This past week saw most market analysts pointing to either the expected GDP data or the "fiscal cliff" as reasons for the markets going to head down in a big way. While we were simply waiting for the market to tell us if it is now starting its next run to over 1500 based upon the sentiment indication we read in the wave structure, others were attempting to trade the news.
Well, to those who attempt to trade the news, I really wish them a lot of luck. How many times have we seen markets go up on bad news or down on good news? How many times have we seen the markets move in a direction that seemed to defy logic? How many times do we have to see these reactions to finally realize that it is not the news, per se, that will dictate market direction? Does the market really trade based upon logic?
So, last week, we were looking for the indications from the market as to whether it wanted to go down to the low 1300s one more time before beginning the final rally over 1500, or if it was beginning the rally right now. Based upon the pattern which occurred last week, the weight of evidence is suggesting the rally to take us over 1500, and potentially to 1600, has begun.
I said "ultimately, under almost all counts, a breakdown below the 1386 Emini S&P 500 futures ESZ2 �level that cannot move back through the 1393ES level would indicate that wave 5 has begun, and we will be targeting the lower 1300 region. However, if support is maintained over 1386ES, or higher, at all times, then 1440-1450 may be the next bigger target region."
After going short at the 1407ES level, which was just below the lower topping target we had at 1410ES, the market headed down as expected this past week. We then broke down the levels that initially confirmed that a wave 5 down to the low 1300 region potentially begun.
However, when we did spike below 1386ES by 3 points, in our trading room, I modified my statement above and dropped the key resistance level from 1393ES to 1389ES, which the market had to stay below in order to head lower to the 1370s to confirm the first leg down of a potentially large decline. However, once the market moved back up through the 1389ES resistance and began to rally in a 5 wave structure, it became clear that the larger downside structure was not developing.
This is one of the main reasons I use Elliott Wave for analysis. Since our initial assumption was that a 5th wave down would potentially be taking hold, we shorted the lower resistance region under 1410ES, and caught a very nice expected trade to the downside. But once the market did not adhere to our Fibonacci Pinball method to confirm the continuation of the downside structure, we had a natural stop on our shorts using the Fibonacci extension at 1389ES. This allowed us to lock in a profit of 18 points, while watching for the next directional clue on the market.
Once the market completed a 5 wave structure to the upside, and after banking 18 points on the short trade, we had another opportunity for a trade that same day. We looked for a pullback from that 5 wave rally, and the top of our pullback target region was 1393ES. The market stopped just under 1393ES, and then rallied to 1409ES, which gave us another 16 points that same day.
This is the tremendous value I see in trading using Fibonacci Pinball and Elliott Wave. Even if your primary count is wrong, it allows you to bank your profits and then look for the next trade on your alternative count very early in the pattern development. This actually allowed us to bank up to 33 points in one market day, if you respected the Fibonacci levels we cited.
With all this now said, the market seems to have invalidated the downside pattern, and has now left us with a bullish pattern. However, even under the bullish pattern, ideally, I am still expecting one more correction down below the 1400 level, which should allow us all a nice entry for intermediate-term long positions in the market. This means that the market will likely top sometime within the next week between the 1421-1432ES region, with the ideal target being the 1421-1425ES region. This would mean that the corrective decline we would like to see would take us back toward the 1380s as a wave 2.
If this pattern does play out, then the final rally in the larger pattern, which began off the March 2009 lows, would be setting up as a 5 wave c-wave to levels that should exceed 1500ES, and potentially as high as the 1600ES region, before beginning the next major bear market phase, which can potentially take us back toward, and even below, the March 2009 lows.
And assuming that this is setting up in the manner in which we would like to see, then trading this 5 wave structure over 1500 should be relatively easy, as these 5 wave structures adhere almost perfectly to our Fibonacci Pinball analysis methodology.
So, regarding this larger potential bullish pattern, we will have our answer soon enough. But, ultimately, the market will have to maintain support over the 1370ES region on the next pullback. Breaking down below that region will get me to look toward the 1270ES region once again.
Alternatively, the market may be setting up in a uber-bullish pattern, which would maintain support over 1400ES, and then move over the 1432ES level. If this were to occur, then the market would be heading up to the 1440-1455ES region, and will then pullback to the 1425-1433ES region before it begins its ascent over 1500. So, even in the alternative bullish count, we can still have a nice entry for a swing trade.
So, for now, we will await the market's next signal to tell us exactly how and where we will be trading the move over 1500.
See charts illustrating wave counts on the Emini S&P 500 and INX.
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