Thursday, July 31, 2014

Dow down 317 points today. The herd is getting nervous.

I expected a pretty good sell off today but @ -317 on the DOW we got past that magic number of 300 at which people begin to wonder if this is just a normal buy the dip pullback or if it is something more.  The $COMPX also lost a big 93 point chunk.  After 5+ years of rally, expect the bulls to counterattack.  Expect the fed to goose the markets behind closed doors to see if a little leadership can go a long way in terms of inciting others to buy.  In addition, it is possible to count this recent move as an expanding triangle 4th wave which could mean 1 more thrust upwards for the $COMPX.  This would lead to a lower low for TVIX which is why I took profits today and moved to JNUG.  Again, I could be totally wrong about this but we should know very soon.  If we get another big sell off tomorrow then game over.  But if we get some cheery sounding news and the markets rally then we might have to wait another 1-2 weeks before the real peak is in.

Tomorrow should give us some critically important technical insight.  At some point rather soon I will stop being so skittish and I will become more emboldened on the short side because once the wind is blowing south, the ship is going to sail south.  All the signs are just piling up including my predicted "300-500 point down day".  Now that we got our 300 point down day, the next big sign will be that 500+ point down day.  Then the hooves will begin heading south and nothing anyone says will stop them.  No clever fed speak, no incentives to buy, no price controls, no cooling off period of closing the markets, etc.   They will call it a panic.  I will call it a reversion to the mean and a return to sanity.

M+M update: Now into JNUG with tight stops below support.

Below is the general model I am following for gold.  The B wave looks like an ending diagonal to me and 5 rail bumps have now completed.  This is not EWI's primary model so I could be all wet here but markets like to do the unexpected so I am placing a bet on a few weeks rally in GLD.

 Of course, I'm playing it via JNUG whose general shape should be like this.   I think wave 1 and 2 (not specifically marked but should be obvious) of C are now done:

I bought near the close after that scary looking drop which could not break below the prior low.  This is a great opportunity because of the small spread between buy price and stop price.  It gives the chance for a bet with asymmetrical risk in my favor.  If I'm right (and we won't know until tomorrow) then wave 1 and 2 have transpired and tomorrow should be a big move up for metals and miners.  If not I lose a tiny bit when I get stopped out.  These are the real value propositions of EW IMO, picking entry points and setting stop loss triggers.  In other aspects of it there is too much art.  But when I buy something knowing what my max loss is likely to be if I'm wrong about the turn, that is not art.  That is logic and so it is repeatable if discipline is employed.  Of course, they could also gap it down 10% at the open tomorrow thus increasing my loss well past my pain point but this wave sequence already had its gap down 3rd wave at today's open so it is much less likely to gap down again tomorrow.  I might lose on this trade but I like my odds and that makes it a smart gamble regardless of the outcome.

Just sold everything, waiting to see what the pullback will look like.

Dumped TVIX @$3.47.  This move is being done out of respect for this possibility.  It is not my primary count but after 5 waves up we have to expect a pull back of some kind.  If minor pullback it is easy enough to go long again.  I figure for the cost of a $20 round trip it's worth the cost to be as safe as possible.

Dollar update

Here is my previous post on UUP, the Dollar ETF.  The general theme was that an ending diagonal had concluded, that the dollar was now entering a bull market and that stocks would begin suffering as a result.  The current chart is so similar to my model that I won't comment too much but you can basically see the breakout, the "vee" 2nd wave back-test and now the acceleration into wave 3 up.  Wave 4 will likely be sideways and then wave 5 will either be the size of wave 1 or it will be the extended wave.  A stronger dollar should mean weaker stocks.  It should also mean weaker metals.  The latter will be very important to watch because we know that the end is drawing near when gold and silver and dollars all go up at the same time.  Common wisdom is that dollars go up while gold and silver go down.  I'm not saying we are ready for that yet, I'm saying we should watch for it and be zero surprised when it happens (while walking to our economic fallout shelters).

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