Wednesday market update

Today was a volatile trading day but the bottom line is that the conventional wisdom chart model is still intact.  In other words, an ending diagonal which began in early 2014 has peaked and we are now determining whether the lower rail will hold or not.  The chart to the left shows this big picture.  Keep the big picture in mind lest the emotions associated with day to day volatility get control of you. 


Note that the lower rail broke slightly today but the herd reacted in panic to buy up shares, almost like it got hit with a cattle prod and a reminder of "cross this line and the game is over".   Here is the simple trading plan for tomorrow:

1. Our current model says that today's action, however strong, was corrective, not impulsive.  If I look at the zoom in on the right side above, I can believe that it was 3 waves.  This does not mean it will turn out to be true but if not then the market is working very hard to keep things as obtuse as possible and this is the sign of being near a major turn.  The market does not normally cover its tracks so well once the direction is set.
1. The implication of this is that tomorrow must begin to sell off before noon.  I do not think sideways is possible here.  If you see sideways at the open then begin to be concerned. It might pop a little higher at the open before turning down but I don't think we get sideways.  Sideways in my mind would be catching breath for another run up.
2. Today's
2. The DJIA cannot go above the recent high and still have the model above, left remain intact.  Mos def stop out of TVIX id that happens!
1. If this happens, do not hold on and "hope".  If you have not been using carefully selected entry points with predefined stops then you are playing into the hands of the wild volatility.
2. I got stopped out of JNUG 3 times in so many days recently.  I knew a bottom was close but nobody is perfect at reading the count; there can always be some kind of extension.  But I knew when I bought where my stops would be.  So today I made up for all my small losses and then banked a big profit on top.  THIS IS THE GAME YOU CAN WIN!  If it was easy then anyone could do it (and trust me, they can't).
3. ODDS, not certainties!  Forget this at your peril, especially with such leveraged ETFs.  Fear and discipline are your friends here.
3. Assuming the DJIA takes out the horizontal red line to the upside in the model (above right) then the current ending diagonal model is dead.  But that does not mean DJIA 50000!  The sentiment is too extreme for the bulls even though the fundamentals are poor.  The "risk off" trade is already happening in the small caps and has been going on for months.  The senior indices are not immune to this, but they are the last to fall (the marginal players are always hit first and impacted the worst).  No, this market is not going to go up much further but this does not mean you can avoid using stops.
1. If the existing model dies, the new model will be as shown below.  Yes that's right "just one more wave up".  Again.  Sorry, that's how this game plays!  The best TA guys in the industry are not measured by being right on every model.  Their real "goodness" is derived from picking at lease reasonable trade entry points and in and how quickly and intelligently they determine when those models are wrong.  This allows you to, in the words of Jessee Livermore, cut your losses short and let your winners run.  If the conventional wisdom model (which is code for "the model accepted by the best TA guys in the industry") is wrong then players who are a bit more conservatives should just go to the sidelines and wait for blue 5 to throw over and come back down into the channel.  If that is seen, the odds will be very high that the bull market is then over.
2. One thing I never liked about the conventional model was that there was no throwover on the 5th wave.  If the model below is to take place then the throwover will likely be larger than shown below.
3. If we get sideways trading action then begin to suspect that the herd is using the model below.  If the sideways action turns into a triangle then you pretty much know that it is a B wave with C still to come.
4. Earlier today I lamented the fact that JNUG seemed to be trading in locked step with the DJIA.  What bothered me about this is that the DJIA was supposed to be ready for a massive 3rd wave breakdown while metals and miners have been set up for a significant rally.  Thus I really expected them to trade in opposition to each other.  So I did not like it that you could hardly tell their charts apart all day.  Can you tell which is which after I removed the scale (see side by side at the bottom of this post).
1. Today's 27 percent move on JNUG was incredible but it is not enough.  As I have posted in these pages, I expect a full retracement to $20.  If metals and miners are in phase with the DJIA (which we should be prove/disprove pretty quickly tomorrow) then the odds are high that the DJIA will move to the top rail as shown below.  JNUG might not be a bad place to be during that time!  But before you go "all in" on JNUG, note that there is a triangular looking component to JNUG right now.  I will post separately on that.

Can you tell which is JNUG and which is the DJIA?  Hint: I made a nice buck today on the left chart.  Yes, the left one is JNUG.

We have to expect volatility at such a major turning point.  Keep in mind that this is likely the end of a very long bull market.  A lot of leverage is now in use and nobody wants the punch bowl to be taken away.  Each time the shares sell off the leveraged longs have to go deeper and deeper into the hole to stop the technical collapse.  Once the technicals go, the game is over because every trading computer on the planet will begin the viscous unwind cycle. They will try to make it "orderly" but there is nothing orderly about the collapse of a Ponzi once the participants decide it is too risky.  When the technicals make it clear that no new fools can be convinced to go long this market, the Ponzi operators will stop trying to pump it up and in fact many of them will flip short.

If you are frustrated by all this, take a day or two off because you are too emotionally involved.  You don't have to catch the tippy top!  Very few in fact will.  All you have to do is be in TVIX when the lower rail gets punched through with gusto (preferably a gap down as I was hoping for today...).  Once that happens then the tail wind will be at our TVIX backs and our main challenge will to be avoid emotional giddiness...