow. Implication: maybe Mar09 is the low, or if we break below, it is not much lower. this is not the end-of-days

Scenario 2: 2007 was the orthodox high, not 2000, and we are in your ABC down with the Hope Rally as a triangle B wave. Not a Prechter sort of triangle since it isn't sideways, unless he really expands his thinking on his Skewed Triangle form. This count makes the drop into Nov08 a "3", and the rise a "3", hence a "5" C to come. This is a lucky count, since the flat C should not go that far down below the Nov08 level of A. Much worse if it counted as a zigzag. Again, not the end-of-days

Scenario 3: 2000 as the orthodox high, and we are in a large wave IV triangle from 2000 - 2017. We are still in leg C of that triangle, which started in Oct07, and it is breaking as a flat as in scenario 2. This too is a lucky count, and it is similar to scenario 2, except it implies a much longer corrective period, not a deeper one.

So while this may not be Neely's current view, the Neelyesque perspective is more of sideways to follow, not down down down.

[Hockthefarm]

The attached chart may help explain Cramer's discussion on CLF:

http://finance.yahoo.com/q/bc?s=CLF+Basic+Chart&t=5d

Seems that wonder boy chose to exclude his refence to time. Maybe time is not relevant when it comes to "adult traders". What a joke.

Hock

[Paul]

I have to say I am astonished as to how well gold held up the last couple of days. While everything was tanking, including silver, gold just held it's ground. I'm curious as to what Hochberg's current wave count for gold is. The last time I subscribed to STU (a year ago) he was predicting an eminent drop to below 680. Is he still beating that "gold is gonna crash" mantra?