Fin/Inv

I am still recovering from a little technical melt down I experienced with ThinkOrSwim this morning. Fortunately their customer support really kicks ass and helped me roll back minutes after posting a slighty angry support request. Alright, it was a really angry request – but who can blame me? We’re talking about dozens of charts here that suddenly disappeared.

Anyway, it’s all fixed now and I’m a happy camper again. Yes, they screwed up their last release but it is clear they are working hard to help everyone roll back to their previous setup. If you have any trouble at all – just email support@thinkorswim.com and they will help you out. Even with all the recent trouble I maintain that they are the best platform for retail traders, period.

Anyway, now back to the markets. I’m posting this chart in the clear as I think everyone should see it after what transpired yesterday while I was on the train South. And I’m not ashamed to admit to this being a plug as this chart continues to keep dominating all others. Some of you subs are familiar with it as it’s a recent edition to the team – the daily Zero.

For the past two months the daily has been pointing upward, much to the chagrin of any bearish subs who have learned to respect it. It’s almost become a daily routine now – after the closing bell I pull up the daily Zero and upload it to the server. And every time I do it I am on the look out for a more negative signal which would be an early harbinger of structural weakness and thus short to medium term downside.

But as you can see – the daily Zero has been stubbornly pointing up. And guess what – thus far it continues to be proven right. I’m not sure what’s making this market tick, and despite the fact that I wrote the damn thing I myself am surprised by the level of reslience that equities have been exhibiting in the face of a relatively firm Dollar, plunging treasury yields, horrible economic reports, etc.

Listen guys – if you’re like me you have been reading hundreds of opinion pieces and studied thousands of charts trying to figure this market out. Yeah, you can do that and maybe you somehow manage to call the wiggles in this tape. Or – you can just follow the Zero

There are three of them now. The daily is the latest edition and it’s really growing on me. The hourly was the original Zero and it shows us nice divergence across daily sessions. If you’re a swing trader or even scalper the Zero Lite is where all the action is. I can’t tell you how often it has kept me and my subs out of trouble – in particular ahead of head fakes. Anyway, if you like what you see and are interested in becoming a Zero sub then don’t waste time and sign up here.

Alright, now after this shameless plug I want to respond to Tim Knight’s post from earlier this morning. I tried to get him on the phone but he seems in bad spirits, so I will address it in an open forum as I actually meant to encourage him. This is what Tim said:

Two important questions I’ve been posing to myself:

Why not just resort to day-trading? It’s tempting. When I read about nummy having something like 28 profitable days in a row, and Market Sniper having – what was it? – something like 50 – - not to mention day traders not having to worry about overnight gaps, it is horribly tempting to throw all the knowledge I’ve built over the past quarter-century into the shredder and just take that approach. But, simply stated, that just isn’t me, and it’s not my style. There’s a reason I approach the markets the way I do; sometimes it works brilliantly; sometimes it seems foolhardy. Lately, it seems to be more of the latter. But throwing my arms up and completely changing styles just because I’m frustrated doesn’t seem prudent to me, although I’m willing to hear other opinions.

Mole: You are worried about throwing away the knowledge you accumulated over the past few decades. That’s understandable. However, you ought to ask yourself what good ‘knowledge’ is when it ceases to serve you? I study martial arts and an aphorism in Aikido – which has only two belts, white and black – is that as you gain more proficiency and work hard you finally are being rewarded with a black belt. Then you keep training and as you do your belt starts to fade and after hundreds or thousands of washing cycles fades back to gray and then almost white again. This is representative of the fact that in martial art you have to learn all these techniques to master an art. And then you have to forget all of them – in a sense, you complete the circle. You have to make them your own – they have to become you. And at some point you don’t think about techniques anymore – you just move when necessary and your instincts will tell you what to do. But those ‘instincts’ is the accumulation of what you have learned and practiced for years and years.

Now, I’m not saying that you should trade via instincts, that is not what I tried to communicate. Rather, I suggest that you should not be afraid of throwing away anything you have learned and that may have served you in the past. I just recently switched from Aikido to Systema, which is a Russian system I am really starting to appreciate. But guess what – many of the things I learned in Aikido I now need to abandon and I again am training with the white belts. Of course I do have a bit of an advantage, but you can’t walk into class and think that you are a hot shot and that you think you know something. That’s a mental block and it will lead you to not learning anything new. Plus it’ll lead to getting your ass kicked – hehe

Maybe that’s why we are mortals to begin with. We accumulate too much baggage and knowledge that may not be applicable as times change. But even within our times we often find ourselves unwilling to embrace change – despite the fact that change is the only constant in the universe. Now, in terms of trading it is very clear that this market has changed considerably in the past few years. And I’m certain that it will never revert to what it used to be – traditional technical analysis simply is unable to offer the type of edge we were able to enjoy for the past few decades.

Phoenix From The Ashes:

But this is also an opportunity to excel to the next level. I have been spending a lot of time working on new automated trading systems lately and yes – they are all intra-day systems. And not just swing trading strategies – most of the ones that seem to be unaffected by the daily gyrations and gaps of the past two years are running on a 1 minute chart. So there – we can argue with what we think what’s ‘right’ or what we want this market to be – or we can just accept the market ‘as is’ and develop tools that offer an edge. I choose the latter.

What worries you more than anything? It isn’t pre-election shenanigans; it isn’t monthly OPEX silliness; it isn’t the Fed; it isn’t Geithner. What worries me above all is…….what if I’m wrong about the economy? What if all this government intervention, in the end, turns out to be a brilliant stroke, and it really does set the economy on the road to a robust economy complete with healthy, growing earnings, growing employment, and worldwide prosperity? What if my sense of “balance” and “natural” is just misguided, and the modern knowledge of economics has yielded a situation where things simply aren’t going to roll over again? I have no answer. That’s simply my question.

Mole: What we ‘believe’ does not matter. The market is smarter than you, I, Prechter, or anyone else out there touting that they have seen the future. Quite frankly, I can show you some probabilities via my wave counts and many times I nail it spot on. And then there’s that sudden move that nobody anticipated – maybe I was suspicious about what preceded it (i.e. my comments to the Zero subs last Thursday) but did I anticipate a spike like we saw yesterday? Hell no – and neither should anyone for nobody has a crystal ball (except Goldman Sachs). Your sense of balance and natural wave form is very honorable and probably spot on, Tim. But you may be limited by your human perception in that you want it to happen now when you feel a redemption is overdue.

Well, sorry to disappoint you, my friend – but there is no ‘fairness’ in war, love, or the financial markets. If I have learned one thing in my life is that the big dogs get away with pretty much anything while the poor minority group schmuck who’s trying to feed his family via some desperate and act like robbing a gas station for fifty bucks gets thrown in the slammer for over a decade. That’s life – and although you have experienced success in your personal life do not make the mistake to think that any of us are excempt. Life is a bitch and then you die.

The market will do what it wants to do. All we can do is to follow the signs and then do what we have to do to survive and fight another day. Another lesson I have learned is that half of winning the war is to surviving and being able to fight another battle. Thus, instead of complaining I am spending my energy focusing on new tools and systems that are impervious to news, manipulation attempts, FOMC statements, etc. I think I am making great progress and to me it is clear that the future is in automated trading.

Bottom Line:

In the coming months Evil Speculator will slowly shift its focus from traditional technical analysis to automated trading and selected tools that provide a clear edge. The Zero is one of them. Geronimo is another. But there are more to come and I’m just getting started.

Cheers,

Mole

I would like to contribute today but am experiencing a bit of a melt down over here:

No, it’s not the market – in my time I have learned to take snap backs in stride. No, it’s technical problems, in particular with ThinkOrSwim.

Originally I had no issues while everyone else was complaining. Well, last night I shot an email over to Tom Sosnoff indicating that they may roll back their latest release. Well, either he completely misunderstood me or he’s trying to have some fun with me – either way, get this: I finally get to my trading station this morning and TOS is unresponsive. So I relaunch it and guess what:

ALL MY CHARTS ARE GONE!

All of them – I literally had dozens of charts that I look at every day. My wave count in Prophet which I have labeled for two years now. All gone. My indicators and my fractal patterns. Gone.

On top of that my NinjaTrader setup is throwing strange errors after having switched from IQFeed to a new service called Kinetick. When it rains it pours.

In short – I’m in a world of hurt today and probably won’t be able to contribute, sorry guys.

And my message to ThinkOrSwim: Better start focusing on stability and speed and not on fucking new feature creep all the time. This is absolutely unacceptable. How are you supposed to trade a market like this if you can’t even rely on your tools?

UPDATE 3:00pm EDT: Alright – it’s fixed. Someone from ThinkOrSwim literally called me a minute after posting this and helped me roll back. My charts are back – wohooo!!

I was almost hyperventilating over here. Those charts represent thousands of hours of work, as you all know – you’ve seen their progression. Glad to have them back.

Alright, now I can start looking at charts again… going to work.

Cheers,

Mole

Stainless steel rats all over the world can rejoice – for Mole is going on a little day trip tomorrow. In case you’re not getting the joke: Word has it that every time I leave somehow equities tank – it’s roughly a 2:1 ratio. Well, I hope this time won’t be an exception and we’ll see a little plunge tomorrow. In the market that is – let’s avoid a repeat of the little ‘incident’ that occurred last time I took the train to San Diego.

I swear – it wasn’t my fault – I slipped on a banana peel and fell on the ’steam forward’ lever. Ahem…

Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed or Evil Speculator Gold or geronimo/ES or evil.rat/ES to view this content.

Public Service Announcement:

There probably won’t be an update tomorrow night – I will catch up with you all on Thursday morning, for sure.

Cheers,

Mole

See, it’s always about the follow through – be this in golf, tennis, baseball, or after a nasty Fed induced ramp in the markets.

Except that there was none today and the bulls found themselves in a sand trap. Which puts the odds back in the camp of the bears – thus far

Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed or Evil Speculator Gold or geronimo/ES or evil.rat/ES to view this content.

The clash of the titans is upon us. Make no mistake – it’s make or break time for the bears as they are running out of time as well as wave sub divisions here. Emotionally everyone has been ripped to pieces, but from a technical perspective things could not be much clearer. Either the bears close the deal right here and now or they will be squashed and again be relegated to watching the bulls take their lunch money and fuck their prom queen.

The financial establishment is fighting for its survival – with tooth and nails – as it has been for the past two years. They have used every trick in the book and some unprecedented ones that hadn’t been written yet. They’ve gotten every break and get out of jail pass one can possibly imagine – but despite having the wind in their backs the upside momentum has stalled for about one year now. But don’t underestimate them for a second – until the fat lady sings the incumbents will continue to do exactly what they have been doing and they will never ever give up.

For their survival depends on it.

We now find ourselves at a major inflection point and the big question that remains now is whether the deflationists or the inflationists will win the war. Robert Prechter and friends insist the Fed can’t possible stem the bursting of the credit bubble through continued quantitative easing initiatives. I used to be convinced of that – but having seen what I have seen for the past two years I’m not so sure anymore. I’m also now mindful of various and concerted currency games which seem to provide almost infinite support and thus a permanent floor to equities.

So perhaps the combined forces of banksters worldwide may somehow get the job done and simply socialize those losses to the rest of us – thus in the process finally destroying what ever remains of our teetering middle class. We shall see – either way we’ll probably see some fireworks before it’s all said and done – and I’m not talking about hypothetical ones.

Whatever we’ll get – I’m dressed for the occasion (yes, I’m almost that handsome – well, almost). Now, that I’ve set the stage for you guys (and have the attention of the girls), let’s look at some charts:

The least important chart today is our wave count. Quite frankly – it’s quite clear at this stage that we are in a downtrend that either resolves itself or may paint a bottom and turn into something else.

Clockwork Orange keeps us locked in that current down channel. Which means we may pop a little on Monday morning but then reverse and paint new lows later in the week.

Soylent Green territory begins after 1070 – if we push much above that we will see many funds throw their weight behind a wonderful short squeeze opportunity. Either bears or the bulls are getting squeezed next week. The bears most likely early in the week and if we push higher quite possibly the bulls. I may however point out that if we don’t turn around at the 1100 mark then we’re talking about something completely different. But we’re not there – so let’s not worry about that yet.

But those are just the current high probability scenarios going out for a week or two – what’s a lot more important here is that the current count does not leave much more room for further sub divisions – at some point this bitch has to drop like a rock. After all this is what should be happening around here. In 2008 we had a similar situation and it was driving everyone nuts. I was telling Berk how the slide was overdue and that it simply wasn’t happening. Then it happened – suddenly – without warning – fast and hard. By the time everyone realized what was happening it was pretty much over.

So, when I say that it needs to happen now then it doesn’t mean that I can’t happen. What I’m saying is that it needs to happen by early October – and by that time it should be almost over. So, that leaves us with a very narrow window for a big slide. It has happened before – and there is no doubt that it can happen. But the important message to take away here is that the whole ‘waiting for Godot game’ we had to put up with will come to an end in early fall.

Now that I have shown you the least important chart let’s look at the most important chart for next week. I posted this one last week while we were hovering around that equilibrium center line of that one year channel I suggested. And sure enough we reversed right at the 25% mark – which coincides with that magic 1040 level the funds have been having fun with for the past few months now. Buying the dip here has been a literal gold mine and like Pavlov’s dogs they will continue to do it until they get their ass spanked in a serious way.

The higher we climb in this chart the less credible the short/medium bearish scenario. At the center point the odds are about 50/50. If we push to 1100 the bears have one last opportunity to squeeze the bulls and turn this market to the downside. At the top line around 1130 the odds for the bulls will have increased significantly compared with the odds around 1140.

We need to clear this channel – one way or the other. If we push above it the bears will be in a world of hurt as the ensuing feedback loop will bring buyers back to the table. I’m not sure that’s what the Fed wants – after all a climb in equities supports rising yields in treasuries. But their game may be something completely different and I’m not putting any of my coin on anyone’s interpretation of the Fed’s game. If we breach 1130 I will anticipate further upside and will trade accordingly. Unless of course my momos scream sell sell sell at me. If that happens – well, I will be here to tell you all about it.

If we finally breach 1040 and then 1020 it will be a starting signal for what Primary {3} – there is very little doubt about that. The majority of the longs will draw their line in the sand right there and should we breach it will most likely head for cover. Maybe politics and the November election make this scenario questionable – at least that’s what some claim. Then again – it happened in 2008, didn’t it?

The daily Zero has been pretty lackluster as of late. Just compare the magnitude of spikes we saw early in the year with the snooze fest we had to put up with since mid of July. Yes, that may have been merely seasonal, and if that’s true then it gives additional credence to my perspective that September will be the make or break point for the bears. The big boys are returning now and we should see considerable increase in volume and participation.

The last buy signal we got (see dotted line) was pretty weak and it was only good for a moderate bounce. Thus far we did not see a new low accompanied by a major divergence. But then again, we did not see a big spike down either that would signal that bearish momentum was on the rise. So, I’m split here and thus the odds are split in my mind as well.

Copper started to point up last week and – to no surprise – equities followed suit. Note however, how equities have lagged in comparison with similar levels in copper. This suggests that bullish moves in equities are lagging those we see in copper – a bearish indication. Nevertheless, we are also at a pretty important level for copper – which I have tried to highlight via a blue rectangle on the lower panel. But it’s actually a lot more clear on the point and figure chart:

See, isn’t that so much nicer? I love P&Fs for support/resistance lines. And copper just touched the 340 mark which should pose quite some resistance. If it breaks above then the bearish price objective of 296 may have been revised. Maybe some P&F aficionados can chime in here as well. I have the rules somewhere but don’t have the time to dig them up tonight.

The message to take away here is to watch copper like an eagle. A breach higher would be another ace in the sleeves of the bulls.

My gold:silver ratio chart plotted against the SPX also has touched my one year sell line. Usually bearish things happen at this lower diagonal and this time should not be any exception. Again, a breach here may greatly weaken the short to medium term bearish scenario in equities – so I will be keeping an eye on it.

Currencies is really where the game is being played these days. The AUD/JPY has seemingly been set up with a turbo charger running on high explosive mix of nitro, fuel and oxygen. Seems that the BOJ has had it with lagging exports and is putting the squeeze on the Yen longs by buying the Australian Dollar. Maybe some FX traders could shed a bit more light on this for the benefit of us all.

We are close to the breaching the upper line on my stochastic but that doesn’t mean much. We may push above and become embedded after all – so who knows how high this thing may climb. And that is probably the most worrisome chart for the bears – if equities follow suit here then we’ll see 1100 on the SPX in a very short order. But if it lags then it will give the bears additional ammunition for a long squeeze once the AUD/JPY rolls over.

The DXY is clinging to 82.87 – and not seeing the Dollar getting killed is a plus for the bears. After all, the 18 month climb in equities has been greatly fueld by stomping on the Dollar in the process. You may remember the chart I posted last week which showed the SPX valued in Gold.

Bottom Line:

It’s now or at least not for quite a while for the bears. I won’t say never of course. But the wave count does not give us too many wiggles to postpone the grand finale here. If this is a Minor 3 of Intermediate (1) then it needs to start showing its colors. And the A/D ratio of 5.0+ we saw on Friday should be an anomaly that cannot be followed up – otherwise we have to concede that something else is going on. That simple.

Public Service Announcement:

In the past month I have again put additional emphasis on refining some of my automated trading strategies, with quite some success if I may say. A major reason for my revived focus is a growing realization that the retail trader is slowly going the way of the dodo. I love you guys but just don’t think there will be many of you left in one or two years from now. The market simply has become to complex, narrow, and brutal. And as the old saying goes:

If you can’t beat them – join them.

Now, I have been blessed with some pretty considerable programming experience – after all I used to be a software engineer for 15 years until I decided to retire and focus exclusively on my trading. That however doesn’t mean that I stopped hacking code – quite on the contrary: I merely had become tired of working on other people’s projects and quickly found that my skills were a lot better used working on trading strategies. I seem to have a knack for seeing patterns and putting my observations into code and thus working strategies is a very rewarding endeavor for me – mentally as well as monetary.

Incidentally, the strategies I am testing and continue to optimize until I am ready all have been back tested starting January 2007 to the present. The reason for that is that I believe that any strategy which was able to survive the past four years should at least have a fighting chance moving forward. After all, we are talking about some very dynamic and contrasting market conditions here.

There will be several announcements in the next few weeks – and I believe you will appreciate the kind of stuff I have been cooking up. And over the next few months you may see a slow shift towards automated trading. Some of it in the same fashion as Geronimo or evil.rat – which means via email or SMS notifications. But I may also finally hook into Collective2 or a similar service and thus give you guys the opportunity to trade various strategies through an automated framework.

What concerns me a bit is that Collective2 takes a big chunk out of my profits and being the greedy market megalomaniac that I am it would be preferable to find a different solution. So, if you are reading this and know of a better framework please let me know – I’m open to anything as long as it represents a viable and secure solution.

See you on the other side, folks.

Cheers,

Mole

This morning’s gyrations produced a bear trap of biblical proportions. I can only imagine how many grizzlies rejoiced when the former low of 1039.83 was breached by 13 cents – just to then having to watch their legs being chopped in a matter of minutes. I can’t help but admire such an evil setup. I hope you all were watching the Zero as it continued to be extremely skeptical throughout the entire morning drop.

The most meaningful chart for me is one I presented a few days ago:

You don’t have to be a master chartist to imagine how this may be a bad situation for the bears. Not only did we bounce at that 25% channel line again – we did so in short succession, thus painting a very ominous double bottom. Not good!

NYSE A/D ratio is at 5.27 right now – and that’s quite bullish, possibly supporting a move higher.

The wave count is getting a bit gritty at this point. I’m not going to sugar coat it – we should not see such a wave formation at this stage. Fast retracements – yes. Opening gaps – yes. Fake out moves – yes. But a double bottom right here in a third wave? Very strange…

Now, I’m not going to throw in the towel right away. It is possible that we are painting some complex sideways pattern, which after bending a rule or two will lead to a count that satisfies Clockwork Orange. However, it would be foolish to not consider a more insidious scenario – one in which we just completed a very shallow Minor 1 down and are now pushing into a Minor degree retracement which could take many shapes (and burn more theta).

The game here seems to be quite simple – and it’s the one you’re all feeling: This is all about theta burn – delaying the down move as to further discourage the bears. Unfortunately it’s working as I may have to yet again add more theta to my long term positions.

Of course what’s driving all this is the AUD/JPY – and I don’t see this thing turning any time soon. There are some huge currency interventions taking place here and if equities (and the ES futures) catch up it’ll be one hot late summer for the grizzlies.

I am increasingly starting to feel like Michael Burry who a few years ago bought credit default swaps to bet against the sub-prime mortgage market. It’s a long story - but one you may appreciate. The banks selling him the swaps fucked with him all the way to the end – until they finally had no choice but to shut up and pay up. Suffice to say – all through his ordeal he didn’t have many friends. This is no consolation and no – I don’t want to be a Michael Burry. If I see any indications that we are pushing above the center line on my first chart I’m going to head for the hills.

Anyway, we are at Defcon 2 here at the Evil Lair – I don’t like this tape and we better reverse here righ away or bad things may happen next week. Thus far I’m sorry to say that it’s not looking good at all.

Cheers,

Mole

Alright, this is getting annoying and I can literally hear the question rattling around in your little chrome plated skulls:

Well possibly – but I have an inkling we may have to endure a bit more of this. Let’s look at our map:

Clockwork Orange has us push us lower straight away as we nailed my initial 1060 target. Soylent Green has us screw around a bit more to complete a b-wave and then pull up hard into a gap fill at 1067. From there we’ll drop even harder, so the difference between those two scenarios is almost academic for long term traders. You ADHD suffering swing traders however should take note.

Both scenarios have a fair chance right now, especially since we just breached a pretty persistent 1051 support line on the ES futures. The Zero readings on the way up have been flat as a flounder, thus supporting a mere corrective move.

The long term trend continues to look solid. However, I would enjoy seeing longer red candles at this point – we are dangerously close to the zero mark on this histogram. But as long as we don’t push into green and expand we should be okay. If anything changes on this chart I will let you guys know immediately.

Don’t over think this – there is not much to do. You are not smarter than the market – no matter how much information you collect and how many charts you look at. We can only do so much in order to determine the odds. After that it’s up to the market to point us in the right way. So far it continues to point down.

UPDATE 12:00pm EDT:

Zero subs probably understand the meaning of this – we just played a very nice H&S formation on the ES futures.

Prost!

Mole

Fast and brutal reversals (on little volume or participation) are expected during meaningful drops to the downside – get used to it – it’ll only get worse on the way down. Before you guys all reach for the eject button let’s look at some target ranges for the current bust higher:

Boy, whoever hit that one is a lousy shot – especially with such a small caliber. My trusted CZ P01 (9mm) clears the center at 50 feet – amazing semi-auto. Any rats resident in L.A. up for a shooting match?

We painted another clean motive to the downside and are right now halting after at a 38.3% fib retracement. Could go higher tomorrow – I like the 1060 cluster but we may just close that gap and push into 1067. However, if we push above 1081.58 then the wave count changes considerably. Thus this is the level where I would recommend to start scaling getting hedged a little on your long term positions.

That’s pretty much it for now – there’s more but I wanted to get this posted during the session.

Cheers,

Mole

I think we should just feed some artifical A.I. with a bunch of Socrates quotes and then let it loose on the market. Looks like the old robe donning Greek nailed the support line he proposed yesterday spot on. I can tell you, Plato is in a bad mood right now as he was on the other side of that trade. But he should have known better as he himself said:

I have hardly ever known a mathematician who was capable of reasoning.

Someone should pass that quote on to the respective originators of various toxic assets that pushed our financial markets toward complete melt down – i.e. MBS, CDOs, CDSs, etc.) – most of which are still traded over the counter to this day I may add.

Plato pondering about Mousaka Baked Sedatives.

So, let’s revisit yesterday’s chart and then look at where we are in the ole’ wave count:

Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed or Evil Speculator Gold or geronimo/ES or evil.rat/ES to view this content.

As my short term equity charts have all slowed down to the point of ambiguity I decided to ignore them all today and apply a slightly philosophical approach to make sense of it all.

After all it was Socrates who said:

A good decision is based on knowledge and not on numbers.

Wise words indeed and what it means for us traders is that all the fancy tools and indicators in the world are completely useless if we fail to put them into context or are able to interpret them to our advantage.

I mentioned this last Thursday – for the past year we have basically been gyrating within a hundred handle channel on the S&P 500 – with the exception of one meaningful attempt to breach it, which of course failed. Although the bulls still act as if they own the place there has been zero progress for either side. This tape is coiled up and wants to finally escape this dreaded channel.

Seems to me there are two forces at work here – one is gravity as dictated by our time cycle as well as the wave count, both of which are suggesting a correction is needed. The other is escape velocity defying said gravity through various machinations by the Federal Reserve in collaboration with the major banksters intent on socializing any losses incurred during the 2008 market melt down.

For the first six months of 2009 escape velocity was winning the day, partially aided by heavily oversold long term conditions. Upward momentum however started to slow in September 2009 and we saw a gradual increase of corrective waves after which a final short squeeze last April completed what we now count as Primary {2} of cycle wave c.

Since then we had a few fast moves to the down side but any attempts to escape the channel shown on the chart above have been thwarted. At this very moment we are smack in the center of this channel – which appears to be the equilibrium between these two opposing forces. The bears are exchanging strikes with the bulls but no winner has emerged just yet. However, it seems pretty clear to me that which ever side is able to breach this channel purgatory will take the price for the immediate future.

So, this very simplistic chart has some very important implications. As we are now in the center of the storm each side has an equal chance to score another touch down. If you look at the quarter channel dividers you notice that they also represent important energy points at which reversals or break outs happen. Only to be presented with another hurdle about 25 handles later. Make no mistake, my dear steel rats, this is a hurdle run and at this point both the bears and the bulls have to hurdles to go.

My suggestion at this point is to do what the market tells us. It’s quite simple – every breach of a line to the upside will diminish the potential of an medium term slide to the downside. If we bust through the upper yellow line then the odds of this happening are reduced by a minimum of 50%. Similarly this applies to the downside. If we push through 1040 it greatly adds much needed credence to the downside potential. And only a push through this year’s lows at 1010.91 will give us a real chance to see Primary {3} unfold as expected.

I know that this is a very simplistic chart but I actually am pretty elated about being able to bring things down to a very basic common denominator. We are in the eye of the storm right now and each tick up or down adds credence to these two opposing forces. Instead of guessing where the market will go we should simply watch this chart and adjust our delta exposure accordingly.

Of course if the Zero (once TOS fixes their data problem, mbmbl… grmbl…) or any of our other short term momo charts are presenting a clear picture I will let you know immediately. Right now however it seems everything is in flux.

Cheers,

Mole

After months of patience and braving some of the most excruciating tape in financial history retail traders had to cope with, the final and most exhausting battle still lays ahead. It won’t be the wild gyrations in equities you will have to overcome – most of us are used to that by now. It won’t be the never ending machinations by our friends over at the Fed – or the lack of financial regulations reigning in the banksters. And it won’t be the daily and incessant HFT tape banging. All that, my dear ladies and leeches, was and remains to be the easy stuff.

For we have met the enemy and he is us!

Wir sind so schön | We are so beautiful
Wir sind so jung | We are so young
Unendlich geil | Infinitely horny
Wir sind so dumm | We are so dumb
Wir sind verwöhnt | We are so spoiled
und elegant | and elegant
Wir sind brutal | We are brutal
und doch charmant | however charming
Wir sind so hip | We are hip
Wir sind so cool | We are so cool
Ein bisschen bi | A little bi
Ein bisschen schwul | A little gay
Wir sind so wild | We are so wild
und so versiert | and so well versed
Knallhart und | Two-fisted
perfekt programmiert | and perfectly programmed

Alright, here is where I’m going with this: Most of you steel rats are probably under 35 and hence your brain is wired quite a bit differently from that of your parents or grandparents. Let’s face it – you are all ADHD inflicted information junkies on a high sucrose info diet who can’t sit still for five minutes without as much as glancing at your fucking mobile phone. You are a bonafide information junkie and should you ever have the misfortune of finding yourself stranded in a barren desert (without cell reception – the horror!) you most likely will die from info-deprivation long before any signs of dehydration set in. Yes, you are on the move – you live on the edge – nothing escapes you – every minute of your waking hours is accompanied by a never ending stream of data keeping you up to date, in touch, and well informed. You are a black belt master of the info universe and the more you know the better.

Well, guess what – when it comes to gaming the market – you are in the way. So shut the door, shut your trap, and have a seat!

One of the most famous and at the same time most ignored Livermore quotes quite succinctly captures my outlook for the next few weeks:

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.

Spot on. Here’s another one, which speaks to the lack of patience, a quite common affliction back in days and even more so today:

The market does not beat them. They beat themselves, because though they have brains they
cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the
courage of his convictions but also the intelligence and patience to sit tight.

And finally – one of my favorites, as it debunks an old myth I never bought into:

They say you never go broke taking profits.  No, you don’t.  But neither do you grow rich taking a four-point profit in a bull market.

I could go on as there are plenty of classics to pick from, but I’m sure you’re getting the point by now. So beyond my rehashing of old Jesse quotes – what’s all this about?

Well, the financial markets have a knack for bringing out the worst in people and although there are many vices and cognitive biases to pick from one stands out among all others, and it’s a systemic lack of patience. Quite frankly, the final lesson the next six months will teach you will be to do nothing, nichts, niente, nada, zilch. Am I coming in loud and clear?

Do nothing – check!

It should be so easy to do, right? Just get positioned and walk away, then cash out and focus on getting lap dances from the gold digger of your choice. Turns out it’s one of the hardest things to do and the need ‘to do something’ kills traders on an ongoing basis. Of course this has always been a case, but overcoming this mental trap will be essential in making it through what we currently count as Primary wave {3} of cycle wave c.

The Wiggly Waves

A new glance at the long term picture – now you know why I bought December puts. The long term wave count has us moving toward a mudslide that will quickly separate the bulls from their ill-gotten gains in a pretty scary move – one that should unfold over the next two months. Yes, it’s pretty much black&white at this point and the wave count is only giving me two distinct choices. Either we slide – and that hard – or the count is wrong and we’ll get something completely different Monty Python style.

As you can see we are currently in the humble beginnings of Minor 3 of Intermediate (1) with a rough target of in between 9,000 to 8,500 on the Dow. On the S&P 500 cash this translates to roughly between 975 to 925 – give or take a few panic sessions. Since we had a pretty complex and tormented correction we should then see a zigzag (or flat) to the upside followed by a slide to 8000 on the Dow. Some fellow Elliotticians may disagree here, rightfully pointing toward the current flat as being ’simple’ – thus something more complex could transpire (which for us traders translates into theta burn and sideways strategies). Well, I am pretty open to that and my current POV on the subject is that we’ll cross that bridge when we get there.

More medium to short term we have quite a bit of work ahead of us. In order to even think about any significant downside we first need to overcome the three stooges, with Larry spoiling the fun at 1,065, Curly ready to cause havoc at 1040, and Moe to whip you into submission at 1010. Once we’re clear those three things should accelerate quite nicely to the downside.

If we push up in the coming week – and as you can see a little correction is expected – we should however not pass SPX 1,100 – although it would not kill our overall wave count as we could still paint a running or expanded flat of some sort (although rare at this stage and after an ending diagonal). However, the line we must not breach is 1129.24 – that’s our line in the sand. If that happens then it’s most likely back to the ole’ drawing board for Mr. Mole as the medium term scenario would lose a lot of credence.

As a side note – the preferred scenario at this point is for this current wave to keep sub-dividing, which would lead to an acceleration to the downside. This implies that any upside correction should be quick and relatively shallow. If we hang around too long here or slowly crawl up for weeks on end then there is probably trouble in grizzly paradise.

As per additional evidence: I could post dozens of charts this weekend but decided against it as there is not much additional that I have not shown in prior updatest. Most of my long term charts continue to strongly point toward a deep drop to the downside. And the short to medium term charts are a bit mixed but do entertain this outlook. So nothing new to work with and thus there is nothing new for us to do except for doing nothing (see above) and wait things out.

And Until Then?

If it happens it will happen soon – until either proven wrong or right there is not much to do right now. You can play the swings Zero or Geronimo style a little if you like, but don’t get too overzealous and caught up in the daily gyrations. If we get what the charts are proposing the long con is the right play here.

Cheers,

Mole

Alright, Evil Rat Academy is officially in session – and since Mrs Tightbuns is needed otherwise (ahem), I was able to find an adequate replacement for today’s installment:

Okay, and now it’s time for the seventh part in our ongoing EWI sponsored series on option strategies. The following post is excerpted from the Elliott Wave International (EWI) eBook, “How to Use the Elliott Wave Principle to Improve Your Options Trading Strategies — Vertical Spreads.” EWI has agreed to make the full eBook available for free to all Evil Speculator readers until the conclusion of this series. So go ahead and download it here if you want to study ahead – however I would appreciate it if we kept all discussions limited to the current chapter.

Last time we were introduced to the Bear Call Ladder and the Bull Put Ladder. If you missed that chapter then I strongly recommend you go back and study it before continuing here. You can also pull up all prior installments of the the entire series via this link.

We now press on with an actual real life example of how to trade/manage a Bear Call Ladder.

Fig. 32

Let’s go through a trading scenario where we use one of these strategies in a situation of ambiguity. This is an Elliott wave-labeled weekly continua- tion bar chart of heating oil. Let’s count up from the 2007 low: we have Minor waves 1 and 2 (red), a big extended 3, and now maybe 4. Keep in mind, heating oil is a commodity. We know that in commodities the fifth wave is often extended. We already have an extended third, so chances are we won’t get a repeat performance in the fifth — but we could. That small possibility is enough to move us forward. The chief question to answer is whether wave four has ended. Maybe the small rise from Minor wave 4 is part of an expanded flat and we come back down. Or, maybe we’re going to skyrocket up in wave five. The first step into figuring that out is to look at the retracement made by Minor wave 4.

Fig. 33

Figure 33 overlays a Fibonacci retrace- ment table to the chart of heating oil.  As you can see, wave 4 has made a .236 retracement of wave three. That is acceptable, albeit shallow. Far more common to fourth waves is a .382 retracement of wave three. But again, .236 is still adequate.

Fig. 34

The next order of business is to assess where we could go in Minor wave 5. In Figure 34, I’ve calculated two common Fibonacci projection points by multiplying the net distance trav- eled of waves 1 through 3 by .382 and .618. We get 3.5247 and 3.9421, respectively.

Fig. 35

Those are possible targets for wave five. Another thing we can do is use the Fibonacci dividers that we dis- cussed early on in section one (bull call spread/ bear put spread) and illustrated in Figure 11. To reiterate: Wave four often divides the entire impulse wave into either the Golden Section or two equal parts. The chart above identifies those two areas in the case of heating oil. The Golden Section would bring wave 5 to 3.7116, and two equal parts would bring wave 5 to 4.2448. This handy guideline gives us two more targets for this particular strategy.

Fig. 36

What about time? Here again we can use Fibonacci analysis to estimate when wave 5 will end. As a guideline, wave five can equal the time it took to finish waves one through three multiplied by .382, .5, or .618. In Figure 36, you can see where these dates fall into the future on the weekly bar chart.  Our entry point is April 11, 2008, so in sequential order .382 comes out to the week ending September 12, 2008; .5 comes out to the week ending October 31, 2008; and .618 comes out to the week ending December 19, 2008.  So, now we have a reasonable time reference.

Fig. 37

With price and time targets in place, we can now set the wheels of this trade strategy in motion. We’re going to do a bear call ladder on April 11th. In Figure 37, the daily chart of heating oil is blown up to magnify the price point of interest — the up leg rising out of Minor wave 4. Make no mistake, this move is unclear. The initial drop could just be wave A of 4, making the rise wave B (leading to a drop in wave C).  Maybe we get lucky and we skyrocket in wave 5. Or, the way we lose the most, wave 5 barely bounces. This is the chance we take.

So, let’s get to the numbers. I’ve sold the September 300 calls at 31.40. On April 11th, the high was 3.2376 and the low was 3.1557. If you’re confused by the “300” calls, don’t be. The puts and calls that I’m dealing on are quoted based on the price (on the right side of the chart) times 100. For example, 3.00 would be quoted as 300 (3.00 times 100). That’s how these options are quoted, so from this point forward I’ll refer to the prices in the same manner. The September options expire on August 26, 2008, close to the .382 time relationship. That gives us about five months, a suitable stretch of time since this is NOT a short-term strategy. Remember, we’re looking for a big move at a relatively high degree. The 300 calls were in-the-money. We were trading around 315-323. I’m going to buy the out-of-the-money September 330 calls at 18.11. If there is just a small up move, I will be giving up 30 points, but we knew we had to sacrifice a small move to implement this strategy. Then I’m buying further out-of-the-money September 350 calls at 12.68. Why 350?

If you recall, we said that if wave 5 were .382 times waves 1 through 3, then it would go up to 352.47 (see Figure 34). We’re looking for wave 5 to go at least to 352, with the potential to go much higher. The maximum risk is capped at 29.39. The maximum reward is technically uncapped, but 395 is a good target, and at 395 we would make 15.61 points. Again, 395 comes directly from the analysis in Figure 34; wave five commonly equals .618 times the net distance traveled of waves one through three. That target came out to 394.21.

Let’s sum it up. At minimum, we should get up to 352. The lower break/even is 300.61. The higher breakeven is 379.39. The implied volatility is 35.85 percent. And, we’re doing this all on April 11th. If prices collapse past this wave 4, we have the net credit. We really don’t have to do anything. We could just walk away. So, let’s see what happened.

Fig. 38

In Figure 38, you can see that we did, indeed, get a big move up. This is now May 15, and we made a high of 372.28 the previous day — this is actually around the area where wave 5 would form the Golden Section. (Recall Fig- ure 35 and the guideline of wave four as a Fibonacci divider.) We still haven’t gotten to 395, and it looks quite possible that wave five could extend. So, we can afford to hold onto this position for a little while longer. The next chart reveals whether the decision to stay in this trade and hold out for further gains was the right one.

Fig. 39

Yes, we skyrocketed up even further.  The last bar on this chart, May 22nd, has a high at 401.53 and a low of 390.80, so we got to that 395 level. It’s time to unwind and get out. So, let’s see how we did. We bought back the September 300 calls at 102.45, sold the 330 calls at 74.74 and sold the 350 calls at 58.14. We earned a net credit of 30.43 points. The implied volatility was 40.49%, however that’s a bit misleading. That was still on the June contract, which had about two weeks to run. The September contract was really down to around 34% — so no major change there. Finally, this trade produced a net profit of 31.04 points.

Fig. 40

Bear in mind, the key to this strategy was not just the wave count. It was using Fibonacci analysis to give us an approximation of what we would expect.  And, if we pan out a bit further, we can see how close our projection came to reality. Our exit day was May 22nd.  On the chart in Figure 40, that date correlates to the peak of Minuette wave (iii) (blue) of Minor wave 5. After that, there was Minuette wave (iv) and (v), the latter of which unfolded as a fifth- wave diagonal. As we have repeatedly learned from the first three sections of this course, fifth-wave diagonals precede dramatic reversals. And that’s exactly what occurred here.

Mole here again – boy, that was a long one – congrats if you made it all the way down to here. But I think it was definitely worth it as we will use this type of ladder in the future at motive stages of the wave cycle.

Enjoy your weekend, you deserve it!

Cheers,

Mole

At this point it’s best to not over think the situation and to simply follow the map leading to our booty:

I swear this time it’s legit – I bought this one from an old one-eyed gypsy with a wisecracking parrot suffering from Tourettes Syndrom – and who by the way wound up filling in as tonight’s dinner roast (the parrot – not the crusty old gypsy). Anyway, before she put some strange pirate curse on me she swore that the red cross marks the entry to the Cave of Death, which in turn is the portal into Primary {3}. So, this must be a sure thing, right?

Ahoy, let’s mo’e on t’ our charts!

That’s how I see it – a bit more down – then a bit of bear spanking to force premature profit taking – followed by a deep slide into hades (i.e. toward 980ish on the SPX). On the ride down we have to fight the three stooges – Larry at 1057, Curly at 1042, and of course Moe at 1010. Watch your eyes on that last one – he’s a poker.

I love that action on the VIX – just enough upside and bouncing against the upper BB line to trigger an expansion – but without triggering an equities buy signal. That is good medicine for the bears and we want to keep it that way. I’d love to see a drop tomorrow followed by a bounce up – this would keep us at a similar level.

And that’s all fer now – keep ‘t frosty an’ keep ‘t clist. Nay punches below th’ belt line an’ keep watchin’ that Zero, ya bilge stainless steel rats!

UPDATE Closing Bell: I have to step out for a few hours to get declawed followed by my bi-annual flea bath. I am still drafting the latest installment of our EWP Option Strategies series and will post it later this afternoon. Should be up by tomorrow morning at the very latest, promised.

Have a great weekend!

Mole

So, here we are – stuck in the same 140 SPX handles trading range for eleven months now. Yes, it’s hard to believe, but go and take a look at your daily chart – it’s been one year of nothing but gyrations without any progress. The bears are worn out – the bulls are worn out – fund managers and retail traders are leaving en masse.

I can’t blame them really – it’s been a tough year and although I think that I have been making pretty good calls lately even your resident evil market megalomaniac sometimes feels the burn. But instead of throwing in the towel I took the past year as an opportunity to step up my game and develop tools and measures that kept the tape from pulling a fast one on us. If life hands you lemons – make lemonade!

As you know I have been also holding long term black swan insurance as I have been expecting a pretty considerable drop the downside. I have been biting my time, reloading some theta after months of sideways tape, and of course counting waves and looking at my momos. But we now have come to a point where there is really not much leeway left in terms of fake outs, second wave sub-divisions, or wave count changes that merely postpone the inevitability of a meaningful drop. We have reached the end of the line and it’s time for equities to die:

But when I say ‘it’s time to die’ that does not mean equities have no choice but to oblige. Everything is where it’s supposed to be – this tape is coiled up tight and ready for a bearish plucking. Time is running out however and if it doesn’t happen by the end of this month then the odds of it happening will evaporate rapidly. The next two weeks will be key:

According to the wave count we are in a pretty bearish medium term pattern. We are currently counting a Minor 2 correction as a running flat – which means that gravity is pulling quite strongly and that corrective forces had difficulty producing a regular zigzag or expanding flat, indicating bullish sentiment was resurgent.

Neverthless 1129.24 is where the buck most likely stops for the bears. The setup is almost ideal – after all ending diagonals as part of a flat correction is what bearish dreams are made of. Should the bulls manage to push beyond that point then the entire wave count as presented is in question. I know this flies in the face of all the long term bearish charts I have presented this weekend. Nevertheless – the bears had many chances in the past year and were unable to close the deal. This is as good a setup one can hope for when betting to the downside. The bulls stomp on this one and the dynamics of the game may irrevocably change – at least for the medium term.

So, set your clocks ladies and leeches – for the line in the sand must not be breached. As long as we don’t the bears enjoy a golden setup. But that’s all it is – a setup – a proclivity toward the downside. You can never mistake ’setups’ with a ’sure thing’ – the former is an opportunity and the latter a pipe dream.

Have I lost my bearish mojo? Well, quite frankly – I don’t care which way the tape swings at this point – as long as we finally get out of that trading range which has tormented us for almost a year now. If we breach last week’s highs then the bears wasted another good setup and chances are we’ll see a lot of follow through.

A breach of 1069.49 is a good start for the bears – 1040 is where things get interesting. After all – at some point we’ll have to breach that line, or the shorts will find themselves in a never ending Peanuts episode playing ball with Lucy. Many somehow have found themselves in ‘next month purgatory’ – having followed the usual pundits it seems that for some reason the current month is never a good time for a big drop – it’s always supposed to happen next month. Well, I for one must draw the line right here. The seasonal cycles strongly suggest that now is the time for the grizzlies to cease the moment – carpe diem. If we push into the middle of September without a very meaningful drop (not this chicken shit I’ve seen in the past month) then it may be time to start looking at the long side.

So, those are the two lines to keep an eye on right now – 1040 for the bears and 1130 for the bulls – everything in between is just market making noise and OPX gotcha games.

Before I go I just want to make sure you guys don’t mistake my call for caution and awareness for anything but. Yes, the time is ripe and this is a wonderful setup for the bears. It’s a great time to be short equities. But if we rush beyond 1130 or stay in this current range beyond the middle of September the games changes – that’s the meat of the message. Hope that’s clear and nobody thinks I’m throwing in the towel here. I’m just making sure we all don’t wind up waiting for Godot.

Cheers,

Mole

The recent installments in our ongoing series on EWP Vertical Spreads started off light with regular debit spreads and then introduced us to some of the more exotic option spread concoctions. This is the list of what’s covered in our series:

Chapter 1 — Bull Call Spread and Bear Put Spread – post 1 and post 2.
Chapter 2 — Bull Call Ladder and Bear Put Ladder – post 1 and post 2.
Chapter 3 — Ratio Call Spread and Ratio Put Spread – post 1.
Chapter 4 — Bear Call Ladder and Bull Put Ladder – post 1 and post 2 (this Friday).
Chapter 5 — Call Ratio Backspread and Put Ratio Backspread (still to come)

As you know we are currently in Chapter 4 and this coming Friday we will continue with a real world example of how to employ a bear call ladder. Last weekend some of you wondered how it was possible to construct some of these strategies, as not all of them are available from the right click panel in the TOS option chain. We all know that simple debit spreads are covered already – just click on ‘vertical’ in the drop down (see image below) – so that’s 1 out of 5. But how about all those others?

I have been pressing Tom Sosnoff and his hard working crew to give us some guidance and this is their response which they permitted me to post here on the blog:

********************************************************************************

Please allow me to clarify your request. If you right click on any leg in the option chain, you will see the ability to create both Vertical and Back/Ratio spreads which covers 3/5:

To accomplish the final two you would need to use the CTRL key. You have the ability to create CUSTOM spreads by holding the CTRL button and selecting single legs. Please see the order ticket below…

You can see here that I have created the Bear Call Ladder custom spread by holding the CTRL key…

Step 1 – Hold down CTRL
Step 2 – Click on the BID of the ATM Call
Step 3 – Click on the ASK of the OTM Call
Step 4 – Click on the ASK of the further OTM Call
Step 5 – release the CTRL key

You can see that this is entered as a single order which seeks execution at a single limit price. This eliminates the risk of executing on only part of the spread as you mentioned. In this way it is possible for you and your users to create ANY strategy which consists of 4 legs or less. Please let me know if I have misunderstood your request in any way or you would like additional clarification. Also, let me us know if you have any suggestions on ways to optimize such a feature. Thanks in advance for your follow-up!

********************************************************************************

Well, there you have it. And this is your chance to chime in and ask for any improvements if you see an opportunity. I will forward this URL to our friends at ThinkOrSwim who are welcome to address any questions or suggestions right here in the comment section.

Cheers,

Mole

In my weekend update I presented a bullish fractal which strongly suggested that at least a small reversal was at hand. And the Monday script didn’t disappoint by following the playbook as we again sub-divided into another second wave.

Bear Market Rally XXXIV – The Spawning Of The Dip Buyers (the summer blockbuster of 2010).

The blue arrow points at that little rascal highlighted in green (like its other predecessors). And may I point out that the shape of the developing fractal was almost textbook on Friday.

Wave count update: We are now looking at more upside – the only question that remains is how much we’ll get. I think 1105 would be rather gentle – odds are the bulls are going to get one last scare out of the teddy bears before the long term trend is taking over again. Thus I’m waiting for 1120 before adding more short positions. It would also be nice to see signs of an impending roll over on the same short term indicators which suggested a rip was coming.

The Dollar (expressed by the DXY) is dropping nicely – just as anticipated. Thus far everything seems to fall into place just nicely. The best thing for the bears here is a quick scary counter rip which absorbs some of the overbought conditions of last Friday. This would nicely position us for a big move lower.

Caveat: The bonds have me worried – you all have seen the recent plunges in the TYX and TNX. This may point toward buying exhaustion in the underlying and although equities seem to have faded these massive moves altogether I’m a bit nervous about it in the context of an anticipated plunge to the downside. So, I suggest to give this thing the time it needs – unless we see clear signs on our medium/short term indicators I would propose to not become too overzealous – maybe we’ll see the beginning of a triangle here – who knows. Also – it should be clear to you all that we should not breach last week’s highs – if we do then it will have significant implications on the current wave count and I would suggest to immediately hedge all your long term short positions.

Anyway, I will keep you all posted – as soon as I see a disturbance in the force (i.e. signs of an impending plunge) I will post all evidence here.

And to answer wrc1k’s question from the prior thread:

I think this should be obvious to any stainless steel rat: The most appropriate trade here is a simple horizontal spread. Don’t worry about entry cost too much – just make sure you’re properly leveraged with long term positions and that vega is moving in your favor.

Cheers,

Mole

Until yesterday night I anticipated this to be a long winded and torturous weekend forecast with much conflicting evidence and various exhibits depicting the pros and cons of the current bearish scenarios. Fortunately, I saw the light and although I am going to present a boat load of charts as well as some short term bullish evidence my position at this point is: Don’t sweat the details. For what’s coming may transpire tomorrow, next week, or a month from now – but it’s coming and either you’re positioned for it or you’re not.

It’s really that simple – forget about the short term – on a medium term basis the bulls are about to get hit by a folding chair WWF smack down style . Obviously, this has implications on how we deal with whatever transpires next week. After presenting what I deem to be some compelling evidence I offer some strategies that should keep us out of trouble plus leverage any sudden moves to the max.

In that context I greatly recommend that you carefully study my Friday update on EWP Option Strategies, if you have not done so already. Please make sure you fully understand the basic premise behind the Bull Put Ladder (a bearish option strategy) in particular and also it’s cousin the Bear Call Ladder (bullish as suspected) – although I reckon that we won’t be needing the latter for quite a while. It is key that you develop a taste or at least an understanding of these strategies as they will be key in grasping some of the trades we’ll be looking at in the near term future.

Alright, plenty of charts waiting – prepare your browser for a regular chartalanche:

Long Term View

Let’s start with our long term chart roll call first – after all I told you to not sweat the details and of course there is method to my bearish madness:

I am pretty confident you by now understand what the SPXA50 chart is – if not I recommend you read up on my recent discussion of average vs. median, which is another topic you should be firm on at this point. What we are doing here is to put the SPXA50 in context with volatility as expressed by Mr. VIX. And then we slapped a CCI on the entire frankenchart. Why? Because we can! Plus it seems to nail roll overs quite nicely. And rolling over it did just when we expected it to happen – that breach of the 100 mark worked like a charm. As you can see there is plenty of downside momentum remaining.

Same chart – except that we’re zooming out to see the last four years and are also using a MACD it on it. Which seems to move quite cleanly – always appreciated. And as you can see it just rolled over from quite severly overbought conditions – which without much of a price move. Again, plenty of downside momentum remaining.

Here we are applying the same rationale – in this case we are looking at NYSE stocks above 50-day SMA in the context of declining volume. Basically we are measuring how much those market makers are lying to us – the higher the spike the thinner the volume driving those market leaders up as rising down volume increases the divider. I know it’s a mind bender – just trust the chart as it seems to be pretty spot on – at least on a long term basis.

Having fun yet? Well, we’re just getting warmed up. This is the SPXA50 chart on its own and again we’re using that CCI as a measure of momentum. Again, I have no particular reason for having picked that one, except for that it seems to work pretty well. Last week I showed this chart and proposed that there was a lack of progress despite prices melting higher. Well, it seems that this divergence played out as expected – thus far at least. Again, plenty of downside potential remaining – long term.

The SPXA50R is the same as the SPXA50 – only difference is that it measures the percent of stocks above the 50-day SMA instead of the number. I posted this chart a few months ago as it depicted distribution as we were painting new highs for the year in equities. Quite interestingly the 84 SMA has not even budged, which speaks to the continuatin of the current downtrend.

And here we go even more long term – we are using a moving average of the SPXA200R (yes, you guessed right – stocks above their 200-day SMA). I have highlighted each time we painted ~1120 on the SPX and as you can see we are at around 60% of what we saw at prior readings. Which means distribution – which means weak hands getting frustrated and kicked to the curb – which means many of you stainless steel rats.

The proof is always in the volume – and the NYSE advancing/declining volume ratio chart again pointed the way as advancing volume began to lag downside volume after that first spike up in early July. Again, much downside remaining here.

This chart is the product of a collaboration with Tooncez and myself – I mentioned that I wanted to see a MACD style histogram showing the delta between the SPX and the SPX:VIX ratio and he sent me an early version which has been going through a few iterations since. RaisedByWolves also joined the fun and suggested to use a log on the ratio in order to bring it in line with our stockcharts predecessor.

Anyway, I think that chart is absolutely beautifully stunning. No other chart I have seen depicts the trend of the past two years as nicely as this one. Good to see red readings in the histogram and we definitely want to keep it this way. It’s now time for those readings to intensify to the downside again as we are too close to the zero mark for bearish comfort.

One more long term chart before we look at the more immediate trend. The McClellan measures the medium term and the NYSE Bullish percent the long term. Each of them is calculated completely differently but we just choose to not care and look at it as a ratio chart. Which rolled over just when we thought it would – fantabulous! Again, there is still plenty of downside momentum remaining – especially if we bounce up a little in the short term.

Which brings me to the short and medium term charts:

Short/Medium Term View

The long term remains quite clear and unless all those charts are wrong down we go. Short term however the tape will throw us a few monkey wrenches and it may be as soon as early next week:

First up, the Dollar seems to be in the process of completing a first motive to the upside (clearer on my 135min chart). Which means we probably will get some profit taking either here or a handle or so higher which will favor equities. If you have any doubts about that please remember that the entire melt up from the March 2009 lows was due to massive quantitative easing and thus the destruction of the Dollar. Let me show you how much your buying power measured in Gold has been degraded:

That’s right – relative to gold your fancy stock portfolio is still worth jack and we are near the 2009 lows. You can thank government (i.e. Fed) sponsored Dollar dstruction for that. Anyway, that’s a story for another day – let’s move on with our short term perspective.

My NYSE A/D ratio chart and in particular the D/A signal seems to be running a bit out of steam. Unless we get a strong spike to the upside on the bottom panel we may be completing a bullish Gothic Church Tower (GCT) fractal, which seems to be a harbinger of green candles ahead. How many and how long is unclear – if this is a GCT it appears to be a mild one, so the expectation is that we remain below this month’s highs.

The daily Zero also spiked down and then went flat for two sessions despite the SPX painting new lows for the month. Which also may mean that green candles loom ahead. The spike down was not super strong, but it is strong enough to qualify.

FYI – that smoothed panel has been puzzling me all last week. Either it’s right and we indeed whipsaw around a bit more, driving the bears crazy, or there’s something wrong with that reading. I’m not sure yet and as of now I recommend you simply ignore it, as it’s a fairly new version of the Zero. In case you read this after it becomes available to no-subs – the Zero is a proprietary trend indicator (there’s also an hourly and a 5-min intra-day version) and you can sign up for it here.

This is the short term version of the SPX:VIX chart I presented above in the long term section. Note that I am not using a log on the ratio – if I do this on the hourly it just doesn’t work. Which is something we’ll have to continue looking at. For now a simple SMA suffices IMNSHO.

But what I’m seeing right now argues against an immediate drop to the downside. Of course all that can change come Monday morning but thus far the downside plunge late last week was not accompanied by a strong negative reading. Could be that we simply need a bit more time and that we may get another push up before a big push down.

Mr. VIX is also creeping along that upper 2.0 Bollinger. If the bears are lucky it stays inside – if not we may see a close outside which would be one step toward an equities buy signal.

Wave Count

Based on all the above I am long term bearish but short/medium term bullish, right now. However, knowing that the long term trend can overwhelm any time I would not recommend going long here. Instead some mild hedging and in particular a ’sell-the-rip’ strategy is what I personally plan to employ.

The Blue Plate Special has the lower probability right now, despite the fact that most bearish pundits seem to be in love with it. I expect a pretty scary retracement should the bulls finally gain some ground and the dip buyers decide to pour in. But we never really know for sure – and relying on ‘just one more rip’ will in the end lead to missing the bus. Thus, I plan on holding my bearish positions and even add more starting at 1100.

Soylent Green has a bifurcation – one suggesting a drop at 1105 and then one at 1122. I think both are reasonable targets and it all depends on how much energy the bulls are able to mount. This right now still is my preferred scenario, mainly due to the short term charts I posted. But I’ve been around long enough to realize that those charts may be fooling me, thus I refuse to over complicate matters by trying to play every swing. If we get a run up then I’ll add more short positions as soon as I see momentum roll over.

Suggested Strategy:

Wasn’t that fun? Exciting times indeed and extremely interesting from a technical perspective. Now based on what we learned on Friday I propose an alternative strategy of playing a possible swing up. If we do get to 1105 on the SPX, which roughly equals 110 on the Spiders – how about a S110P/L108P/L106P bull put ladder? I’m sure BobbyLow will have a field day with this and I’m open to various suggestions – as a matter of fact, that would be your homework assignment for this evening. I would love to see some TOS simulations and profit/loss as well as break/even analysis – as a matter of fact the winner gets a free week of Zero goodness.

Cheers!

Mole

Alright, Evil Rat Academy is officially in session – but before we get to the meat of this post let me introduce you to our new substitute Mrs. Tightbuns, who will fill in for evil but mentally exhausted Mole today:

I am sure she will be able to re-focus your attention after one of the most boring trading sessions in recorded history. Tronacate – keep it in your pants!

Okay, and now it’s time for the sixth part in our ongoing EWI sponsored series on option strategies. The following post is excerpted from the Elliott Wave International (EWI) eBook, “How to Use the Elliott Wave Principle to Improve Your Options Trading Strategies — Vertical Spreads.” EWI has agreed to make the full eBook available for free to all Evil Speculator readers until the conclusion of this series. So go ahead and download it here if you want to study ahead – however I would appreciate it if we kept all discussions limited to the current chapter.

Last time we looked at a more aggressive strategy called the Ratio Spread If you missed that chapter then I strongly recommend you go back and study it before continuing here. You can also pull up all prior installments of the the entire series via this link.

We now press on with chapter 4 of the eBook – covering Bear Call Ladders and Bull Put Ladders. Those are credit spread equivalents of the Bull Call Ladders and Bear Put Ladders we discussed in chapter 2.

Fig. 29

Up next: The “bear call ladder,” also known as a “short call ladder.” In options literature, people may categorize this strategy as somewhat ambiguous and confusing. Are you bullish? Are you bearish? You’re selling an at-the- money call, but you’re also buying two different out-of-the-money calls. What’s going on?

Well, the really interesting thing is that this strategy fits Elliott wave like a glove. The reason being: Wave patterns are often ambiguous and warrant an alternate labeling. The alternate wave count may be telling you to lean in the opposite direction, and that’s where this strategy helps.

First, we’ll go over the basics as they appear in Figure 29. The bear call ladder is bullish. It’s a relatively longer- term strategy — about three to six months. You should be able to squeeze out a net credit on this. You sell an in-the-money or at-the-money call, buy an out-of-the-money (OTM) call and buy a further out-of-the-money (OTM) call. Your maximum risk is capped; it’s the difference of the first two strikes minus the net credit. Notice, maximum reward is uncapped — this is the biggest contrast with the bull call spread. It’s also going to make a big difference in what kind of wave positions we choose. We have two breakevens: the short call strike plus the net credit, and the higher long call strike plus the maximum risk amount (in the area beyond the further OTM call).

In a nutshell, we’re betting on a big move up. Our bias is in the direction of the main trend. Either way, though, we have some protection if prices move down or sideways. We only get hurt if prices go in the direction of the main trend but only for a small move. In other words, we’re sacrificing a small up move in exchange for a big up move, a sideways move or a down move. Not a bad deal, but you have to be able to structure the trade so that it generates a net credit.

Fig. 30

Figure 30 shows the same details for the bull put ladder, also known as the short put ladder. Again, it’s the same structure except now you’re betting on prices to fall. So, you’re selling an at-the-money or in-the-money (ITM) put, buying an out-of-the-money put, buying one further out-of-the-money put, and generating a net credit.

Fig. 31

Now it’s time to reveal the ideal Elliott wave context in which to implement this particular strategy.

• Function: The three strategies up to this point have all required short, sudden countertrend moves. Here, however, we’re talking about actionary waves, which are those that move in the direction of the main trend.
• Position: Impulse waves — waves one, three, and five — are the strongest types of waves. Within those, waves three and five are highly preferable, as they are prime breeding grounds for extensions. Wave one can be extended, but it’s not common. The other factor against using this strategy for wave one is that wave one occurs right at a turning point. You may not be sure whether you’ve really turned or are still in a countertrend move.
• Degree: Of course, is high. Don’t get hung up on the actual degree labels — it’s basically a big move.
• Entry Point: For waves three and five, after a shallow wave two or four due to the possibility of a flat. The only time you should use this for wave one is after a key reversal, if ever. The truth is, you normally are not going to get the huge move in wave one that you get in waves three and five.
  It’s important to understand why this strategy is so suitable to Elliott wave analysis. Often when a move is relatively small or drawn out for a long period of time, it’s difficult to gauge its end. For example: How do you know when a shallow wave two is over and thus marking the start of a powerful third wave, or whether it’s unfolding as an expanded flat? Maybe a triangle in wave 4 has ended, but you’re not sure because prices continue to move sideways. So, around every corner of ambiguity, this strategy lies in wait.
• The wave prior at the next lower degree is the same as previous strategies.

Mrs. Tightbuns again: Alright, I am going to stop right here to make sure all this sinks in thoroughly. It’s essential you guys completely grasp the basics before we press on. Digest this for a while and if you all behave next Friday I’ll dress up extra sexy and show you an example of how to use those credit ladders on an actual price chart.

Have a great weekend!

Here’s a quick no frills update for my stainless steel rats. I’m not yet happy with the way this is playing out and although I may be over-thinking this whole affair I’d like to share a few more charts you ought to see.

No matter what happens, I sincerely we don’t wind up like this poor fellow…

Mr. VIX pushed outside its BB during the session but fortunately closed inside. Too much of a rise in VIX can be too much of a good thing and this benefits the bears as we got spared a first leg into a VIX buy signal.

This is the chart that bugs me the most tonight however. The red readings on the histogram have been rather mild and at the end of today’s session we actually saw some green readings. If we are heading into Minor 3 we should see something a bit more pronounced here. Of course price action will dictate in the end, but the evil lair is officially in DEFCON 4 mode.

NYSE A/D ratio closed in ‘meh territory’ at 0.77 – yes, bearish but nothing to really write home about. The Dollar however is pushing up nicely and although equities may fade it for a while (just like last December) the bulls will eventually start feeling an uncomfortable squeeze in the loin area if ole’ bucky continues its trajectory upwards. So keep following your DXY or EUR/USD charts – a strong Dollar is concentrated kryptonite for equity bulls.

Wave Count

If we drop tomorrow (Soylent Blue) I expect dip buyers jump into the fray around 1070 – unless of course we get a large gap down but thus far the futures look actually slightly bullish. A retracement would probably get us close to the 1100 mark.

If we open higher tomorrow and run up things may accelerate quickly – be prepared for a run up back to the 1120 cluster. Should be scary enough to once and for all cure any bullish inclinations the small remaining number of toilet paper holders may have afforded themselves. And yes, I expect it to be a final shake out and for the bus to leave with only four people in the cheap back seats.

Bottom Line

Whatever happens – stay frosty – this bull is in a crappy mood and you better strap in for a rough ride. The bulls may throw us a curve ball here – dig deep and use it to add long term short positions if you have not done so already.

Cheers,

Mole

The overnight spoos pulled a fast one on us by leading the SPX below the 1088 level. Although I definitely consider this progress for the grizzlies and favorable to our long term scenario it may in the short term turn out to be a nasty bear trap. Of course I my suspicion is not completely baseless – the current reading on our Zero chart advises caution and if you are a subscriber you surely know what I am talking about. A lack of participation usually means a big move is in looming ahead – either EOD or overnight – the latter having become a fine tradition in equities as of late.

The Stainless Steel Rat Zapper 2010

Let’s take a peek inside:

And here’s a snapshot of the current Zero chart. Most subs are used to mostly following the white Zero signals but there is a reason I keep the original Mole oscillator around. Take a look at the purple lines I have drawn which connect squeeze points to price action. Without fail usually a big move ensues and I have little doubt this time will be an exception – especially after such a fast drop to the downside.

The Zero Lite is also gone completely flat which means that major participants are biting their time and probably are getting positioned as cautiously as possible. For us little stainless steel rats this usually means it’s a good time to take profits on short term positions and to be prepared for a possible snapback. Now, that move may be to the downside – we just don’t know yet.

I know that sounds stupid – the tape will either go up or down – thanks Mole! What I’m trying to say is that the next move will be fast in either direction, so please consider than when holding short and long term positions.

The AUD/JPY chart is also a bit concerning on a short term basis. It’s possible that we may see a push back on that currency pair which most likely will favor equities (which recently have started to ignore the downside but are leveraging any upside in the AUD/JPY).

The wave count hasn’t changed materially. If the bulls manage to get out of the gate we could see some pretty fast candles to the upside in an attempt to shake out some weak hands – it rarely fails. You may be surprised that the blue scenario is still considered the less preferred scenario and it’s not due to a lack of confidence regarding the long term trend. I just don’t think that it’s straight down today/tomorrow especially based on what I’m seeing on the Zero right now. This may change by the end of the day and I will chime in here if it happens.

Words To The Wise

However, the potential is there and we need to be positioned on a long term basis. Yes, we may get that spike up but if we don’t then you will find yourself looking for rips a lot further down then you may anticipate right now. When it’ll break it’ll happen very fast. There is no way of timing this – if you try you will most likely be left behind. Best course of action I can offer is to do nothing – just let ‘er rip and if it does add short positions. Sometimes it’s best to simply do nothing and let things play out until the market tells you that you were wrong.

The real risk right now, my dear stainless steel rats, is not to the upside.

A Little Favor To Mole

The past few months have been taxing on many levels. I don’t have to tell you that those endless gyrations can take it out of even the staunchest traders. The recipe to make it through intact and without losing my nerves was to slow down and to stop anticipating – I simply did what the tape told me. I know that sounds simplistic but instead of trying to lead the market I was trying to simply follow it – which was a bit of a psychological shift for me. But it saved my butt and I’m a lot more settled and focused now than I was maybe six months ago.

However, there is a bit of double meaning in today’s headline. I have to admit that the lack in participation in the comment section in the past few months is slowly getting to me. Some long timers have been MIA for a while now (where is the chicken?) and I see less and less traffic here which cannot just be attributed to a summer slow down. Which confuses me a little bit – this is probably the most exciting setup the bears have found themselves in for a long time and it seems to me that everyone has walked away.

I have tried very hard to not let it affect the quality of my work, but just as an example: Last Sunday I spent literally six hours of my afternoon putting my post together – admittedly it took me a bit longer before I found my groove and settled on a theme for this week. When I checked the blog before going to bed I only saw a dozen comments, which was a bit disappointing as in the past there would have been dozens.

I have been pretty determined to slug out any slow down during the summer but I have to tell you that I’m starting to slowly feel the burn. I think that I have managed to maintain a pretty high quality blog throughout some of the worst tape this market has thrown at us. You all know that blogging is a two way street – if you all walk away and simply enjoy the receiving end I doubt that I will be able to keep things up. After all, I am not doing this for the money – quite frankly, the subscriptions are pretty cheap as you know and they barely pay for the time I put in here. Just yesterday I spent 30 minutes resolving a PayPal case about a guy who signed up out of Nigeria. He turned out to be legit and he was very apologetic, but it was 30 minutes of my day I could not focus on trading, blogging, and the two other business I am running right now (which I don’t talk about here, so many of you may not be aware of that).

So, the message here is this: If you enjoy this blog and if you find value here, then please try to participate, even if you’re a noob – you must be trading something. I very much feed off the energy of the people who post here even if I don’t always respond (as I’m busy). I can understand that the blog gets quiet during boring tape or if things are frustrating. But just last week I threw out a dozen symbols or so – and almost all of them went exactly the way I had proposed and would have been profitable. Nevertheless there is literally no mentioning of any of them in the comment section. So if I can’t get input on trades that turn out to be winners what is my incentive to keep posting symbols? Again, I don’t do it for the subscription money – even a few dozen subs at 29 bucks don’t make you rich

Alright, I’m done complaining – I have bitten my tongue for a while as I don’t want this place to be a downer and promise that I won’t keep wining about this. But many of you had an opportunity to take vacations and recharge your batteries in the past few weeks – I decided to keep the blog running. Nothing would energize me more than seeing Evil Speculator again be the rich and energized community it once was – and now is the time.

UPDATE 2:55pm EDT: Here are the two posts:

Fashion Victims – BTU, COP, DBC, FISV, HDB

Fashion Victims 2.0 – HRC, MGLN, NGG, TOT, UFS, WLL

Please take a look and compare them with today’s charts.

Cheers,

Mole

I have mentioned SPX 1088 in the past few weeks – so, what’s the big deal about that number? Well, for the bears it most likely marks the end of the Dark Ages and the beginning of the Big Reckoning which (after a lot of fun) will lead to a new Renaissance based on real values and stringent limits on over leveraging. With some luck the Big Reckoning ends with a big bang along the lines of banksters being tarred, feathered, and carried out of town on a rail. Or something more entertaining – use your imagination.

What do you think? Am I properly dressed for the occasion?

The drop today has lowered the odds for that last push to 1060 I was expecting. Can’t say that I’m sorry about that as you all can imagine. But the time cycle suggesting a roll over around the 15th may still spell true if we get a milder version of the fake out DarthTrader has been suggesting. Here’s the grand idea:

Soylent Blue has us straight down from here. And you know what that means – the effervescent trampoline (sorry, I spelled it the German way on the chart) at 1088 needs to be taken out for that to happen. And the force is strong down here as there is a cluster going back several months.

Soylent Green has us bounce here for another fake out to the upside. The bulls will see that as the dip preceding a strong up move, so it should be fast and scary for the bears. However, if it plays out I expect the 1125-1130 to serve as strong resistance. Should that be breached then the bears are in a world of hurt and I would have to scrap the medium term wave count for something else.

However, the odds are now shifting back to the bears – the time cycle has us roll over mid August and there’s nothing but downside looming ahead for a while. The bulls missed a great opportunity to stick it to the grizzlies one last time – and in the context of today’s long candle down it looks like the ending diagonal is complete and we that we may be at the onset of Minor 3 of Intermediate (1) of Primary {3}.

Old bucky is doing its part and it seems that after registering 6% Dollar bulls it was finally ready for a snap back. Wave C turned out to be a 1.618 multiple of wave A – which I have to admit was about the maximum I allowed before considering a more ugly future for the Dollar. With some luck we’ll get a nice short covering rally here which should also serve as head wind for equities.

And yes, we did have another GCT fractal on the NYSE A/D ratio. Reason I didn’t bring this up a day or two ago was that I expected another up spike per the prior fractals. Which we got of course but *@&^! Multicharts got stuck somehow as it’s running against the same DTN feed as my NinjaTrader setup. It does that sometime – so sorry about that – need to reload it manually more often.

But it’s pretty exciting to see that we seem to have recognized a repeating pattern accompanying medium term topping formations. That should prove to be extremely profitable moving forward.

Cheers,

Mole

Between all the drama and the ritualistic gyrations of FOMC day the SPX managed to hold a pretty important line today.

Call it another safe by the bulls, dumb luck, or good ole’ fashioned Fed sponsored manipulation – we don’t care and whatever it was – it does have implications on what lies ahead for the remainder of the week and most likely into the next one.

Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed or Evil Speculator Gold or geronimo/ES or evil.rat/ES to view this content.

It seems that the big unraveling in equities has switched into second gear.

If you are still positioned to the long side I have two charts you should see:

Exhibit A: The AUD/JPY against the spoos. The AUD/JPY has been leading equities in the past few months, however lately a new trend has emerged in which equities (and thus the ES futures) completely started fading any downside in the AUD/JPY. Today this apparent unraveling has kicked into second gear as the two are now moving completely against each other.

Exhibit B: 10-year treasury bonds against the spoos – the former here shown as its inverse moving yield (TNX). In general (and some will argue this point) equities and the TNX move in tandem. This more long term chart shows a distinct detachment by equities (and index futures) traders as of late. However, today’s respective moves tops the all time charts – and someone has to explain to me how/if that makes sense.

The big unraveling that I expect to ensue in the near future won’t be kind to anyone with long exposure in equities. I strongly recommend that look for exit signs near you. You have been briefed.

Cheers,

Mole

This weekend I have a special kind of treat for all you VIX charting aficionados. I have been playing with VIX ratio and correlation charts for months now but my recent effort began a few weeks ago with this chart:

Strangely it took a few days to see the obvious and the scales finally fell of my eyes earlier this week. The SPX:VIX ratio in comparison with the plain old vanilla SPX seems to be a pretty reliable purveyor of things to come – I think the markers above convey the idea. Of course me being Mole I couldn’t just leave things at such a simplistic level – so let’s take things up a notch or two.

That first chart seemed pretty promising and I made a comment that I would love to see the distance between these two signals plotted as a histogram – just like what you get on a MACD. So an intrepid reader you know as Tooncez sent me an email the next day with a ThinkScript concoction that plotted those two signals as a MACD, which was a great start. Gee – thanks a bunch for sucking me into yet another script hacking project, Tooncez!

However, there were some problems with the left chart conversion (think conversion from one chart into the numeric scope of another) and I was able to offer a good fix for that. And after some closer inspection it seemed that a full MACD was complete overkill and that I was mainly interested in the diff between the two signals. I wound rewriting it a few more times and the current version is shown below:

Now, this is actually the hourly version containing a bit more medium term detail. As you can see I have also added a ‘ratio left chart’ version above which is similar to what we get in the original stockcharts version. However, it’s got the advantage of offering real time feeds and other more fine tuned settings I am able to add (i.e. SMA, BBs, etc.). On the lower panel you see what I was mainly looking for, which is the diff between those two signals. And that gives us distinct clues as to the state of the current trend in its particular time frame.

Here is the daily version, which seems to deviate a bit from the stockchart version shown first. That’s obviously related to the style of data conversion I am performing from the SPX:VIX ratio into the SPX chart space. Nevertheless the cross overs are pretty interesting and I’ll keep fiddling with the conversion to work better on the longer term chart.

Another VIX related chart – the SPXA200 relative to the VIX – I showed that one a few weeks ago as it seems to map the overall trend quite nicely. Instead of showing a moving average I am using a zigzag to avoid over-averaging but at the same time I am able to smooth out a lot of the in-between noise. Just think of it as ‘connect the dots averaging’ instead of using a moving average. Doesn’t always work but often shows some very interesting patterns. Great for detecting momentum fractals if you ask me.

What I’m seeing here is that we seem to push into the ‘roll over’ phase of the current correction on a long term basis. Which means what it means – we may push into 1150 or higher to complete the current wave pattern, but this thing is definitely running out of steam. Nevertheless, to be more confident we want to see the MACD roll over pretty soon here.

Another VIX related chart – the $NYMO (i.e. the medium term McClellan) in relation to the VIX. That is actually one of my favorite charts as it seems to be pretty spot on when it comes to calling reversals on both sides. However, it’s been a bit lacking on the short side since the end of Primary {1} – let’s hope that changes soon.

The yellow highlight marks what remains in terms of potential upside here. But it’s not guaranteed that we push all the way into 2.8 – we have come a long way since the early June extreme and this thing may start rolling over soon. However, bear in mind that this indicator is often early, especially on the short side, so allow for more upside and the conclusion of Soylent Green.

Okay, no VIX involved here – it’s my NYMO:BPNYA ratio chart – basically medium term in relation to the long term trend. And boy, did we shoot into the sky in late July. I am glad to see this thing fall to the downside again, which may indicate that a top in equities is near. A by saying near I mean we may rally for another week or so before equities are ready to give it up to the bears.

You probably remember this chart – it shows the number of SPX symbols above their 50-day SMA. I have various other renditions of this but the more purist version seems to agree with the two prior charts in that equities are running out of steam which is suggested by an increase in distribution and a narrowing of symbols that hold up the index as a whole.

Which brings me to a chart that was instrumental in suggesting a bear trap in early July – the NYSE Volume ratio chart. The proof is always in the volume after all. It’s just that this thing is often tough to read, which is why I mostly am on the lookout for divergences. And again, it seems that the upside volume is diminishing. We had that big snapback after the extremely low reading of <0.7 and since then it’s been sideways to down.

But again – prior examples suggest that quite some time can pass between a divergent reading and the actual roll over, which is why we only use this in the context of other charts and supporting indicators.

And here’s the chart that is quickly turning into my favorite medium term trend indicator – the smoothed daily Zero. Which perplexes me by stubbornly pointing up. Quite frankly – a lot of the pundits have now embraced the short term bullish scenario, which is why I was actually hoping for a divergent reading (yes, I love to stick it to the competition). Unfortunately this indicator seems to agree with the pundits – unless of course the market somehow pulls a fast one on all of us. After all, no indicator is infallible, which is why I always look at my entire collection before forming an opinion.

And here’s my opinion piece – the wave count for next week and beyond. Soylent Green remains my preferred scenario – there are two ways of how to count that ending diagonal thus I am leaving a door open for a top around 1150. However, chances are this bitch of a market will fake out both sides again by pushing a wee bit higher into 1165 – not guaranteed but be prepared for that to happen. That should however be the end of it as we are running out of time in the time cycle.

Soylent Blue still has a theoretical chance but we would have to turn starting Monday morning – if we push beyond Friday’s highs then this one goes to the big junk yard of Elliott wave counts.

Bottom Line:

The market is getting closer to rolling over but I do expect a bit more upside before it happens. Stay frosty and don’t try to pick a top – leave that to the crystal ball pushers – we stainless steel rats strictly focus on probabilities and place our trades accordingly. And if the odds are unclear we simply stay out of the market until the situation becomes more transparent. After all this market has become very sophisticated in faking out even the most savviest of traders – we had to step up our game to stay ahead.

Don’t let the tape’s wild gyrations get the better of you and stay frosty. As of late I am seeing a significant amount of exhaustion in particular among bearish participants. In the past few days I have come across various rants on the inadequacies of Elliott wave, critical opinion pieces demonizing Prechter and EWI, frustrated comments regarding the never ending manipulations by the FED, the fear of a looming QE 2.0, etc. Fortunately most of that has been missing on Evil Speculator, which is something I am intensely proud of. Instead of capitulation we chose to use the past 16 months as a learning experience – we developed a whole slew of market indicators that have kept us from getting cut to pieces at various setups that turned out to be nothing but nasty bear traps.

The moaning and complaining you see across the board mostly comes from market participants who still rely on trading strategies that may have worked a few years ago but are now ancient history. And I am not just talking about retail traders – several large funds have been throwing in the towel recently after their trading strategies have repeatedly been taken to the woodshed by a growing number of HFT bots. The lesson learned?

Evolve or be extinct!

Well, that’s a pretty easy question, right?

Thank you for flying Evil Speculator. Now buckle up – we expect the ride ahead to be bumpy.

Cheers,

Mole

Alright, Evil Rat Academy is officially in session – let’s make this again a productive day before we head into the weekend.

And if you are built like this inquisitive (and may I say obedient) scholar evil Mole would be happy to postpone his weekend plans and donate some of his precious time to some – ahem – ‘private tutoring’. After all I’m all for academic growth (hey, whatever gets me laid).

Alright, it’s again time for the fifth part in our ongoing EWI sponsored series on option strategies. The following post is excerpted from the Elliott Wave International (EWI) eBook, “How to Use the Elliott Wave Principle to Improve Your Options Trading Strategies — Vertical Spreads.” EWI has agreed to make the full eBook available for free to all Evil Speculator readers until the conclusion of this series. So go ahead and download it here if you want to study ahead – however I would appreciate it if we kept all discussions limited to the current chapter.

Last time we looked at some real life examples of a bull call ladder. If you missed that chapter then I strongly recommend you go back and study it before continuing here. You can also pull up all prior installments of the the entire series via this link.

We now press on with chapter 3 of the eBook – covering Ratio Spreads. And may I point out that the timing could not be any better! Don’t worry, this one will be quick and painless.

Fig. 25

Fig. 26

The third pair of strategies is the “ratio call spread” and the “ratio put spread” — similar to the bull call ladder, bear put ladder pair. With a ratio call spread, you’re buying an in-the-money (ITM) call and you’re selling two out-of-the-money calls at the same strike. You may have a net credit or debit. Your market outlook is neutral to moderately bullish and short-term, about one month. The ratio put spread has the same overall structure, but you use puts instead of calls, because you would be neutral to moderately bearish.  Now, let’s talk about risk. I can’t stress the level of exposure here enough. Maximum risk is uncapped. However, your short strikes are closer to the money than the short strikes of the bull call ladder and bear put ladder, which had the short strikes spread out. In other words, the out-of-the-money puts and calls are more vulnerable, and your uncapped risk is more severe.

Fig. 27

I’m not going to go through a trading strategy on these, but if one were to use them, it’s of great value to know the “optimal” Elliott wave characteristics. Figure 27 provides a complete list of these.

• Function: Clearly countertrend and at the next two higher degrees, at least, because you have significant uncapped risk. In other words, not just wave two of an impulse wave. You would, for example, do this in a wave two of a wave three so that even the next two degrees are moving in the direction of the main trend. Since you’re heavily betting on a countertrend move, this buys you more insurance against the countertrend move somehow morphing into a main trend move.
• Position: Only waves two or four.
• Structure: Zigzag.
• Degree: Relatively low.
• Entry Point: The latter stages of the wave position; i.e. wave three of C of wave 2.
• Prior at the next lower degree: The same as always: An ending diagonal, truncated fifth wave, fifth-wave extension, etc.  I would rely on rules only for second and fourth waves, due to the uncapped risks. Those are: Wave 2 always retraces less than 100% of wave 1, and the end of wave 4 can never enter the price territory of wave 1.

Fig. 28

Ultimately, the ratio call/put spreads are most likely for those traders who just can’t stay out of the market — they always have to do something.  Whether the high level of risk is worth it is best visualized in this chart of the NASDAQ 100. Look familiar? Well, this is Figure 21 from the previous bull call ladder section. Remember that we were able to create a break/even rate that was way up there, almost as far as wave two could go. With the ratio spreads, though, you want to get in almost near the end so that you can push the break/even up even further to protect yourself.

Mole here again: See, that wasn’t so bad! Now go out and play – have yourselves a great weekend!

Lovely tune courtesy of ultra – thanks mate! Not metal but I’m genetically programmed to be partial to Euro-trash-synth-pop

Cheers,

Mole

Ending Diagonals are the root of all evil as they repeatedly lure in bears and bulls alike – thus inflicting the maximum amount of pain until the grand finale. Which I believe is not yet in the making however – I hope I’m wrong (please let me be wrong on this one) – thus far all I see is a fast non-confirmed emotional drop. Remember, bad news do not matter when market participants already made up their minds on where the tape needs to go.

Before listening to this make sure no pets or young children are in the vicinity.

We dropped to a pretty interesting inflection point – take a look:

Interesting spot for support and dip buying to kick in, isn’t it? I often said that the market is a cruel mistress. Well scratch that – rather she’s a sadistic cunt who’s bent out on ripping your balls off and serving them for breakfast Monday morning.

I know I owe you guys the next installment on the Elliott Principle option strategies series – let me get to that…

Cheers,

Mole

As expected the last two days have been a flatline snooze fest in anticipation of tomorrow’s non-farm payroll numbers. As if the news ever mattered – but heck, let’s leave the financial p0rn to the drama queens. Here at Evil Speculator we neither engage in anticipation nor mental masturbation – instead we focus on proven charts which provide us with a clear edge in reading the market’s temperature.

Tonight you are scheduled for a visit by the Evil Lair’s Four Horsemen:

Let’s see what those scoundrels have in store for us:

The White Horse – not particularly evil but rather a representation of righteous bears on a course toward self destruction. This chart tells me that we are already in the late phase of the current swing up. Which is accompanied by rising prices but a falling NYMO:BPNYA ratio.

The Red Horse – representing the incessant war between bullish and bearish legions – the former greatly outnumbering the latter. Which is why we have to be better trained and a lot smarter – think Sparta and 300. This is Spartaaaaaa!!!!

Anyway, the NYMO:CPCE ratio (think medium term momentum divided by put/call ratio) is back to where we like it the most – meaning it’s overbought to the hilt. Does however not guarantee a drop right here – it’s often delayed – same old, same old. However, the shot out MACD gives me hope that we may actually turn and fall hard after we finish the obligatory circus clown parade leading us into 1160.

The Black Horse – representing famine. Thus far copper (traditionally an important representation of the health of the economy) is busting higher just like most commodities recently. Russia just announced that it will stop exporting wheat due to record drought conditions (and raging fires everwhere), which will probably create a lot of volatility in those futures pits. May be short term inflationary and push commodities higher – and stocks with it as the Dollar continues to be stomped on. Although – we are currently at 6% Dollar bulls, not sure how much lower we can go there. But it’s been a brutal summer for ole’ bucky and may continue for another week or two. Currencies and futures like to extend – remember how long it took for the Dollar to find a floor late last year.

The Pale Horse is the forth and final horseman – representing death. As in the death of Mole’s chart reading abilities. I can’t believe I have been so blind since I started looking at this chart. Fortunately tonight the scales fell off my eyes and I saw the light. No, I didn’t see the Holy Mary (I’m probably last on her list) but I finally saw what should have been staring me in the face. And you guys too – shame on you!

So, the big deal here is that the SPX:VIX ratio obviously is leading the trend. As long as it’s below the SPX the trend continues down. When it’s above the trend is up – that simple. Usually reversals end when both touch – now that is very interesting – wouldn’t you agree? Short/medium term this chart doesn’t have too much value but for long term trend traders this may just be what the doctor ordered.

I need to figure out how to create a MACD of an SPX MA and an SPX:VIX ratio MA and then paint that with a histogram. Reason being is that it seems to me that extremes in the distances appear to rise the odds of reversals. Any ideas on how to do that? I could probably hack it up in TOS or NinjaTrader but it would be nice to be able to do that in Stockcharts.

Of course the not so good news is that it’s above the SPX right now – and until we see a touch there I would venture to propose that we continue to the upside. The daily Zero also seems to agree right now, so despite tomorrow’s anticipated volatility explosion I still expect at least an attempt of a final run higher. Maybe once we see the blue and gold line converge it may be time to get re-positioned for some downside. Until then we continue to wait out the summer of pain.

Stay frosty!

Cheers,

Mole

I can’t tell you anything you don’t know. We live in the trenches out there. We fight. We try not to be killed. Sometimes we are. That’s all.

Alright, that may sound a bit too fatalistic. After all we stainless steel rats did have a pretty good idea of what most likely awaited us this summer. So it’s no big surprise that we are close to pushing into Soylent Green territory. So, what lies ahead if the SPX pushes above its June highs? Here’s how I see it:

Soylent Blue is officially kaputt as soon as we breach 1131.23 – but quite frankly, it’s been almost academic since the last big gap and push up. My target range for Soylent Green remains the 1160 – 1170 cluster. There is a chance we may push higher, but if we do the ending diagonal theory ends if wave (v) extends beyond the length of wave {iii}. As we are most likely still in Minuette (3) we’ll have to wait it out. Similarly Minuette (3) cannot push beyond 1146, otherwise it would be longer than Minuette (1). Either occurrence would push us into option three I mentioned yesterday – meaning that we are not in an ED and instead are sub-dividing into a forceful third wave to the upside.

So, those are the levels you should be concerned about:

• 1131.23: Soylent Green becomes our main scenario by sheer process of elimination.
• 1146: Soylent Green is most likely a motive and we are in a third wave sub division. Which means the ED is dead and that a lot more upside is possible – there may be the chance that we’ll paint new highs for the year and even need to adjust our wave count.
• 1088: Meaning we turned on a dime tomorrow and breach 1088 – which would breath new life into the Blue Plate Special.

Copper is still pointing up and we’re not going to argue the point. As I’ve said before – copper is calling the shots and when it turns equities will most likely follow suit. Wait until you see the white in their greedy little eyes.

The gold/silver ratio turned where I thought it would. That is a good start but let me caution you that we may see a little dance on the lower line before equities are ready to make a turn to the downside. As a prior precedence look at the April/May period before equities rolled over.

Before you run – after hearing rumors of Tim Knight converting to the dark side I decided to be a good fellow bear and put up a post over on the Slope. Nothing new really for any of your regulars but it does offer a summary of my long term picture plus it’s free, so go check it out!

Finally, something very disturbing occurred to me today and I have to announce with deep regret that Bob The Horse needs to die:

Of course I can’t let this stand, which is why I have already sent out my mutant ninja team to … ahem … ‘correct the situation’ if you will. So, if you have any parting words for Bob, now may be a good time – but better hurry…

Cheers,

Mole

I promised a few more short skirt fashion victims – so here we go:

Call me weird but I actually think Paris is pretty hot – something about a promiscuous blond that pushes a button in my depraved brain.

Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed or Evil Speculator Gold or geronimo/ES or evil.rat/ES to view this content.

Although more upside is probably pending, it’s time to start hunting for some overbought short skirt fashion victims:

Sure, I’d take them all out on a date – on a leash! Arf arf!!!

Charts and commentary below for anyone donning a secret decoder ring. The rest of you guys will have to wait until tomorrow – sorry. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed or Evil Speculator Gold or geronimo/ES or evil.rat/ES to view this content.