Trade Ideas for 05/01/09

The S&P gapped up yet again at the open, running/staggering to new uptrend highs at 889 before dropping into the close at just below breakeven. The move down closed this morning's gap. So far this run has been from 667 to 889, or if you prefer, 666 to 888. (Begging the question, is 777 or 999 next?) Judging from subsequent market action, there's a good chance the high was put in today. First, let's consider the idea that a new high is yet to come. The most straightforward explanation for such a scenario is that an impulsive move is forming.

Under this count, we have today's high as wave 3 of 3, meaning at least two higher highs are to come—(5) of 3, and 5 itself. However, under this count waves (1) and (4) overlap, which is disallowed (strictly speaking, it's strongly discouraged) as mentioned yesterday. The conclusion here is that this is a corrective advance, despite its seeming 5-wave structure.

Above is the simple corrective count, which shows the B wave ending today. It is plausible that the B wave will continue. Such a count would have today's peak labeled as iii and today's lows as iv, in which case another higher high is in store. Continued downward action would (eventually) rule this count out; a strong opening move tomorrow would favor it. Regardless, by either count it appears we are close to the top, if it hasn't passed already.

No trades today.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
DGP	18.68	18.37	-2.2%	17.96	N/A	Chart
GOLD	45.56	48.40	+6.2%	46.14	N/A	Chart

Tomorrow, more short-side suggestions. We've been burned on the short side the past two weeks as this resilient corrective wave has progressed. However, tomorrow the opportunity is better than it has been thus far. To reiterate, there's a good chance that the high was put in today. I'm going to do something out of the ordinary and provide two different entry prices for tomorrow's ideas. The first, lower, entry price is more aggressive and doesn't rule out the possibility that another high is in store. However, the potential reward is commensurately greater. The second entry price means paying a bit more but would render another higher high unlikely. (But not impossible.) Note that FAZ is intended as a one-day hold; sell by the close.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
SDS (Ultrashort S&P)	64.71 OR 65.61	61.49	N/A	Chart
TWM (Ultrashort Russell 2000)	49.84 OR 52.11	46.58	N/A	Chart
FAZ (Financial Bear 3x)	8.66 OR 9.01	7.57	N/A	Chart
DXD (Ultrashort Dow 30)	53.94 OR 54.81	51.59	N/A	Chart

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

Correction

Trade idea for 04/30/09 is SKF, not SDS. The correction has been made in the table.

Trade Ideas for 04/30/09

The S&P ran up at the open, and after the Fed announcement made new uptrend highs at 882 before falling into the close. The new high changes the wave count, potentially on a large scale. Either the market is in "climb the wall of worry" mode and set to take off for new highs, possibly to pull back to this price area as a support level in the future, or this is a double top in the making, the effect of which was to instill complacency in the bulls and slaughter the bears. There are good arguments for both cases.

To me, the two scenarios hinge on how one reads the tape since the prior uptrend high of 4/17. After an intraday low on 4/21, the S&P made its way to new highs today. The chart shows a clear five-wave pattern.

Under the bullish scenario, this move up would be part of the uptrend (presumably as wave 1 of the next advance) and therefore must be interpreted as an impulsive advance. However, waves 1 and 4 overlap, which is not allowed under Elliott Wave Theory except in the case of diagonal triangles. The pattern of this uptrend doesn't fit the description of a triangle: it's more like a regular parallel channel, which suggests that this is a complex corrective 3-wave pattern rather than an impulsive 5-wave. And that would suggest that although new highs were attained, it was nevertheless part of a corrective move. Note, too, the length of time it took to attain marginal new highs: 7 sessions to recover the price lost last Monday. This is not the hallmark of an impulsive move. My count therefore shows that we have completed (or are near completing) the B wave of an expanded flat, with the C wave yet to unfold. This was a count I alluded to in the weekend post when I mentioned the market might like a run to the 880 level, to sweep the remaining bears away. If the market manages to rise impulsively above the new highs before going below S&P 823, it would invalidate this count.

Today's rally certainly swept away our short positions. Gold, however, survived a fast drop.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
DGP	18.68	18.87	+1.0%	17.96	N/A	Chart
GOLD	45.56	48.69	+6.9%	46.14	N/A	Chart

As easily as the market could drop sharply from here, it could also take off from here, following an impulsive count that reveals itself in hindsight. Either way, the opportunity appears promising. Therefore, I have one long and one short idea for tomorrow.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
URE (Ultra Real Estate)	4.14	3.25		Chart
SKF (Ultrashort Financials)	59.72	55.21	54.42	Chart

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

Update 04/29/09

The S&P gapped down on the open, and then immediately rallied. Interestingly, it appears that it didn't actually fill the gap from Friday, leaving an island gap on the way up, but this could just be a bad print from the quote provider. After hitting a high just before the final hour, it closed right about where it closed yesterday. Just a choppy couple of days. Here is one potential count for the action the past two days.

By this count, on Friday we began the C wave, marking the final phase of this sideways correction. For this count to work out, the S&P would need to start sliding within the first couple of hours of tomorrow's open. Tomorrow the Fed announces its interest rate decision at 2:15PM ET, and this has moved markets in the past, both up and down. We bought MZZ near the open today.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
DGP	18.68	18.61	-0.4%	17.96	N/A	Chart
GOLD	45.56	47.64	+4.6%	46.14	N/A	Chart
DXD	55.67	55.54	-0.2%	53.99	N/A	Chart
TWM	53.67	53.14	-1.0%	50.74	N/A	Chart
MZZ	46.23	44.95	-2.8%	43.68	N/A	Chart

Since tomorrow is a Fed announcement day, no new ideas.

Trade Ideas for 04/28/09

The S&P gapped down this morning, tested the 855 level a couple of times, then rallied up to close the opening gap. It managed to get very close to Friday's highs before dropping to new lows, testing the 855 level several more times in a choppy basing pattern. For the first time in a few sessions, there wasn't a notable end of the day move.

A breakdown early tomorrow is possible. The S&P has traced out a potential head-and-shoulders top over the past two sessions and is now just above an unfilled gap. The gap support level has been tested multiple times over the past two sessions, and with increasing frequency. Since the more times support is tested, the weaker it becomes, this action favors breakdown. But the bull has shown great resilience, not missing a step since recovering from last Monday's wide-ranging drop.

We bought both the shorts from the ideas list.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
DGP	18.68	19.17	+2.6%	17.96	N/A	Chart
GOLD	45.56	49.15	+7.9%	46.14	N/A	Chart
DXD	55.67	55.34	-0.4%	53.99	N/A	Chart
TWM	53.67	53.46	-0.4%	50.74	N/A	Chart

For tomorrow, more of the same stuff that our portfolio already holds.

New Trade Ideas

Ticker	Entry	Exit A	Exit C	Chart
GDX (Gold Miners ETF)	34.87	33.83	N/A	Chart
MZZ (Ultrashort Mid Caps)	46.23	43.68	N/A	Chart

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

More Satisfying Count

The third wave of a flat has 5 subwaves, and while Intermediate B is shaping up as a potential flat, wave b within that B (action from Tuesday-Friday) also looks like a flat. The count pictured above also mirrors the underlying action more faithfully. If it turns out this way, then there shouldn't be another higher high on Monday, and it would be possible to have a repeat of last Monday's drop.

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.