Market capitulation
By Dominick Mazza
Dec. 20, 2006 — In the Dec. 9 update, I wrote:
For now, we have reached the point where it starts to get exciting. We saw call buying on the rallies again this week, and the bearish camp got a little quieter, which are contrary indicators for sure. So make no mistake, we are closing in on the sweet spot. I still have three working ideas, one or two of which can be almost immediately removed on Monday morning because we must either advance into the Fed meeting or sell off. The preferred pattern has a target of 1429-ish, possibly for Tuesday or Wednesday, but the larger patterns would see even bigger numbers towards the first week of January after a bit more work to the downside.
Is it so hard to believe the market has been matching a weekly update to such perfection and for so long? Not for me, as I believe that applying the Elliott Wave Principle correctly, produces those results! Now, the question most of you are probably asking, going into next week is, we had aimed for 1429-ish and got a high of 1431.63 on Friday – was that it? Was that the top? Let me tell you, I’ve got a real gem of a find that is guiding my expectations from here, and it’s something most other analysts are not seeing yet. But first, before we get to the outlook for next week, since I’ve been receiving questions on exactly what benefits members of www.tradingthecharts.com receive in the forum, I want to review some of my recent chart-posting and how you could have traded them for a tidy profit.
Early in the week, we were watching the Nasdaq to confirm or deny the rally that was being hinted at by the S&P and, in the process, found a nice risk/reward setup that was too good to pass up. The chart above was posted at 12:54 EST Tuesday. The trade it suggested was trying to catch a falling knife pre-Fed, but, since I had the NDX in a contracting triangle, I knew the move down could not take out the 12/08 low of 1767.83. Applying classic Elliott rules provided a tolerable 7-point stop ($140 per NQ contract) with a huge upside potential.
Obviously, the results could not have been much better. If you took the trade, your stop was never in any danger and, even though there is still probably a bit more upside potential to this move, selling half or more of the position into Friday’s open netted about $900 per contract. The same setup was in the S&P, which produced a larger gain.
Before the FOMC statement on Tuesday, I had good reason to think the SPX was triangulating. The chart above was posted on Monday’s closing bell. Sure enough, the market sold off early, all the way down to 1405, which of course spurred the rumor that the Fed’s decision had been leaked. Rather than play that game, and knowing we had this triangle setup from the night before, I commented in the chatroom that this sell off could be the start of the Santa Claus rally. The results, as illustrated in the chart below, prove it was!
So, as I hope you can see, the intra-week trades covered in the forums are much more important than finding “the count” on the monthly charts. Like a giant puzzle, it all comes together through the completion of smaller structures – otherwise I would be calling tops every time I can count a 5-wave advance! Instead, I had rather book profits all week long until I have a reason to be cautious. With that said, be sure to check out Joe’s Precious Points update, as silver sold off exactly at our target on December 5th and produced a profit of $4850 per contract on Friday alone as it declined 7%!
Regular readers of this update will have no problem recalling my bullish call from August that totally cut against the grain of mainstream thought at the time. Since then we have climbed the “wall of worry” on past the SPX 1360 target and I advised not to challenge the move as we rolled up our targets, noticing that the structure kept subdividing and adding incomplete patterns.
I also stressed the importance of market sentiment. And I must say, if there ever was a week where market sentiment is ripe, this is it! Everyone I spoke to this week was a born-again bull! Analysts now have target estimates from 1600 to 1800+ on the S&P. Sure we can have a bit more upside, but I sense a pure capitulation. I think a little something called a "surprising disappointment" in Elliott-speak may be dampening some New Year's celebrations this year.
As we sold off into the summer lows, I had a huge problem believing that the May high was a top based on the Fibonacci projections I construct. Over the past several months, I’ve noticed a long-term projection has been pulling up on the NYSE’s price like a magnet. When we achieved SPX 1360, the NYSE was still shy of its ultimate target, which is partly why we have avoided stepping in front of the SPX so far. As illustrated in the chart below, we are close to tagging that NYSE target and, as far as I am concerned, we can complete the move right here or trade a bit above the target as we wrap it up going into 2007. A more detailed analysis of this situation was submitted to Futures magazine, which should appear in their February issue.
As you can see, I am not about to spoil a perfect prediction so far unless something changes. Of course, this is not my announcement to go short! As of Friday afternoon, I recommended holding off on any shorting to at least next week. It is a hard call around the holidays, but I have mentioned before about this rally holding up to Jan. 2. I would actually enjoy seeing another small move up early next week that completes a pattern from the July lows, but if we trade lower, and able to take out the 1413-ish area, I will go with the flow. If we somehow trade through the NYSE target without recognizing it, I will stand aside or get BACK on the bullish trade. I have no agenda each morning, week or month that involves marrying a particular count or concept, which is the reason I have been calling the market correctly. I don’t agree with what many are calling for from this point on, but if something were to change in the next few weeks, I will not be blinded but some bias or number and quickly join in.
I expect the SPX to make another attempt early next week, which could have some serious bearish implications. SPX 1360 area is no longer the short trigger (but still an important level for other ideas) and a new number will be posted early next week for members. There probably always will be someone who wants to get in on the entire move and short a few points higher, but I hope you can see the logic in my strategy and understand that this level of discipline has kept me from being short all along. I’m not about to mess it up now.
Keep an eye on the next high, along with the p/c ratio, a/d line and non-confirmation from either the NASDAQ and/or the Russell. Targets sit at any new high, 1436.50 and 1456. The end of this leg does not have to mean crash, or never a higher move, but the next week or weeks should get very interesting! We have a couple of plans and levels on the radar for a 2007 idea. See you then!
Dominick Mazza
TradingtheCharts.com
Dominick@tradingthecharts.com
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