Saturday, March 7, 2009

Looks like turnaround Tuesday :-P

The above chart was adapted from the work by Daneric over at StockTock.com. He did it on the $SPX, I simply redrew it for SPY. The ending on thursday was a little confusing to me, which I noted in the blog posted. I had mentioned to a buddy that it might be an ending diagonal but I didn't really see it until Daneric's post Friday night. Sure enough it looks like wave 5 of 3 is finishing with an "ending diagonal" formation. This is where the waves over ap and look corrective in nature.
Still, Friday was an excellent day to build a LONG position, and because we are in the midst of an ending diagonal, everyone has another shot at it on Monday :) Then we should continue on according to the chart below.

We should definitely either turn around some time monday or tuesday. This rally should make at least a 38.2% retrace of the entire wave structure, taking us to the 77.50 area. If we stay in the idealized Elliot wave Channel in Green above, we should hit the peak around 3/16 and then start a decline during opex. This is the tough time, iprevious wave 4's have played out longer than expected. In an idealized situation wave 4 should be opposite in nature to wave 2. Wave 2 was choppy and formed a double top. My guess is that wave 4 will be sharper and more energetic and take less time.
Kemal_1 from Atilla's Xtrends is forecasting 73 as the top for wave 4. I believe he is basing this on the idea that the gap left on 3/02/09 will form an important resistance point which the market will not be able to overcome.
My bet is that the bounce for wave 4 will be sharp and will blow through that gap. The 77.5 area is also the peak for wave 4 of 3 of 5...which makes this a logical retrace.

Anyway I am long with front month calls on SPY. As we rise up, I will layer out of my SPY calls and start buying APR/MAY puts between 73 and 77.


I wonder if one of my favorite indicators above is broken. Afterall how many puts can be expected to trade on AIG, BAC, C, GM, FNM etc nowadays. So is it possible that the ratio is skewed more to calls now? Or is it just no one thinks we can go down any more?

ps. Thanks for catching that Tommyt, I mean Friday was good for building a LONG position and have corrected that.

5 comments:

tommy t said...

Thanks again for you work. I want to be sure I got this straight. Friday was a great time be building a short position? but you are long calls now? So, on Monday/Tuesday you are expecting a possible slightly lower low before wave 4 starts to possibly 775 is how I read you. TIA

Pokerden said...

Thanks for catching that Tommyt, I meant Friday was good for building a LONG position and have corrected that.

If the ending diagonal plays out, we can expect a sligthly lower low monday (66ish). Actually I believe we will probably be up by end of day Monday, if not, then definitely a good up day on Tuesday.

On the otherhand, we may continue up on Monday and have started wave 4, but I don't think that is quite as likely.

So Monday should be a second chance at getting long...but I think its the last chance to do so at these levels before wave 4 plays out.

mark said...

Great work first of all. I am not understanding the ending dialog wave count though and believe your original count was correct.

The ending wave count you added has wave 4 overlapping wave 1. I was always under the impression that wave 4 can not overlap wave 1. Thanks in advance

Pokerden said...

Mark,
Here is a reference to an ending diagonal from elliot wave international ( http://74.125.47.132/search?q=cache:IeWgoRmrWtsJ:www.elliottwave.net/educational/basictenets/basics2.htm+elliot+wave+ending+diagonal&hl=en&ct=clnk&cd=1&gl=us ). Its around figure 9. Wave 4's are allowed to overlap wave 1's in ending diagonals.

Pokerden said...

a non google cached link:

http://www.elliottwave.net/educational/basictenets/basics2.htm