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Wednesday, March 6, 2013

Elliott Wave Update ~ 6 March 2013

The ending diagonal count in the Wilshire 5000 has been eliminated by rule as wave 3 cannot be the shortest wave. However the S&P can still be an ending diagonal triangle as long as prices remain below 1551 SPX.

Note the S&P is now overbought on a weekly basis for the first time in over 2 years.
However the Wilshire5000 counts better as some kind of combination pattern such as a triple zigzag.  Note also the overbought on the weekly.
Regardless of the larger pattern , the medium term pattern counts well as 5 waves. A few more squiggles however would fill out the pattern nicely.

Prechter says, when the larger pattern is not clear focus on smaller patterns that are (or vice versa). In this case the a 5 wave move has formed and appears nearly finished.
This 6 month count has been adding a small bit each day for a long time. It is one of my favorite counts.  Being that it is a long-term count, patience is required. However, things are getting interesting indeed.

The country will not be able to handle higher rates. Greece couldn't. Spain cannot. Neither will the U.S.
I believe CMG would make an excellent sell candidate very soon at $352-$370 range if it can make it there with $362 being the .618 retrace target.
And finally 2 longer-term sentiment indicators which are registering quite extreme via Sentiment Trader
The first is the CSFB "Fear Barometer". Summary explanation snipped from Sentiment Trader:

The CSFB is an indicator specifically designed to measure investor sentiment, and the number represented by the index prices zero-premium collars that expire in three months.

The collar is implemented by the selling of a three-month, 10 percent out-of-the-money SPX call option and using the proceeds to buy a three-month out-of-the-money SPX put option.  The premium on both sides will be equal, resulting in a term commonly known as a zero cost collar.

The CSFB level represents how far out-of-the-money that SPX put option is, or in insurance terms it represents the deductible one would have to pay before the put kicks in.

So, for example, if the CSFB is at 20, then that means an investor would have to go 20% out of the money to be able to buy a put with the proceeds from selling a call that's only 10% out of the money.  That means there is more demand for put protection - a sign of fear in the marketplace.

The index would rise when there is excess investor demand for portfolio insurance or lack of demand for call options.

It differs from the Chicago Board Options Exchange Volatility Index or VIX,.  The VIX, calculated from S&P 500 option prices, measures the market's expectation of future volatility over the next 30-day period and often moves inversely to the S&P benchmark.

The VIX is a fear gauge by interpretation, not by definition. It was designed to quantify the expectations for market volatility -- a property that is associated with, but not always correlated to fear.

The Fear Barometer doesn't work as most of us expect it to.  It doesn't necessarily rise as the market drops, or fall as the market rises.  In fact, often it's the exact opposite.

The reason is because traders in S&P 500 index options are mostly institutional, so the options activity is often a hedge against underlying portfolios.  So when stocks rise, we often see more demand for put protection, not less.

We also show a 5-day Rate Of Change for the Fear Barometer.  It turns out that these traders can be pretty savvy short-term market timers.  So when we see a sharp upward spike in the Fear Barometer, it means that traders are quickly bidding up put options, and the S&P 500 often sees a short-term decline soon afterward.

Conversely, when we see a sharp contraction in the Barometer (and the Rate Of Change drops to -10% or more), then we often see the S&P rebound shortly thereafter.

The next is the "Smart Money" index.  Summary again provided by Sentiment Trader.
Their current chart is followed by their summary:

The idea behind this indicator, popularized by money manager Don Hays and existing with many variations, is that emotional trading takes place at the beginning of the trading day (as traders react to overnight news event and economic releases) while the "smart money" takes the day to evaluate price action and input their orders before the market closes. 

Due to that assumed tendency, we want to bet against the opening action and bet with the closing action.  The way we calculate the index is to subtract the performance of the S&P 500 cash index during the first ½ hour of trading and to add the performance of the S&P during the last hour.

For example, let's say the Smart Money Index closed yesterday at 800.  During the first 1/2 hour of today's trading, the S&P 500 gained a total of 5 points.  We then ignore what happens until the last hour of trading.  Now suppose that during the final hour, the S&P lost 8 points. 

To get today's Smart Money Index reading, we take yesterday's number (800), subtract the opening gain or loss (5 points) and add the last hour change (minus 8 points).  So today's SMI would be 800 - 5 - 8 = 800 - 13 = 787.  Today's SMI would be 787.

The following chart shows exactly the kind of action that would be considered very bearish...a market opening strongly, only to fade (fall) near the close.  This occurred in late December 2004, giving an excellent heads-up that a market decline may be imminent. 

At the bottom in 2003, the S&P was opening very poorly and closing very well.  All the news at that time was bad indeed, and we would often see the market dip in the opening hour or so of trading after traders digested the bad news before the market opened. 

However, by the close it would often make a comeback, which could be considered accumulation by the smart money.  This was bullish action, and resulted in a quickly rising Smart Money Index.  Bearish action is shown in the chart above, and is reflected by a sharply declining SMI.

Unlike most of our indicators, there are no hard-and-fast rules to go by with the SMI.  There are no absolute or relative levels we can point to and say "yep, this is bullish". 

Instead, we need to look at the action in the SMI - when it is rising rapidly during a decline, that means the smart money is buying, and we should expect a bottom soon.  Conversely, a rapidly falling SMI during an uptrend would tell us that the smart money is selling into rising prices, and a market decline is likely ahead.

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