Dec. 4, 2006 — In the Nov. 18 update I wrote:
For next week, I have two ideas for the continuation of the current fourth before continuing on again to new highs. If, by chance, the market has its own plan, we have a line in the sand close by and stand ready to go short if we cross. But, give me SPX 1392/1395, and I’m long for a possible 1420 target!
We might be able to put in some type of high in the next week or so just before getting ready for the November Jobs report, followed by another Fed meeting.
After that, Santa Claus and his famous rally might be stopping by for a visit.
Just when you started to forget that markets could trade to the downside as well as up, the S&P opened lower Monday and never looked back! I was hoping to buy SPX 1392/95 but the selling never stopped that day. Of course, the entire exercise proved only to be a bear trap because the S&P rallied on Wednesday like Monday never happened. Talk about a roller coaster ride!
I am starting to sound repetitive, but it just seems like this market won’t stop whipsawing until every bear has spent every last dollar. From here, I feel there are only two ways the market could stop rallying and capitulate to the bears. The first, which I am not interested in seeing happen, is as a terrorist attack or violent geopolitical event. We can put in a new high, but something like that will make Monday’s sell off look like kindergarten. The other way, which seems inevitable, global shakedown or not, is to have a final capitulation blow off. I think the last 20 to 30 points of this move will be put on and removed within days if not hours.
As a trader, you need to be aware of the sentiment around you as the market continues to try to sell off. Wednesday was the first time in a while that the rally was accompanied by call buying throughout the day – every other rally had tons of put buyers. But this sure sounds like bears buying calls and if this is the case, then the end is near. The psychology is no different from when traders finally caved and bought puts on the March 2003 low. Once a month I hear about how everyone was so bearish on the 2002 and 2003 lows that they got brainwashed and lost lots of money. We are at the mirror image of that now.
The rally up from the Tuesday low gave me an expected ES target of 1408 into Thursday’s closing bell, but the market once again sold off for most of Friday. The news will tell you it was the ISM report. Wrong! By Friday we had completed a move from the week’s low to its perfect target and there was lots of call buying associated with it. That’s the real reason. By that time, puts were loaded up because the idea of a market crash was again circulating. That is what they mean by “hard landing,” right? A crash?
Anyway, I posted in the forum that a long trade at ES 1388.60 was worth taking for the next move up into our larger pattern, and the market makers of those puts must have been thinking the same. We closed our long position into the close at the 1398 target, booking nine points in less than two hours. I bet those buyers holding puts into the weekend are not too thrilled.
For quite some time, we’ve had 1360 as the line to go short as a failure to any further advance. I raised the number to give readers a bit more of a short trade instead of waiting until 1360, but as I told the chatroom on Monday’s sell off, I am just not comfortable with it anywhere else right now. The number will remain at 1360, but will be adjusted in a heartbeat if need be. Plenty of trades will be executed before that, long and short, but the real trade is under 1360. If we do have that blow off reversal event, that changes everything. At that point, we will have a much closer number to capture the whole reversal.
When Monday’s sell off hit, I was far from an aggressive seller. First, the pattern that was unfolding, if it was read correctly, was corrective. Second, I personally do not short into such a large hole as we had on Monday. We were short ahead of that level as we expected a fourth-wave pullback, but let the few points under it go. Sure, there were a few points to make, but the outcome would not have been good. We would have been shorting and covering all week with losses, instead of the nice gains we were able to grab.
In the end, it was a flat week with a spread of 75 points between low and high swings, but the ideal environment for a forum like ours. You simply cannot make sound intraday trades with such leveraged instruments just by reading these updates or from a weekly service. This market is much too quick not to have constant, real time views of the counts and patterns throughout the day, and that is exactly what we do at TTC. And to think, for only 1-ES point per month, the current $50 membership is a no brainer.
Another decision that did not even really have to be made came after presenting this chart to the forum and chatroom. We were able to buy the Nasdaq futures, four ticks above the low!
Until then, we have three perfect patterns that support a few knee jerk reactions off the payrolls and the Fed, followed by plenty of Christmas shopping. On the downside, we have only one setup, and it is not a high probability yet. The patterns, along with price targets for each swing within it and the final target for the advance out, are reserved for members only. To everyone else I’ll say this: Be careful next Friday because that day will establish the theme going into the Fed meeting on Wednesday. Don’t guess the payrolls number or the Fed outcome – they don’t matter. The reaction to the news is what is important, not the news itself.
This market is on a journey and it will eventually reach its destination. I’ve been bullish for a while, but I’m ready and waiting to turn bearish, even if many think it’s the wrong move. The chart below of the Dow Jones Utilities average is further proof that my thinking is justified. The chart shows a pretty Elliott count that has reached its two targets along a long-standing Fibonacci target.
Dominick Mazza
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