Trade Ideas for 04/06/09

Had a great powwow today with my mom, the resident Elliott Wave expert in the family. I felt off by a beat in my commentary the past two weeks. A couple Fridays ago I observed that the path to new highs was a slog. When things don't feel right, for example a higher high that feels more like a lower high, my mom explained, one should think B Wave. This past week, when I thought the C wave (within the B wave) was about to unfold, it had in fact already unfolded, and the huge drop at the end of the day Tuesday was actually a Wave 2. Wave 2 is one of the trickier waves, because it can fall very far, very fast, seeming like an A or C wave at first. The key difference is that what follows wave 2 is the most glorious of the waves. OK, enough talk; upshot is, the correction phase is over. For the next week or two, the likely path is up, and that, furiously so. How about a picture: This chart shows an a-b-c correction where the B wave exceeds the top of Wave 5. Such a correction is known as an expanded flat, and it implies great strength in the direction of the B wave, in this case up. Further credibility is lent to this count by the fact that Wave c of the a-b-c was 1.618 times the length of Wave a (the ones labeled in light blue). Yes, there is ideally a Fibonacci relationship between waves A and C; either C tends to equal A, or it tends toward 1.618x, 2.618x, 3.618x, etc the length of A. (1.618 is the golden ratio: the ratio of consecutive numbers in the Fibonacci sequence as the sequence approaches infinity. Check out Wikipedia to find out more about this remarkable irrational number.)

Better yet, based on this count, we find ourselves in the midst of the most powerful of the impulse waves, Wave 3. As such, it's time to be skeptical of pullbacks; they are more likely attempts to shake us out of positions than starts of brutal legs down. Best of all, we can project a potential target area for this counter-trend rally. Based on the rule-of-thumb relationship between Waves A and C, the target range for this move is SPY 93-103 (referring to the labels in red). (As a note of caution, sometimes Wave C equals 0.618 times the length of A. However, this type of situation indicates weakness in the direction of the a-b-c, and so far we have reason to believe quite the opposite; that the move is powerful and deeply supported.)

What this means for my system is looser stops (because we don't want to get stopped out on a fake-out move), and increased risk per trade. But within this pocket of bullishness, it's still important to keep in mind that the prevailing trend is down. It's vital to get out when the market turns south for real, because this rally shall end in horror.

Friday we were stopped out for losses in VIVO and EGO, the latter when gold took a dive.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
MELI	17.39	19.57	+12.5%	17.99	N/A	Chart
CLS	3.24	4.15	+28.1%	3.38	N/A	Chart
SOL	4.01	3.84	-4.2%	3.59	N/A	Chart

Long ideas for Monday. BGU is another Direxion 3x ETF and ought to be sold by the end of the trading day if elected.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
MI (Marshall & Illsey)	6.51	5.79	N/A	Chart
ITRI (Itron)	48.61	46.77	45.18	Chart
XHB (S&P Homebuilders ETF)	11.76	11.20	N/A	Chart
UWM (Proshares Ultra Russell 2000)	15.89	14.99	12.69	Chart
BGU (Large Cap Bull 3x)	27.23	25.49	N/A	Chart

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.