Big Tease Countdown

Over the past two weeks our three market scenarios (and a wildcard) have steadily shrunk to one: the Big Tease. The Big Tease has completed the minimum requirements for a bounce, and could be done; but odds favor a bit higher and a bit longer to go. Nonetheless, we are now on a countdown to the next fall. Let me walk through the odds and what to watch for.

 

This chart from MarketThoughts is a reasonable starting point for the Big Tease. The first wave down started Apr26 at Sp1220 and followed the requirements for an impulse down:

1. it broke in five waves with the third not the shortest
2. the second and fourth alternated in structure
3. it ran down a channel of parallel trendlines marked by waves 2 and 4
4. the main waves down were all impulses, with the third wave the most violent (the Flash Crash) and the third of the fifth wave having a sharp fall with gaps down. 

(For Neely followers, the form fits MEW 5-2 but fails the test of an extension, where the longest wave should be more than 1.6x the next longest. In this case wave 5 ran from 1174 to 1041 or 133 pts and wave 3 ran from 1209 to 1109 (truncated fifth wave) or 100 points, so a 1.33x relationship.) 

The countdown has to do with when and where the wave 2 bounce will end. The first wave down was an 180 point drop from Sp1220 to Sp1040, and took 21 trading days from Apr26 to Mar25. The wave 2 bounce so far has gone just under 38% in 13 trading days, or 62% of the time of the first wave. This is about the minimum retrace, so it could be over. The odds however point to more to come:

• 50% of the time a wave 2 retraces 50-62%
• 20% retrace less than 29.3% (requiring instead a fib relationship in time)
• 23% retrace 30-50%
•  7% retrace more than 62%

(The 29.3% is a repetition number related to the square root of 2 and comes from the use of squares to mark time/distance targets, a technique in Neely's MEW and used currently by Carl Futia. Half the square root of 2 is 70.7%, and 1-70.7% = 29.3%. The stats come from Zoran's work.)

Applying the thinking of the Monty Hall Effect, once we went past the 30% level, the odds shifted to 2:1 to the 50-62% retrace (50% vs 23%), giving a target of 1130-1150. This is also the range of the inverted head & shoulders (1140) and where wave C of wave 2 (marked as the yellow Y in the chart above) is 1.6x wave A (1147). 

The main supporting factor of today's high being the end is it marks the third time in three weeks the S&P has tried to break above the 200 DMA. Each attempt has come with less volume and fewer advancing issues (there is a good chart on this in todays STU.) As the STU comments: "These figures suggest that the effort to rise above the moving average is becoming exhausted." Strike Three! calls Bespoke:

Wave 2 counts pretty well as a flat correction, with A=C at today's high and the B wave retracing essentially all of the A wave - typical relationships. Still, wave C is not clearly a five-wave pattern, and the STU notes that it could extend further, at least to cover the gap at Sp1115 / Dow 10444. 

My take: I expect this to take more time, closer to the end of the month (and the quarter) or even past the fourth of July weekend. If we do pop above the 200 DMA, it is likely to be a fairly sharp thrust and then quick fall back below (a false break). For all of this to happen, we might see the simple flat now begin to break into a more complex corrective wave, staying in the 1080-1105 range before the false break up. 

The triple witching Friday is a good moment to watch for a sharp move as positions get cleared out for the quarter. The cash settlement index options allow a form of gamesmanship which might explain the odd pattern of a sharp rise or dip at the close. A major player can take a much larger options than stock position, and then either buy or sell enough of the basket of index stocks to move the index, benefiting with the leverage in the options. A small cost in the stock basket can return a much larger options profit. If we presume the option holders are long into Friday, look for a spike in the S&P before the cash settlement. It will look like a short squeeze, which it probably is, but self-induced. 

Comments

[Roger D]

If you look at many Dow stocks, IBM for example, some have just finished their corrective waves off the "fat finger" bottom. To reflect that,I have this count. Those looking for a further bounce,will probably not get it. If this count is right the next leg down has started.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/11421a0e-6821-4802-942e-acb549aba1cf

[Roger D]

This count is a variation of the other.

http://www.screencast.com/users/parisgnome/folders/Default/media/48cde6a6-1a59-4450-8cbe-69a84c520ea2

DG,

I'm sure you will love these,lol.

RD

[DG]

Roger,

If we go under 109.39 by 9:55 ET tomorrow morning, I will be going short. I had a short trade that got stopped out at the open today. But, I also had a long trade from Friday that got stopped out once we started declining in the afternoon for a profit. Under current market conditions, playing only one side of the market is myopic.

I never like to say "this pattern is done" until the market does something to warrant it. I was watching for a short trigger today and we missed it by .08 on the SPY. I thought for sure it would happen, but it didn't. So, rather than just jump in blindly, I actually lowered the price at which I will short.

I agree with Livermore that I'd rather short from lower if by the market moving lower I get a higher probability that I'm on the right side of the market.

[Mr. Panic]

SP needs to close the week below 1087(the close 4 weeks ago) to maintain its TD weekly downcount which it should do if this is a new down wave. More on this at the end of the week.

[Roger D]

"I agree with Livermore that I'd rather short from lower if by the market moving lower I get a higher probability that I'm on the right side of the market."

DG,

I think you have the right strategy. I will be watching the DAX and USD wave structure tonight. I expect the DAX to start down and USD to continue to advance off todays low. If my count is right tomorrow will be very important.

Good luck,

Roger

[Dsquare]

From a Neely perspective, I think you're wrong on the extension (as long as one wave is longer than another by 1.62x is all we need and 3 isn't the shortest). But I doubt one could count a truncated 5th wave on a 3rd wave (although theoretically you could have a missing wave 4 of 3). Truncations should only occur on 5th waves or c waves as these truncations "anticipate" a big move in the opposite direction. Since 4th waves are counter-trend waves they shouldn't be powerful enough to distort a 5 wave structure.

[barack0]

Nice synopsis Yelnick. If the 200dma gets taken out today at close, bullish, if not, bearish.

[burritO]

I still say the goat's rear-end is behind door #2

[Mamma Boom Boom]

Roger, is that you, yelling for help?

[dom]

Mamma I've been a naughty boy and need to be spanked

[usdollar]

My guess is that this final c wave up to B is 3-3-3-3-3, so wave 3 is doone, 4 is going now, final abc up to 5 of c of B is left to do.

[Roger D.]

Mamma this is all USD related. The final exhaustion up,last gasp. I would short below 1099.50 for agressive traders. This market is topping before our very eyes.

RD

[Mamma Boom Boom]

>Mamma this is all USD related.<

Yes, do go on. I have a pencil in my hand.

[DG]

Roger,

Serious question. Assuming you're posting your scenario because you want people to realize the precarious state of the market, aren't you undermining your own message by posting EVERY SINGLE DAY that "today is the day"?

Again, think about it probabilistically. How many waves of the degree you want to trade have completed in the past year? 1? 2? Sure, it depends on your wave count, but it can't be more than 10, right? That means that in ~275 trading days from the March 2009 low, 10 important patterns have completed. That's less than 1 per month! The probability of one completing on any given day is LOW, not high. Seriously, just relax and let the market do its thing.

Why would any rational person listen to you at this point?

And, if you're posting it just to "get credit" for calling a top, isn't that just your own need for ego gratification talking?

We could rally for weeks here, to consolidate the initial decline. Are you seriously going to post every day for that entire time that "today is the day"?

P.S. Pushing the causality off to the US dollar is irrelevant if you are making market calls on the SPX. All it means is that if your dollar count is wrong, your SPX count is wrong.

[Roger D.]

DG,

Ok, My count right now is yesterday was a X wave down. Today is the final abc up,in which we are in c now. The financials will not confirm, so if it tops today, maybe,but we should fail here again at the 1107 pivot.

Your point is well taken but, I don't know anybody,that knows exactly what the wave count is, probilities are inherent in wave counts. The best thing is to couple tem with main support and resistance levels. The market structure tells me this rally is at a end.

Your'e point about let the market do it's thing is right on.

Roger D.

[Roger D.]

5 up, so I added to my short position.

RD

[DG]

Based on what are you calling anything a 5 up? Is your stop at the high?

[Mamma Boom Boom]

Now that it's too late, we get some candidates that care.

http://www.youtube.com/watch?v=6iQ7ZDUutU4

[MoneyMaker]

Roger,

I'm sorry buddy but you have absolutely NO IDEA what you are doing. That much is certain.

[JT]

"If this count is right the next leg down has started." Roger

Once again, you are wrong with your bearish calls and getting absolutely crushed. It's a wonder that you have any money left to trade with.

Every day we hear "This is the Top!!!" from you. You have no credibility whatsoever here. Wish Yelnick had an IGNORE button.

[Mamma Boom Boom]

Roger, I hate to rub salt into the wound, but I told you that you were probably going to get your butt kicked today.

Actually, if you just 'have' to be short, right now is a pretty low risk time-zone.

[Roger D.]

Mamma,

I feel pretty confident about this terminal pattern.

http://www.screencast.com/users/parisgnome/folders/Default/media/ffb078d9-1fc4-405b-a1bc-aba7f271ccce

Roger D

[DG]

Roger,

Honestly, you may want to think about whether or not you are "addicted" to trading. You seem to crave the excitement of a huge bearish decline than to look at the market objectively.

Look at how quickly your "5 up" call got destroyed. Go back and look more closely at the charts and SEE why you were WRONG and LEARN for the next time! There was never any "5 up".

[Mamma Boom Boom]

Roger, don't you think your being a little selective, if not downright sloppy, in drawing your lines?

[JT]

Agreed 100% Mamma.
Those trendlines are "fitted" to what Roger wants to see happen. They are indeed very "sloppy".

[vipul garg]

Mamma Boom Boom,
"Roger, don't you think your being a little selective, if not downright sloppy, in drawing your lines?"

i like the good old subtle british humor here.

[Michael]

EXAS Vipul.
EXAS.

[JT]

So much for resistance at the 200 day MA. LOL!

[dom]

Mommy, I need to be spanked!

[da bear]

... looks like my count.

what exactly are X, Y, and Z waves? When I see this in EWI letters I usually think that something odd is going on.

Yeah, I would rather label this new rally as an a-b-c. So a 'c' wave target up a little higher would work. or that would be iii of 2. I guess we wouldn't really know until the DOW broke below about 10,200. A break below that (if DOW 10,500-10,666 is hit) and the wave 2 is over and the vaunted 3 of 3 is here.
The last BIGGIE-SIZE 3 of 3 took the DOW to, uh, 41.

Look for the low for this UBER-BEAR to also occur after this BIGGIE-SIZE 3 of 3 is over. A Prech-tacular low of DOW 911 is possible.

July 2012 could work. That would be 80 years after the last mega-low.

Then would come the BIG WAVE 4 similar to the 1932-1937 rally. Yes, that was a WAVE 4. It was a fill-the-gap move within a long-term bear market and lead to the Depression within a Depression (within yet another depression?), aka the FINAL WAVE FIVE down.

So a 3 of 3 of C low (along with the requisite teenie-tiny 5 of 3 of C higher low or double bottom) for the summer of 2012.

A WAVE 4 top in 2016 or so, then a WAVE 5 low in 2017. That would fulfill basically all of Prechter's time forecasts.

da bear