Trade Ideas for 04/27/09

Friday marked the second day in a row of careening tape. After a gap up open, the S&P marched to new highs for the week, took a nasty spill after bank stress test information was released, then picked itself up, attaining even higher highs before taking another spill in the final 10 minutes. Whew! Turns out Thursday's end-of-day volatility and short squeeze was but a foretaste of what was to come!

This countertrend B wave appears to be taking on the form of a flat, which is a sideways correction. After months of huge falls and weak rallies, it's as though the tables were turned in March, as these huge rallies have been interspersed with very small corrective waves. Recall that wave b of Primary A was a flat as well. Let's take a look back at how that unfolded:

Back then, what looked like a B wave in progress was really wave 1. If we follow the same script this time, perhaps we're about to embark on another bull run. But there are several problems with this scenario. Principally, the corrective wave that we ought to be in now is of a greater degree. A 45-day rally needs more than the 1-day correction provided last Monday. The next phase of the rally requires a solid base from which to launch. Let's take a closer look at last week's action:

Under the count as pictured, we have wave a equal in length to wave c, and within wave c, wave c twice the length of wave a. These are relationships that make sense, although it's also possible for the S&P to make it up to 880 level, whereupon the ratios become 1.618x and 2.618x respectively. The market might like that, as a break to new uptrend highs would squeeze out a great deal of the remaining shorts. My read is that more basing is needed, so I'd rate as low the chances of such a break heralding the start of the next bull run. The tape Friday was also telling. Look at those knifelike drops in the last couple of hours. Even though new highs occurred, it resembles a distributive pattern as the highs were marginal and the momentum slowed considerably (see the negative divergence in RSI).

Another factor to consider is the number of outstanding gaps that are just below the current price. The market likes to close gaps, and it likes to do so as quickly as it can. In fact, with Friday's late surge, the market closed the gap formed from Monday's early drop. In the chart below, the shaded areas represent outstanding gaps. The market is currently above three stacked gaps formed within the last month. It might want to fill them before moving on.

What's happening now is analogous in terms of price as well as wave structure to the action of mid-January to mid-February, when the market was tracing out countertrend Wave 2 of the final wave down. A 5-7 session walk down from here to the 800-810 level, or even down to the 50-day moving average, would close recent gaps and form a convincing base from which the market could rally, not to mention a kind of price symmetry. But let's first see what happens on Monday.

The above chart also shows how Thursday's "expanding triangle" turned out to be a pretty common snippet of tape the past few weeks: the transition period between waves a, b, and c.

Friday we were stopped out of SDS.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
DGP	18.68	19.48	+4.3%	17.96	N/A	Chart
GOLD	45.56	50.22	+10.2%	43.99	N/A	Chart

Since we didn't elect either of the short ideas, here they are again.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
DXD (UltraShort Dow)	55.67	53.99	N/A	Chart
TWM (UltraShort Russell 2000)	53.67	50.74	N/A	Chart

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