SPY's Last Drop

I took some pokes at shorting SPY during this rally to no avail. The rally has been confounding me but today finally I'm rewarded with some signs that I have not yet missed the long boat.

Here we can see that a negative reversal was created by today's lower close. This is significant. Note how the previous negative reversal called the last sweeping collapse. The first reversal of the sideways pattern was also prescient. The second reversal was a false signal but given how early it was in the rally it was easily dismissed. The small chart has some even better news:

First the 60 minute SPY chart. Note how we have a lower high on this minor trend. The curvature and top of this rally now looks a lot like all the previous ones. Take a look at how RSI and stochastics have curved over with each wave. Only one of the waves has a secondary hump (higher by one penny).

Now I hate to pull up a 1 minute chart but it's the best information you have when you're looking to place a swing trade 45 minutes before the extended session closes on a Friday night. This one is just fantastic. Here we can see the lower high on the right of the screen which is an undeniable textbook 5 wave. That's 1.5% in about 10 minutes off the index.

Leading up to that was a very interesting surge. We can see that a triangle formed at the 1 minute level and when the resistance was broken we got a surge from 1 minute momentum traders and stops firing off. Longer timeframe traders (smarter ones than me) were selling into that strength.

Finally inching back further we have a less obvious but still deliciously perfect 5 wave down. I've broken down the waves here and noted how the 4th wave is an obvious 3 wave pattern (it follows all the guidelines including alternation and depth to prior 4th wave). While not quite a "golf club" I'd say this 1 minute chart did everything a golf club pattern does. Compare it with coffee recently:

Note the curving downward pattern and surge back up to a lower level, and then subsequent plummet. I've found this to be one of the most reliable patterns to trade. The toughest part is finding the bottom of the club. The top of the surge is usually easy because momentum slows down long enough to catch it.

Finally I've noted previously that these humps have mostly fallen on a small Kiss of Death. I should have been more patient:

I drew that trend line in yesterday and it certainly gives me some confidence. Note also how the prior technical resistance line (the sloping horizontal) has been providing support. With the exception of this morning's jobs related surge this wave has already been trending down.

The million dollar question however is whether this is a 3 wave or 5 wave. I dare say one could bend this count any way one wants. It has been a weak rally, defined not by buying pressure so much as a lack of selling pressure. Let's zoom out a bit and try to make some sense of Elliott. Here is my original interpretation:

My original interpretation was that we had a truncated 5th wave. This allowed the A/B/C pattern to fit perfectly. It also correctly predicted the lower drop. Things got a little sticky when our last plunge ended too soon. The only way for this interpretation to hold is if the two prior plunges were both "1" waves and that the next drop (assuming it happens Monday) would be a killer 3 wave that would bring us down to 975 and then further by tacking on a 5th wave and possible extension. Frankly this seems too drastic as this stage.

Another possible interpretation:

This secondary interpretation is far more satisfying in terms of fitting a wave count into current market conditions. I arrive at this count by working backwards. Our current wave is a motive wave and thus a C wave. The prior two drops (that otherwise would be extending 1 waves) are actually part of a large, downward sloping, 5/3/5 "B" wave. Then the wave prior to that is an "A" wave. Now previously I had considered this to be motive but I should point out that it has the characteristic choppiness of a retracement wave. It is one of those waves that could be placed either way.

Perhaps the most satisfying piece of this equation is the X wave. The X wave is always a connecting wave between two 3 wave patterns. Characteristically, it is a distinct 3 wave pattern that does not make a higher high or lower low. We can see that our X wave fits this bill.

Where things get messy is interpreting the first A/B/C flat. The C wave to me looks distinctively like a 3 wave although I will grant that one could count it either way if pushed. Then the B wave is the hardest for me to swallow since I think this is clearly a motive wave. However, this wave count eliminates the awkward truncated wave and allows our next motive wave down to end pretty much anywhere.

Finally:

More liberties with motive waves need to be taken but it's possible to interpret this rally as the 1st wave up (in a much much larger corrective pattern granted). This one is really not satisfying to me but I will say that our negative reversal price projection point is higher than our previous low (109). I think by 109 it should be clear whether the wave is motive or corrective which should clarify the picture.

I wanted to revisit the 1937 and 1984 crashes now that our picture has developed a little further:

1937

So 1937 is no longer a great analog. It has a crystal clear A/B/C flat pattern. I can see why Elliott was so excited by his theory. We do have a boatload of negative reversals just like today. We also had positive reversals which were pretty good until they created two fakeouts during the final plunge. The first fakeout would have been particularly nasty. DeMark didn't invent his indicators for another 50 years but you can see that a DeMark perfected on that negative reversal day. Ouch. After being bitten once I'm sure anyone seeing the second would have been more cautious. What 1937 does kind of do however is throw some cold water on the truncated 5th wave theory now that we see what a real 5th wave is supposed to look like.

1984:

Once again 1984 is pretty much a textbook A/B/C flat pattern. One interesting tidbit is that 1984 also has the same little hook that has been bothering me in our current pattern. So this again throws cold water on the truncated 5th theory and adds weight to the other interpretations.

1984 gives us a beautiful 5 wave pattern for the 5th wave an a nice DeMark signal but then it throws a curve ball by making a lower low which I believe is an extension from a small 1st wave prior to the crash. Note the DeMark countdown signaling an end to this market correction. We have no such signals yet although a countdown has reached a 12 count and is likely to signal with a new low.

UUP

I have to admit I was questioning myself on why I hadn't shorted UUP on the composite/RSI divergence that I had blogged about. It just didn't feel right. Now we see it has made a positive reversal that puts it into "gap magnetism" territory. We have 3 gaps before we reach a DeMark resistance point. The dollar could really shoot up there (treasuries by comparison are in "open space" with only bearish reversals right now. I think they'll spike again but probably make a lower high).

Meanwhile, Elliott "determinism" is telling us something about gold:

Note that the sideways action has never made a lower low than the initial drop. Elliott says that there will be a lower low. Odds are that this was a triangle pattern but it's possible for it to extend further. Based on the little straightline plunge hiccup we see in today's action I'd say we're going to see downward action. I think this is going to surprise some technical traders who might be reading this as a triangle pattern (when in fact it's a rectangle).

Using Constance Brown's fib techniques we can plot out some fib support:

We see that 150 provides support. We can also see how the previous support levels have drafted the borders of the current rectangle. The calculated distance (1st wave same length as 5th wave) brings us a little lower, to the DeMark support level. Then there's that gap and the possibility of spikes. I don't think it makes sense to try and catch this falling knife.

I think the most important thing to note however is that gold is making a 5th wave (per the Elliott triangles). This means that the correction is not complete. Gold will rally with a 3 wave and then fall further with another 5th wave. Although it could end up being flat overall, there is the possibility of an extended slide in gold prices. Suffice it to say that gold will not make new highs for some while.