Market update

In today's pretrading post I wrote, "The next logical stopping points are the gap fill shown by the red model and the 61.8% fib shown by the blue model.  I suspect it will be the blue because that would also cause a throw over of the 5th rail bump of a rising wedge.  If that happens and then the DJIA breaks down it would indicate that this was C of 2 having played out.  Much higher than 17100 and something else is likely playing out - perhaps a trip back to the top of the channel."

By the time the markets opened the DJIA futures were already up 60+ points and so the short term damage was already done to my TVIX holdings.  Thus I decided to hold on and monitor the chart.  By my own logic, "Much higher than 17100 and something else is likely playing out" and so I decided to use that level as a trigger.  Fortunately, the DJIA could not take me out, it missed by 1 point and then came back down into the red.  

While today's action matched my model fairly well today, I want to underscore that the bear market is not confirmed yet and the herd has left itself the option of moving down the river one more time (i.e. DJIA one last higher high) to a new crossing point if it senses too many snapping jaws at the current crossing.  Per my last update, the blue model below (or something similar) might still play out instead of the conventional wisdom red model:

The market has been tricky about not letting on which it will be.  For example, the common wisdom is that the final wave of the ending diagonal finished on Sept 19th.  To visualize this model block out all numbering except the black numerals.  So, if this count is correct then why is there a big fat triangle right in the middle of the wave coming down off that supposed high?  I marked that triangle in red above.  That looks a lot like an a-b-c!  Thus it could possibly be forming a new count which can be visualized by blocking out all the black numerals and looking at what remains.

So at this point it might all sound like a complicated but useless blathering which nets out to "stocks could go up and they could go down" but the situation is much better than that for wave counters because the most likely outcomes by far are only three in number and each have a trigger point.

In the first outcome (which is shown by the top chart in this post), the conventional wisdom count turns out to be right.  If this turns out to be the case then we should enter a 3rd wave tomorrow.  It could play out as a gap down at the open and then just get worse and worse all day or it could open weakly and then accelerate into collapse, likely accompanied by some news which will be taken as very bad news even though similar news would have been ignored by the herd last week, last month or any time since 2009.  In other words, it's not the news, it's how the herd decides to take it.  In any case, a gap below the lower blue and orange rails would be a dead giveaway: wave 3 down is in progress and you should buy TVIX with both hands, both feet and any other appendages that are not holding something.  Your stop in that case would be a break back up into the channel.

The next two outcomes are just small variations on each other and they are shown with a new count below.  This new count says that Friday's move up was not 2 but rather A.  It then implies that today's move down was a and b.  If this count is correct, tomorrow will start off weak with the red or blue pullbacks to either the 50% fib or the 61.8% fib respectively.  The chart will find support there and then will turn around probably mid day and move to a higher high.  If either of these two scenarios are playing out, the selling will start from the open but it will sort of meander down at the red and blue angles shown.  This is NOT 3rd wave action!  If you see this slow moving chart from the open, begin to suspect that the red or blue path will be taken.  In this case, count 5 waves down to either the 50 or the 61.8 and sell TVIX and go to the sidelines.  Then, if the chart powers higher than A / black 5, you might even want to swing long for a ride to the top rail (see 2nd chart above) and perhaps even a throw over.  In this case, put stops below red b.

So, to net it out nice and simple: a big gap down should be assumed to be a 3rd wave down and TVIX should skyrocket as the chart breaks down the lower rail of the big rising wedge.  A slower move down from the open should be highly suspect and I will be looking to sell after 5 waves down, likely at the 50 or the 61.8% fib.  Of course, a break below the lower rail in the red circle would be a clear TVIX buy signal.

I want to close by saying this:   These sideways moves are designed to wear the attackers out.  The herd sets up for a move to cross the river, the attackers all line up, the herd doesn't like what it sees and then it moves on to pick another potential crossing point.  The herd knows that it can never shake all of the attackers (this is just not nature's way!) but it still wants to be sure that those attackers who are around for the feast actually deserved to be there.  

By patiently not over-committing my capital to any of these head fakes I have managed to still be up 35% from when I began stalking TVIX in February of this year.  That may seem like a long time for such a paltry gain relative to the effort I have put in but many traders trying to catch the peak like I am would be showing a big loss at this point.  It is really difficult to know that wave 1 of a 5th wave ending diagonal is just that as opposed to being all of wave 5 in and of itself. 

The key point was that I allowed fear, discipline and patience to rule my trading.  So I am not tired, not frustrated and not poorer than when I began this stalk.  In fact, I smell fear coming from the herd.  It cannot just continue to reposition forever and the herd knows this.  The herd needs to cycle back to the feeding and breeding grounds very soon because all of the growth for stocks has come to a near halt.  Please realize that the DJIA started 2014 at about 16600.  Last Thursday's low was 16675, a measly 75 point gain year to date!  The herd cannot live on this. Too many people have been brainwashed into thinking that the market is a fountain of endless wealth and prosperity for all.  The participants expect alpha and if they don't get it, the markets will die if they just stood still.  Volume would shrink to nothing.  Wall St cannot live like that.

This market is very tired but always dangerous to shorts.  Maintain the use of stops, keep using EW to define likely entry points and stay focused until the big selling begins.  Then watch your TVIX fortune take wings.