Lots of nervous bulls and excited bears all over the TV the past couple of days … everybody needs to just chill and look at the roadmap. Everyone loves to call the top and I am as guilty as anyone. I way messed up calling the top of the 3rd Wave … as it turned out I was looking for Wave 4 when it turned out to be just a more minor/smaller wave iv of the bigger wave 3.
In the end, that early call cost me some lost profit opportunities on the long side as well as some losses on the down side on my shorts. Good risk management kept those amounts relatively small compared to my gains so far in 2012 however, so I am still pumped about the possibilities of the market going forward.
I find it much easier to calculate the support areas in a market trending higher than trying to pick the tops. Why is that? Well I have mentioned in several of my earlier blogs about trying to figure out what what chart time frame is in charge of the current wave structure.
I was talking about this in the fall of 2011 as it related to the importance, I thought, to the Oct 2011 lows on the weekly chart. To make a long story short, I was looking at the "symmetry" of the weekly chart when the October lows respected the same level (38%) as the summer of 2010 lows had (see chart below).
S&P 500 Weekly Charts
So the big picture that traders must keep in mind is that until the October 2011 lows are violated, the uptrend in the weekly chart is intact and remains "true". Does that mean traders should remain blindly bullish? No that is not what I mean.
Tops to wave structures are made when chart patterns fail … that is what traders should really be keeping their eyes on while they keep in the back of their mind the more "macro" or longer term view that we are still heading higher.
I have added a couple of new lines to my "macro" chart … I looked at the prior "minor" weekly wave after the summer of 2010 38% low and looked to see where resistance was found. As you can see, the 1.618x fib extension was the area that provided resistance on that weekly wave.
So what does that mean? Well as long as this weekly structure is in place and remains "true", that should be the "macro" target play for traders. Most traders probably recognize that "area" as awfully close to the Oct 2007 all-time high of 1576. That without a doubt makes that level even more significant.
What other interesting things does the weekly chart provide traders?
So if the weekly chart is still intact and in charge traders can look and notice at the last time we found support and then moved to a new structure high (Nov 2010). Looking at this on the weekly chart we can see that a 3-4 week consolidation period occurred before the chart pushed higher into that 1.618x target zone.
Well what has happened since the Oct 2011 38% support level held? Well, we made a move to a new high and now it looks like we are in some type of consolidation period. Does history repeat itself? Yes it does … usually not exactly, but close enough that it often rhymes.
With that encouragement, let's look at the daily charts …
Firstly, let's look back to that November 2010 time period to get a closer look at what happened then.
S&P 500 Index Daily Chart (November 2010)
So similar to my reading of the current daily chart, the Nov 2010 time frame saw a "bigger" Wave 4 pull-back right into the smaller wave "iv" from the prior Wave 3. Price found support there and then consolidated before moving higher in the daily 5th wave higher.
Couple of things traders should note. Firstly, the support for this move lower came in at 28% … that is the support level we should be watching on the current Wave 4 pull-back. Its all about "symmetry" … we want to see symmetry to retain confidence in that bigger structure.
Next look at the amount of days that the Wave 4 corrective move consumed … 6 days down and then 10 days of chop that frustrated traders who were too focused on all the negative news that was going on during that time period. I often warn traders about Wave 4's and how they are more emotional and will whipsaw both ways as they "fake-out" both bulls and bears. All of that action just serves to set-up the Wave 5 move higher … weak bulls bail and then have to chase and re-add longs once Wave 5 starts. Bears get stopped out and have to cover. All of this action serves to fuel the Wave 5 move higher.
What Ninja level 9 traders do is patiently wait, knowing that Wave 5 will come. We start longs at the expected bottom of Wave 4's but keep size small so we can withstand the whippy stock action. The real time we pounce is when Wave 4 completes. While everyone else has their head up their asses, we put on SIZE because we "know" where we are going.
Back to the Nov 2010 Wave 4 … the push lower was 6 days and the entire corrective action was 16 days … that split is basically a nice fibonacci split of 38.2% and 61.8%. Funny how that often works!!
Lastly, I want traders to note the Wave 5 target on the daily chart … wave 5's typically end at the 1.27x Fibonacci extension zone. Obviously, this target was blown through. That is what happens when a "bigger" time frame chart is in charge of the price action. The weekly chart did not care about that daily chart resistance level and price proceeded to the 1.618x Fibonacci resistance level on the weekly chart.
S&P 500 Index Daily Charts (Current)
So here is the current chart … the talking heads on tv are looking at how bearish everything is currently. Ninja level 9's just shake their heads and wait patiently …
So I have added the 28% level that should act as support for the wave structure here on this Wave 4 move. The number is pretty much 1350 so that is an important level for traders to keep in their heads.
That level fits right into the prior wave "iv" area … again history often repeats itself or at least rhymes.
I also drew in the daily Wave 5 target zone. That level needs to be watched, but if the weekly chart is still kicking ass then price should blow through this level.
Everyone and their dog are expecting a repeat of the summer of 2010 and 2011 where traders should have "sold in May and gone away". Maybe they are going to be right again here in 2012, but what if they aren't??
If the "market" is poised for a correction, but instead the market fails to go down below 1350 here soon and in fact breaks above the 1480 5th wave target,what will happen? Well can you say "mad scramble" or "melt-up"?
Let's not get ahead of ourselves, but Ninja level 9's are keenly aware of what "may" happen, not what everyone is expecting to happen.
Before I finish this post, let's drill down and see how the 4th wave is looking on smaller time frames.
S&P 500 Index 60-Minute Chart
I have been pretty much on top of this corrective move … it is unfolding as I thought it would and to me it looks like a classic ABC Zig-Zag correction. These corrections are typically in the form of a 3-3-5 wave structure.
As you can see we are in the last/final "C" wave lower … if so, then we should be able to count 5 waves lower on the smaller 10-minute chart to the bottom of this move.
S&P 500 Index 10-Minute Chart
This is the interesting part of the forecast … everything seems to suggest a move through the normal first area of wave targets (1.27 – 1.618x) down to the 2nd target zone of 2.618x.
Where does that take price? Well it takes it right into the 1350 area that is also the all important 28% retracement support level on the bigger chart as well as the 1.27x extension area on the 60-min chart from above.
Not only that, when/if price can push down through last week's "A" low, a ton of stops will be taken out that were put in place with the mid-week "B" bounce by weak bulls/retail schmoes. They are about to get bitch-slapped here next week.
So when we push through the "A" lows of about 1360, the weak hands will get stopped out and the perma-bears will pounce and add big to their positions. What do Ninja level 9's do? We rub our hands and wait/expect for 1350 to hold. We don't blindly have limit orders in place … we wait to see that the market can't penetrate and hold below that important level.
When price shows it CAN'T go lower, then we pounce, expecting to benefit from the scramble/short covering that is bound to follow.
So that is where I see things currently … adding to the fire this week is the fact that we are entering OpEx week. I'm not sure what impact that will have on price action but it is something traders should be aware of.
Cheers … Leaf_West
