Trading plan for Monday 10-20-2014

In last Friday's market update, I warned that 5 waves down have not been confirmed yet.  Without 5 waves down, the bear trend is not yet confirmed.  I also did not like the fact that the chart dipped into the big expanding channel and then was able to climb back out and to rest on top of it.  But make no mistake, stabbing down below that line was a very, very bad technical sign for the markets.  The next time it does so, it will be for good.  1st waves down will often do this.  They will break down the major support and then the vee second will buy it back up.  Then the mighty 3rd wave comes stomping down and leaves no doubt as to what's what.


But one step at a time, shall we?  At the bottom of last Friday's post was my bottom line (yellow highlight added):

Bottom line:
We should see selling right from the open on Monday.  Be wary of anything different.  We could end up with another deal like we got in late 2007.  It looked like a full a-b-c up from 2002 but then spiked one more time after the initial strong spike down before it was really done.  Again, any higher of a high than 16410 should make you very wary. 
 
EWI characterized the formation that peaked on Sept 19th as an ending diagonal.  It met all of the rules yet it lasted a good deal longer than other ending diagonals they have tracked.  Ending diagonals are supposed to be very high quality peaking indicators.  I have seen that rising wedges have been high quality indicators of 3rd waves (or C waves) but have not done any investigation as to how many, if any, of those wedges were legitimate ending diagonals (which are supposed to be very rare according to EWI).  So for the time being, I'm going to continue to believe that the 19th was the peak.  Things like the NFLX 20% single day collapse certainly back that view up!  But that does not preclude a massive rally into a vee style wave 2 up.  Of course, that requires motive wave 1 down to have concluded.  Any green opening tomorrow will seriously dampen the possibility that Friday's close was wave 4 for several reasons (including a channel breakout, etc.).  In that case, more than likely wave 2 up is taking place.


The first indication that all shorts should be covered (except long term puts of course) is the lack of a red opening on Monday.   While it can always change overnight, the DJIA futures are up 73 as I type this.  So it does not look good for a red opening.  That is strike 1.  Next, anything except a red opening will trigger an inverse head and shoulders breakdown (or breakout if you prefer).  That would be strike 2.  Applying the guidelines for this formation (target = size of head added to right shoulder) implies a move back up to the 78.6% fib retracement.  This is higher than I would want to see in a confirmed bear market but we are not in a confirmed bear market, are we?  We are in a market in which buy the dip has been working for well over 5 years now.  So this would not be out of line for a vee style 2nd wave; in fact it would be completely in character.

So there is a LOT to consider here in the very short term.  The two biggest questions are how big the rally will be and whether it will power to a higher high than Sept 19.  We have to have a working model for all of this.  It might not turn out to be correct, but we should know when it is not correct.  We should also, given that 2nd wave vee bounces can be quite dramatic, be willing to get stopped out tomorrow AM at the open in order to take another scoop of TVIX at much lower prices after wave 2 finishes.

We must also realize that tricky counts are most likely to be seen near the turns.  A tricky count would be something other than expected by either mainstream shorts (DJIA is either just finishing a 4th wave and now ready to head down into a 5th) or longs (after an a-b-c pullback the market is ready to rally to higher highs). 

As you might have already noted by my discussion of vee type second waves, I suspect that both of the mainstream views will be proven wrong and the only way for that to be true is if what has transpired on the DJIA was not just 1-2-3-4 but 1-2-3-4 AND 5 already (a tricky count).  

In this tricky count scenario, Friday finished A of C and B of C in the wave 2 vee style retracement.  Thus we face C of C next week before some new "news" hits the market again which reverses dramatically and begins wave three down for the markets and up for TVIX.  For TVIX that means that if it can avoid a lower low that $2.50, the next move should take it to a much higher high than the recent $6.50.  That move should also play out with great power as it will be a large 3rd wave which again smashes back into the channel of the expanding wedge that has been in place since ~Y2K.


Guys, what I'm describing above is the kind of sentiment that drives a vee style 2nd wave!   If this plays out as it seems to be doing it will be a gift for anyone who simply allows themselves to be stopped out of TVIX on Monday with the idea of buying back in at much lower prices.  

Make no mistake: a 500+ point DJIA rally will beat the stuffing out of TVIX at this point.  

If you are sitting on 80+% gains since the bottom of TVIX like I am, get stopped out with another 7% loss at the open and then just smile as TVIX pulls back to the $2.70 to $2.90 range.  That might not be the bottom of it but it would certainly be a likely support point.  So buy it back up after that dip and then set stops below the low of the dip.

As I wrote before, nothing is certain, there are only odds.   Also, we have to expect volatility when playing TVIX.  But if the markets cannot put in a higher high (and TVIX cannot put in a lower low than $2.50) then the next move up is going to be epic for TVIX.

For those who have just decided not to trade but rather to hold TVIX no matter what, I don't think you will lose on this deal.  Some epic things have already happened including the initial breakdown of that top rail of the expanding DJIA wedge.  Also, Yellen's recent speech about wealth inequality must not be ignored.  She did not do this for the heck of it or to show compassion.  She is a central banker, a money man.  They have no real compassion for anyone but themselves.  She was sending an important message for anyone with ears to hear: the fed cannot keep supporting the markets because at some point it will result in hyperinflation which will end the fed's regime by killing off the working class.  Someone has got to take one for the gipper and the already poor will be out with pitchforks if it gets much worse.  So the rich are going to have to give back some of their paper wealth at this point as they are now the ones with the ability to pay.

With all that said, if the DJIA finds a higher high during the coming rally then the current bear count is off and that is just the reality of it.  In that very unlikely case, don't fight the ticker or go down with the ship.  There is always the next battle to fight as long as you still have capital in your trading account.  Unless the DJIA opens flat to red, I will get stopped out early on and then not get back in unless the markets see a lower low than Friday's close OR until the DJIA plays out the rally implied by the inverse H+S.