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Friday, June 11, 2010

E-minis [Update 1:48PM]

[Update 1:48PM: Its probably bad form to count VIX waves but what the heck!  Wave 2 technology and targets might work in that it will retrace somewhere into my "blue box" virgin area. That would be the "blowoff" and one close under the BB which is a bearish setup once it closes back inside. Just speculating again here. 

At the very least a backtest of the 50DMA and/or 200DMA. Also that gap area will likely be closed. The lower one should stay open (like the upper SPX gap near 1200)
[Update 1:30PM: Updated squiggles]
[Update 12:30PM: Updated squiggle count based on this is Minor 2 up. So working on [a] I suppose.

Note the suggestion for a truncated low which takes into account why the SPX failed to break under 1040 by a hair.

1068-1072 is the bull defend support area.  Also note the big wide up channel.

[Update 12:05PM: Not by coincidence, the /ES is also working on trying to break over its bearish downtrend line. One poke above this morning was beaten back but all the market has to do is "rope-a-dope" sideways and it will achieve its goal.  Thats basically the plan for the EURO to break over its trendline also.

And might I add, neither of these are a "sure thing".  In fact the contrarian play might be to short it just when it thinks its in the bag.] 
[Update 12:00PM: Here is a closer look at the EUR/USD chart I showed last night  Perhaps it ended on a small wave truncation.

I'm thinking 1.20 needs to hold as support. Then it can break over the downtrend line for good and squeeze some Euro bears perhaps.  A confirmation of a trend change I think would be a break over (e) at 1.2326.

A break back under 1.20 and wave [v] may not be finished.
[Update 11:30AM: Just to continue the discussion on wave two's and their personalties,  I must caution that my theories about wave two's are not in any textbook that I read, I have been working on this stuff on my own and I share it on this blog to get feedback and see if it even makes sense.  So how well this may or may not work is up to the market of course. 

Now, I also think its best to use the Wilshire to determine things.  After all, we are talking sentiment of the entire market, not one index.  So plotting the waves so far using the Wilshire, if we assume the current rally is a wave 2, here is the "map" chart below.

Note that I would give the market its "one close" over the 19:1 down day. If for no other reason than the market closes the (SPX) gap. This one close would then probably start the next day trying to advance further but then a hailstorm of selling comes (and hence fails to hold as support) and it turns into a wave three of next higher degree. Such is the nature of wave twos!

Also note, that if it followed this path and this is Minor 2, a right shoulder would probably be weak and lower than the left shoulder. All things technical so far project to this outcome.  It is a severely damaged market. 

NOTE: And since this is a "weird" and overlapping structure, if the market can reconquer and hold as support the 19:1 down day, it happens to have a 17:1 day (the "flash crash" candle) that will also act as a Waterloo for the markets.  Hold as support the 19:1 down candle, and the market may try and do one close over the 17:1 down candle. You then would short this under the same reasoning at that spot.  

So we have our map. Of course the market cannot afford to head down and close low. Major shelf support that exists on most indexes such as the Industrials is precious and probably cannot take one more pounding test without failing. The market may have a "do or die" mentality in it and that is precisely what a wave two's personality is.

So maybe P3 all this stuff will not work. I have no idea, I am just sharing what I am thinking about waves and why. This is a wave blog after all!
[Update 10:40AM: I have shown this advancers chart before  And you can pretty much see this is the first time this has declined in 5 waves since the March 2009 bottom.  That is a good sign for confirming things.

Could we see a textbook [a][b][c] counter rally? Sure!  The only thing bears have to worry about is if this chart goes and makes a new high. But for that to happen, the SPX would certainly be above the 19:1 decliner day that created the big gap at 1107-1115 and hold it as support.  To me this is the key zone that will determine the market's fate.  I am not saying the market cannot rally above this gap. I am however suggesting that this area will not hold very well once its tested for support to further an advance to much higher areas.

So thats why I would say "one close over" this area in a fit of blowoff energy. Then when the market goes to test it for support, the market will pounce hard and beat it back down. This is my analogy of why P[2] got beaten back at Lehman Day.  This was the area the market had to "reconquer" and then hold as support to advance the bull rally further. So far it failed.

Each wave one down of any degree has its own "Lehman Day", that  the subsequent wave two retrace must reconquer and hold as support to prove its not a wave two! Seems kinda "duh!" but its useful approach to the markets and waves rather than shoot from the hip and say "My target is XXX" without ever thinking if the target is doable or valid. 

So the trick is if you see a wave one down (no matter what degree!) find its "Lehman Day" and assume a wave two will try and challenge it and reconquer. If it manages one close over that day, short the heck out of it! After all, the worst that can happen is the trade doesn't work out.

So if the market can retake and hold (the hold as support is the key!) this 19-1 decliner day, then it unlocks the door for much higher retraces and possibly a new outright high. This is why I don't bother to fret anymore on whether the market is "going to 1300" or back up to 1200 even or wherever. It has things it must prove first. And a wave two must always reconquer its point of recognition first.   Of course if its a wave two in the end, it will fail!

[Update 9AM: I adjusted the trendline and I assume its being felt. By the way, the big pattern on the e-minis is distributive in nature. It needs to break over the green line to be able to rally obviously. ]

Very tight range overnight for the e-minis which has not been the norm lately.
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