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You know what they say, they don’t ring a bell at the top. This is not my top call, and readers should know I actually take great pride in having had the discipline to not call a top back in July, particularly since those levels were just taken out this week. But still, I know for the short term, at least, I’m going to be watching closely to see if there is anything getting started on the downside. Seems a bit like going against the trend, I know, but isn’t that what we always do? Of course, all it means is I have specific levels which have to be taken out before I’ll enter a full short position, and then certain targets and stops that, if they find support, will get me out. It’s called trading the charts – if there’s still some more wiggles higher, which there very well could be, they won’t catch me short. And this week didn’t catch me short either. In fact, as I wrote in last week’s update, there was no reason to be buying puts last Friday, even if everyone on the street seemed to be doing exactly that. The evidence simply did not support a bearish attitude, though as usual if the bearish attitude is already there just about anything can look like a sell. Well, not only did the markets not go down Monday morning, they punished the shorts and launched a rally that saw all-time new highs. We got long 1542 and had 1560 as the target for a market pause, as you can see from the chart I posted as soon as our 42 long trigger hit:
The high on Monday was 1561, making this trade alone worth $4500 on a single S&P futures contract. Not bad for only the first day of the month! So if anything, the bells I’m hearing are wedding bells, because, whereas over the summer we had to stick solely to our numbers, trading this week required the perfect marriage of Elliott wave theory and our proprietary target numbers. As the chart above shows, a consolidation period is the natural follow-up to a fat, juicy rally. But not a crash. We actually had two primary patterns in which the consolidation could unfold, shown below, but generally, since the ultimate target for the move was higher, at 1569.5, we advised not to exert too much effort chasing the downside.
As it played out, the consolidation ate up most of the week with the market spending long hours bouncing from and vibrating around our 1552 number. But the whole time, while it seems plenty of traders must have been loading up on puts for the big crash, we knew we were just biding time before the fifth wave advance to my 1569.5 target. The idea to get us through those sleepy days in the middle of the week was simply this: if it ain’t broke, why fix it.
We knew about 1569.50 even before Monday, and it had been an upward battle convincing most of them we were setting up to take out the previous highs. It just wasn’t supposed to happen. But like I said, going against the trend is just something we do when the evidence supports it. Maybe they should have known better since, after all, we bought the three wave decline into 1375, refused to call a market top, and called the entire selloff from the June highs a correction. And so, with our pattern before us, Friday was a no-brainer. We had targets at 61 and 67.5 - 69.5. When the early morning rally stalled at 61, we looked for a breakdown to short, but it never materialized. The market not only hit the 69.5 target that looked impossible a few weeks before, but charged four points higher before finally reversing in the final hour. In the end, the week was a triumph for unbiased trading of the charts – particularly our special blend of Elliott wave wedded to proprietary target numbers. After the third wave that supposedly surprised the street on Monday, the rest of the week played out as a picture perfect fourth wave consolidation that vibrated around our target number before the final fifth wave brought in the new highs we’d expected for weeks. If the street wanted to hold out for Friday’s jobs numbers and make them into a big deal, we weren’t going to fight it. But this isn’t to say, as some probably think, that I consider the market fundamentals to be worthless, and news garbage. Far from it. Readers of this update may doubt that our consistent results come from pure technical analysis. They may roll their eyes when I say to turn off the TV. But my question for them is: what happened to the CDO’s, and the runs on the banks, and the next hedge fund blow up? It was really supposed to be the end of the world out there, so why are we back to record highs? Why is the only remnant of the August crisis a long wick on a weekly hammer? How did we go from negative for the year to up over 10% in less than two months? My answer is that those fundamental problems are not gone, that even if they’ve been shipped to Europe they will likely come back to haunt us – but that they were never going to be allowed to do so without first completing the pattern. When the count is done, who knows, maybe then the bears and the fundies guys can have their way. So, to make a long story short, if you thought last week was painful, you might not have seen nothing yet. As I’ve been saying for the past few weeks, we’re watching several markets that are at or near target highs, but, just as in June, I’m not willing to say an absolute top is in on this market – and waiting for confirmation is just one of the reasons. What I can say for sure is there are two possibilities from here depending on whether we’re going to complete an Impulse soon, or whether this was a b wave rally – and we have the numbers for both. IF a short term decline becomes another corrective wave, don’t rule out Dow 15k by year end!
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