We are now into the 19th trading day from the December 1st long day. And there is not one day away, or completely outside its range. This is ominous. The extreme shrinkage in range and volatility will undoubtedly be followed by some violence. (When the real traders get back from the Hamptons.) On the other hand maybe the real traders don’t have any ammunition left because all of their investors have demanded their money back. One of our clever colleagues said that a hedge fund was an (extravagant) compensation scheme disguised as an investment strategy. Whatever. Our readers will note that in this range bound period two Candidate basing Point days have appeared. If you wanted to tighten your stops up you could drop your stops to 5% over one of these points. We still like the farther stop identified on the chart. In this time of great uncertainty we see no reason for not finding some likely longs and making light commitments with well placed stops. For instance T, which we will look at a little later this week.
If there is any sense to be made of this chart (and there may not be) it is that so far the up wave has failed, and that more downside should be expected. But since these markets are totally psychotic we must just stick with the method, which is still short, brave readers.
The breakout of the trading ranges lead into a disappointing gloom secondary recovery, unable to close above any key point. The only positive is the VIX’s diamond pattern with down side breakout. Indices retrace between 33 – 62% while we stopped at 32% (SPX). Reaching the 1050 upside would mean a 59% retracement. The raising wedge pattern ended in an ascending triangle with a down side breakout for now. I watch the SPX 845 level for confirmation.
In my opinion, we seem to setup for the third phase of the bear market lead by big caps offering reasonable put options with sufficient volume.
The slowing VIX made me to I re-read Chapter 7 again, explaining the formation of Kilroy as bottom formation We have 2 left shoulders, a head with a left and right shoulder yet. If we will start forming 2 right shoulders on the 1000 (SPX) neckline, we could complete the formation. Symmetry and volume seem ok. I am looking for a pullback from that possible 2nd neckline prior to enter long equities. The SPX target should reach then around September high.
But all this may not reverse the primary trend yet. We would still be in a bear market phase 2/3 at this point.
I have always regretted premature analysis of formations. The present Dow pattern in my analysis could be the start of a bottom, but the recovery from the nose (or head) is not sufficient to draw a neckline. I will post a chart later. At the moment we are watching the rally, which rather than looking like a shoulder looks like the unresolved upwave from the nose. To a certain extent this is academic or non pragmatic discourse. We know we should be short and staying that way.