Many thoughts to share

I was gone until recently on a work related trip and have been quite busy.

Right now I just want to mention that in all likelihood, based on Elliott wave patterns, and technicals, and history, the next bear market rally has begun. That information is derived from the insights of the professionals at Elliott Wave International. I cannot give more detail as, mentioned before, this is a paid service. That being said we are short term oversold in a bear market. Either the pullback we saw at the end of the week was a healthy retrench and we go higher or, more likely, we get a major sell-off but do not hit new lows... and the major sell-off, when it comes to an end, will provide the largest buying opportunity we have seen since 07. If the markets rally above last weeks highs I personally may look to buy QLD conservatively with tight stops. Preferably, we go down hard and then I may examine the opportunity to start phasing in more aggressively on the long side, depending on conditions. I do not have time to add detail but at the very least right now it should be said that the bear market is due for a significant bear market rally, one that lasts for quite a while, and that ideally this would begin after a significant pullback from the recent rally from market lows.

The market tips its hand often as to where it will go next and the recent rally is the first major, consecutive day rally, in a long time... this bullishness should be considered as a potential sign of things to come... even if, and perhaps especially, the market sells off heavily from here.

With the charts below I would like to demonstrate the significance of technicals in demonstrating potential price movement and the potential for big gains. There are still people who don't believe in technical analysis... I don't know what cave they live in but I operate on the basis of scientific evidence... note that technical analysis is just one indicator to use... but a powerful one at that...


Trading is about probability... that is to say putting probability in your favor. The more indicators that favor a given move the more probable it is to occur. Let's look at Feb 9. According to Elliott Wave Theory the most probable move around February was a move to lower lows. One probability in our favor. Elliott wave does not predict exact time probabilities for moves with the kind of accuracy that it does actual price movements... that is to say that although it can give hints as to when a price movement may occur it is more accurate at indicating that the price movement itself is going to occur... which is big in itself and provides a framework... this allows for us to look for behavior consistent with this by using other indicators. On Feb 9 we had:

1. a candlestick doji after a big move (doji's that make price extreme's are reliable reversal patterns)
2. a price that was at/above the upper Bollinger Band (also reliable as prices tend to move towards their mean and hitting the Bollinger Band indicates that prices have gone two standard deviations from the 20 day moving average),
3. An overbought slow stochastic that was ripe for a turn back down
4. An overbought CCI which was also ripe for a turn back down... also the combination of an overbought CCI and a price extreme is a highly reliable indicator of a potential reversal pattern

Combining this with Elliott Wave Theory, or using it by itself if you are not a fan of Elliott Wave, either way this showed a powerful combination for a downside reversal of magnitude... especially in a primary bear market. Notice that in early January we had a very similar pattern... and also a big price move down... though we first had a gap up (which formed a beatiful island reversal pattern). In this case the Elliott wave pattern did not yet call for new lows as the highest probable event and we did not get them, instead bouncing off the lower Bollinger Band and moving back up... actually a nice trade on the long side if tight stops were used.

On March 10 we had the opposite synergy of technical indicators and had reached the new lows in the markets as predicted by Elliott Wave Theory. The result was a powerful move up to current levels in the markets.

In both cases, by looking at the combination of technical indicators, using predefined stop loss limits, and then using trailing stops when the price action went in the favorable direction, would all have provided the opportunity for nice gains with calculated risk.

That is the name of the game. Additionally, the follow through of such moves helped confirm big picture concepts of where the market might go next. I am a big picture person and for me, at least, I really like to see the forest from the trees and these kind of tools really help.


The SP shows very similar patterns. As has been the case throughout the market the Nasdaq has been the stongest market, followed by the SP, and then the Dow. As a kid I went to high school wrote in the school newspaper during my high school days: "I'll take my coffe de-Kafka"... I say I'll take my market "de-'mark to market'." Investors agree and hence the differences in the relative strengths of the indices.

Right now I want to point out that we again appear to have a similar synergy of technical indicators on both charts... again towards the downside. This could create a nice shorting opportunity as long as tight stops are used. Please note, though, that on a big picture basis, the recent rally is likely to be the beginning of a bigger move up... again as indicated by Elliott Waves... not 'the bottom' but the potential (based on probability) beginning of a bear market rally. There are many people who have become convinced now that to make money in this market going short is always the way to go... that is DANGEROUS after the kind of selling we have had and therefore, while I may short the market if it turns down and use tight stops... I am much LESS BEARISH than I have been in a long time for the intermediate term and mostly want to look to go long when the markets pull back and start to turn... nobody said this was easy... but it is what it is and if you know this you and I probably know more than most retail investors and have begun the move from 'dumb money' to 'smart money'?

On a closing note I recommend that you check out alphatrends.net (I have no affiliation). Brian is doing a market analysis for free tomorrow if you sign up on time. Also, check out 'The Technical Take"... the author has some very nice discussions about sentiment and 'smart' money and other meaninful topics... finally at a later point I would like, if possible, to revisit SIRI, HGSI, and some other individual stocks that were mentioned.


"The Yellow Rose Street Beat" is for informational purposes only. It does not give investment advice.