Random Thoughts

> As a trader, our job is identifying trend and exploiting it. Our job is never to PREDICT a trend or trend change. As a trend is in place, we must not bet against it. Price action in trend is most important thing to analyze in technical analysis, other elements like volume, divergence, pattern, sentiment etc. are secondary to price. always remember that.

> Mankind after so many years evolution still can get rid of emotion. You talked about successful trader relies on 70% on a successful mindset, which means at least 70% of decisions people made are irrational. Trading on chart is simple but people always have difficulty to look it right.

> In order to be right most of times, you must be willing to be wrong some times. Don't balk on a decision looked wrong when technical analysis called you to act. You may well be wrong but odds are you are right more often than wrong. It will be stupid to buy at top and sell at bottom but in order to be smart for most trades you have to be stupid in some trades.

> Trading, it is not a game you are more right than market, it is a game that you trade with market more often that you trade against.

> Today's action is more important than yesterday's action. Tomorrow's action is more important than today's action. A reversal of a significant signal is a more significant signal.

The Flaws of Elliott Wave Theory

It is almost embarrassing to see markets trend against Bob Prechter and his Elliott Wave International for so long, but they don't even consider the alternative. Gold/Silver, for example, have put them on wrong side of market for so many years. Not to mention the deflation call comes earlier than reality for decades. That brought up my thought, as the most popular market model, EWT has some serious flaws and limitations.

The first flaw is, EWT is generally correct as a behavioral technique, but the price movement in any financial market is multivariate function. besides sentiment, other variables like fundamental, technical, and structure is also as important in influencing the price. So it is basically wrong to use sentimental extreme to identify pivot high/low, that leads to more mistakes that correct calls. Of cause at the important juncture of market extreme reading in sentiment is apparent, but it is necessary not guaranteed.

The second flaw, which is directly associated with first one, is that EWT is tied up with Fibonacci sequence. A lot of studies argue that fibi is ineffective to provide retracement level. In a market that is only driven by sentiment, fibi might be a lot more effective but in real world, you better rely on other method to speculate where market is turning.

The third flaw, is that EWT can't distinguish degree of wave ahead of time. Because it is heavily relying on sentiment, it is difficult to define if a pivot is long term or short term bottom /top. You may not know immediately so you have to leave s lot of options open. Then a single chart can be interpreted in many different ways.

There are lot of invaluable points in EWT including patterns, contrary opinions, and personality of waves, etc. You can learn a lot by practicing EWT, but when comes to trading, it is difficult to apply and the user is easily trapping himself by labeling the wave from his own opinion, while not violating any wave principles. I know a lot of people made good money by only using this method, but it is not for everyone. especially for those who can't stand many many small losses in order to hit a big one. It is always a good weapon in trader's arsenal, but is not bread and butter for majority.

SPX Rollover

Finally we got today's action, a large range reversal with heavy volume under overbought condition and extreme bullish sentiment. Not sure if it is game over for the entire rally since March, there are cluster of supports at 950-970 level. we will definitely have some sort of rebound at these levels, But subsequential downside breakout from there will also probably trigger Dow theory sell signal which will confirm that primary trend changed again.

My Strategy is to buy into these support and monitor quality of the rally. A lower high in this incoming rebound will be a good entry point to short.

In Search for Divergence

Since March 9th the tide of risk appetite is the primary driver of stock rally. Use ratio between high yield bond and investment grade to characterize, it goes neck to neck with many markets, euro, Hengsheng, commodity et al. Now for the first time in last 5 months, you see clear divergence.

One More Loop UP

With dollar weakened for 2nd day almost reversed turtle soap buy set up, equity rallied with good news (late) of Paulson Co. took massive position in BAC. You would expect a 3% rip at least, right? Nope. only a peanut gain but new closing high for S&P anyway. Volume is still unimpressive, and this small "breakout" is another sign of fatigue. You can't push forward when wind is on your side, which means we are at important juncture for market to change direction.

Nonetheless, I expect commodity will make a new recovery high in 1-2 weeks before dollar bulls fight back.With stocks also go to making a final push and roll over.

Tape Reading

The volume had been light all the way since July bottom. But 3 Heavy volume up day left long upper shadows, indicates smart money is selling to crowd. That is different behavior than initial stage of rally.
Huge divergence of Tick and index suggest less and less stocks participate the rally. Time is late and up trend is aging quickly.

So, In next 3-4 weeks I will be looking for target to short and long dollars, anticipating SPX back test neckline, (5% at least).There is a chance the whole thing is over. I am not smart enough to know but will follow the tape at pivotal level.

Exhaustion

Market still offers more buy set up than sells, but strong follow through is rarely seen. It is change of character to me, in April and May, stocks pivotal up attacted money flow very quickly, lead to blow out and price never looks back. In contrast, the hot sectors that led Friday's rally, including Homie, CRE, Retailer and hotels failed hard today, some stocks just broke important resistance only lost most gain today.

earlier buyers still don't want to sell because there is no catalyst to downside, for now. But a ponzi scheme without new suckers coming in to hold bigger bag will eventually collapse. So I expect market back and fill for a few days before it starts meaningful correction.

Weekend Charting

Spending a couple of hours reviewing chart of S&P 500, my impression is that buy set up still way outnumbered sell set up, some previous negative patterns turned positive in a blink. Which means money still keeping coming in, see the chart of SCHW, TROW.

The leading sector is retailer, REIT, homebuilder, hottel resort, financial transport, well, yesterday once more, huh? A service economy based on asset price and credit expansion come back to life?? that is market would tell you every time wave 2 rebound at the end stage.

As long as money keep flowing in, the price will go up. those homebuilders, REIT, Retailers can't collapse in one day. On the contrary, I would like to buy a pullback, betting this wave 2 rally have at least one more up leg to go. But after this, I am fully expecting market is going south in a hurry and break below 666 low.

The Next Big Move is Down

Just trying to retrospect fundamentals and clear sights in big picture. Here are reasons I believe why next big move is down.

1. We are still in an economic abyss. There is no sign of any new economy in a scale comparable to housing and IT in past to be driver of job growth. Even cheerleaders were admitting jobless recovery. A jobless recovery will not be sustainable and a double dip will be increasingly likely.

2. Tax hike next year. At least Bush Tax cuts will expire for sure. I won't be surprised to see everyone will have to contribute more given the funding problem federal government has to face.

3. Boomer retirement and demographic problem. Which means less investment and less consumption. One more bonus point, does anyone around world still want to immigrate to America to have one old "American dream"? LOL. Just Check how many" For Lease" sign on the window of former Immigration Law Office at LA you will have clear thought on this.

4. Fed is desperate to inflate, but they used wrong medicine, once again. If they really want to inflate, forgiving consumer debt is the best way to do. But they are so arrogant and don't give up their old trick- credit expansion. The credit is expanding in less efficient part of economy, it only guarantees one result, debt grows faster than income, and most debt can't be paid in the end.

5. They can't unilaterally inflate. Last week Turbo Tax Tim told Chinese official that US would cut deficit and encourage saving shows under pressure of creditor, which means not like before US can pass its problem around, this time US has to take some sort of pain. That message is completely overlooked by market.

6. Government finance bubble is not going to last. For a fundamental analyst, they call every overpriced asset bubbles. For we technician, all bubbles are ponzi scheme, which is sustained only when imbalance between demand and supply is expanding. We already had a government finance bubble in 2003-2004, when ill advised emerging economies shift their investment into US bonds, they increased purchase even when rates start going higher in 2005. That was a bubble. Now these countries had a hell of headache of how to deal with their portfolio. Look at now, Who would be the next sucker, to eat the enormous supply in coming years, to keep rates low, except Fed's printing press?

7. Derivatives atomic bomb has not been detonated. it is out there, it is still growing. Well this one may need a catalyst to trigger, may take long time to take place, but the number is staggering.

These are fundamental points, Technically, it is more compelling to bet another stock market crash.

1. It is overbought. It is the largest rally in stock history. No surprise because it follows the worst bear market in history. But the long term trend is still going down.

2. Sentiment is so high. some polls showed extreme numbers.

3. We are in Early stage of exhausting.

To summarize, I think I ought be prepared for a trend change. By missing most of first part of bear market, I think wave 3 or wave C would offer much better opportunity for a bear.

Yesterday's Star Sector

Restaurant stocks were ones leading the rally since Last November. It manifests the entire theme " depression is not coming, thing are less bad than you think". Smart people got burned shorting them. But what they are doing right now?

They did not join the last rally that creates negative divergence. And now these charts can't be more crappy. All four former stars built huge exhaustion pattern over a few months made them top short candidates. EAT and DIN already broke pivotal support down trend likely already started. I expect PRNA and PFCB to follow the suit.

Things are less bad, really? Well unless you work for goverment. Companies and sectors always go bust, No matter we will have hyperinflation or depression.

Interesting Action in Gold

Usually, a bunch of shooting stars and hammers signal reversal. But look at what happened in October 2007... If gold is in a uptrend, it often makes a quick stab down to trap shorts, only recovers loss soon after. Today gold marginally undercuts important 960 level quickly snaps back is interesting. I believe it will back and fill in next a few trading days before the long waited breakout.

Heads Up, SPX tracing out a outside reversal day.

A stright up run with 3 unfilled gaps, a hammer and a beraish engulfing, decisively negative.

Support at 988, 975 and mega support at 950. So far it is only a correction of Rally since July, price action around those support levels will decide if there are some more at stakes. We will see in next a couple of weeks.

Wash out time!

Market is ready to pull back after 3 unsuccessful tests at pivotal 1008. I will be very careful to examine the nature of this pull back, and action around important support. Personally, I don't think this is the end and I am not ready to load up short yet. We have to watch one drive down and one drive up to determine if this rally come to end. So far, market behaves very well, seems everyone's perception is hyperinflation coming!
Market went up straight from July low but volume just picked up modestly. For any Ponzi Scheme, no volume expansion means trouble. If stocks do have value to hold and fundamental to be justfied in future, at least we will have a consolidation period because demand doesn't keep up. To be honest the valuation is rich to me and momentum seems only reason to drive the rally in last month.

LOL.

From Steve Saville of Speculative-Investor.com.

Does ANYONE only has HALF brain on this green earth want to take this sucker as reserve currency?

When, it is over, the hangover will linger for decades, if, there is no outright collapse.

I sense collapse is most likely outcome, you can't do this for free forever. I am so enticed to short Chinese market but timing is hard...

Gold is about to rally

In last four days, action in gold market resemble much in equity market 'run in past 4 months. A drop induced short, then pump and squeeze. No dobut this pattern shows new money come into long side. The implication is that gold is about breakout overhead resistance zone from 970-1025. and have a potential go much higher.

And what is implication of over 1000 gold? A greater global inflationary boom bust cycle driven by dollar carry trade?

Commodity broke out

The price action in commodity sector could not tell me more clearly the about macro picture, economic activity is picking up, but inflation that was driven by monetary disorder is going to up faster. No surprise, dollar was hit very hard and critical support at 78 was lost. with such momentum, a new low below 71 is distinct possibility. So, Now we can talk about "the end of end of recession" because all the unintentional consequences of moronic efforts of global central banks are about to take center stage. We have already seen the the first chapter.

With stock market still in firm uptrend, It will take more than a few sell offs to alter the trend. So I don't have any intention to fight it. Nor do I want to joint it blindly. Just focus on selected sector which has not made too much noise. Precious metals will be best option to play this scenario. Highly speculative solar sector have been quite lately. expecting action to pick up.

Weekend charting

After a vicious selloff last month, Agriculture index made solid recovery in last couple of two days.

Three higher lows indicated new up trend. Things like sugar and cotton are traded well. Despite very bearish inventory data, corn and wheat settled in trading range. If there is any catalyst this sector could explode.
The back-filling action of OIH confused me. Wednesday it refused to go lower as crude was smoked, making a interesting divergence. But Oil staged big rally later the week the action in OIH is very timid.
Review the daily chart of semi, it just doesn't look like an impulsive drive. Too many back-and- Forth moves now seems the entire rally come to exhaustion. it will be my primary target to short if market reverse its uptrend.
Talking about impulsive move, that is Homies in last a couple of weeks. Now it is traded above neckline and long term downtrend. It could reverse but I will buy when it works out short term overbought readings.
The most bullish on my screen? after a few months of consolidation This sucker looks being ready to go much higher.

Refaltion at Work, Dollar On the Edge

Despite a flip-flopping stock market in last two days, the rally in junk bonds never took a breath. Use JNK as a proxy, the price has recovered 100% loss since Lehman collapse, with no sign of exhaustion, indicating reinvigorated animal spirit will take rally in equity much further, which is another ponzi scheme promoted by ultra loose monetary policy.

After rally to test previous high earlier this year, gold has been in consolidation mode during weak season. As we see the contraction in 20 weeks bolling band always lead to large move. the time is due. Triangle pattern usually breaks out in the direction of predominated trend, so we may see 1000 gold very soon.

After a few weeks working out oversold conditions, dollar appeared to be bottomed out a a couple of days ago only before a huge selloff end a weak rally that failed to capture any significant price level. This failed pattern suggested large money follow out of dollar once again overwhelmed current supply /demand balance. I would not be surprised a dollar move south in a panic mode which will serve a catalyst for gold's breakout.