Wed 11/17/10. Chess game. Evil plans.

(Update Fri 11/19/10 4:00 PM EST)
1/3 short within pennies of 1200 right at 4PM. That is a non-System trade! Would like to see one more blip higher to 1202-1216 but am willing to scale in Monday either way. My hope is to average a short position from 1195-1207 with initial target of 1150-1160, bounce and then 1145ish. Today's hi/lo must be closed beyond to set the next trend and trade for the System. Good luck and good weekend.

(Update Fri 11/19/10 3:15 PM EST)
I think if SPX drops below 1194.35, the rally from 1173 could be done with Y not quite reaching the top of W. 1189.44-->1198.78 looks like a good ABC with C being an EDT, but it is possible that the structure completed AB1 with an LDT until 1194 is breached. The latter case would fit better with our nice Fib targets of 1202-1216 and the 1207ish bullseye, but we won't necessarily get what we want especially with VIX and USD reaching viable targets and with VIX now bouncing. If SPX closes between 1194 and 1198, it will be a tough call for Monday but we're at or near the top either way. If 1198 is to be broken today, it will likely be in a spike to 1202+ and that should end 3 of C of Y from 1173 and that's where I will short. If 1194 is broken by end of day, I will likely enter half short and wait for the next small rally to finish filling my position just in case Monday gaps up. I will try to update again before the close with my decision.

(Update Fri 11/19/10 2:15 PM EST)
VIX set a new low below 17.90 with posd...nearly 25% lower in 3 days! Still haven't heard it mentioned.

(Update Fri 11/19/10 1:00 PM EST)
VIX is down to 18.25 with SPX still slightly down. It probably won't take much SPX upside to get it down to sub-17.90 now. And, I haven't heard anybody on blogs or TV talking about this today or yesterday. Odd. SPX wave Y=W*.5 is probably the low end target for this rally at 1202-1203. Earlier, I detailed the high end target as 1216 and likely target as 1205-1210.

USD is up 1 penny today at 78.63 and has plenty of room down to 78.16-78.30 support if SPX makes a final rally. In looking at the USD chart in terms of EW, the overnight 78.16 low was well above the likely wave 1 high since the dollar bottom, so USD has likely finished a wave 4 (or is finishing) and will likely shoot up in a wave 5 matching the SPX wave 3 down. When USD starts an ABC pullback to its 20dSMA most likely at end of next week, SPX will finish waves 4&5 of its LDT into end of month and then bounce for 1 week in early December. My guess would be that during that period copper will retest and possibly even pierce the low of its 8% plummet earlier this week but with positive divergence allowing a dead cat bounce in line with SPX but giving us a clue that copper is likely portending a bad world economy in 2011. Financials aren't doing as well as I'd hoped but XLF could reach 15.15 if SPX gets north of 1205.

Could my dream setup and evil plan be coming true? I warn you that it's moments like these when the indicators align that things CAN go the other way but it's a high risk/reward situation with less potential drawdown than most such trades. One thing that is not lining up as of yet is my set of reversal indicators (NYAD, TRIN, VIX BB20...) but they don't point bullish either and there are plenty of reversals they don't signal and one could argue NYAD had a somewhat small change near a high yesterday which often has a 1-day delay effect and a new VIX low with posd should be good enough even if the lower BB20 is not reached. So, I guess I'm feeling pretty good about my typical reversal indicators too. Good luck, but remember luck is when opportunity meets preparation. Opportunity is knocking. Are you prepared to answer the door?

(Update Fri 11/19/10 11:00AM EST)
We have what looks like a WXY down from 1200 backtesting and piercing the 1227/1207 downtrend line and holding 1187 support at 1189.44 with dynamic RSI confirming 1173-->1200 as a completed ABC structure. So, 1200-->1189 is likely wave X with an outside shot it will turn into a wave 1 down or triple zigzag. We can still use 1187 as key support. If 1189 did mark today's low, the rally off 1189 this morning is likely completing wave A of Y of 2 from 1227. Since 1173-->1200=W in that scenario, Y=W at 1216 and Y=W*.618 at 1206. 1207 is a 61.8% retrace of 1227 and the previous significant pivot, so, assuming 1187 holds, 1205-1210 still looks like a great short entry with stop just above 1216 where the 76% Fib retrace also lies. That setup is likely to occur Friday afternoon or Monday morning. If SPX rises but does not quite reach 1207 by end of day, and if VIX falls but does not quite reach 17.90 by end of day, I'd say odds favor a small jaunt higher on Monday post-OPEX to tie the bow, but I expect the air to come out of this rally quick next week with an awesome VIX boost, so I may go in partial short (non-System trade) if that occurs to hedge my bet. USD is holding up well and I'm now looking for its 50dSMA (78.30ish Monday) and overnight low (78.16ish) to act as support if SPX 1205-1210 is going to act as resistance. That would really trap some dollar bears and gold bulls if it happens because the dollar retrace has been shallow after its sharp rally. Today is a Marker Day in the System and 1189.44 may be the bearish level to watch next week.

(Update Fri 11/19/10 8:30AM EST)
3 things to note this morning.

1. The downtrend line from 1227, which was touched 4 times including 1207 just before the cascade down to 1173, is now at 1192-1192.5 falling to 1188ish by end of day. SPX may choose to backtest that line given futures are down 4-6 pts. Bulls would probably survive a piercing of the line, but OEW has a pivot at 1187 near the old congestion area. So, I think bears need the trend line to break and then 1187 to break.

2. USD is hanging above its 50dSMA this morning although it did dip below it 20 cents or so overnight. If USD loses its 50dSMA intraday and especially if it loses the overnight low of $78.16, I think it will approach its 20dSMA. Something to watch Fri/Mon.

3. 1173-->1200 looks like an ABC or 123. If SPX pulls back a little to say 1189-1194, you'd have a 23-38% pullback and dynamic RSI would almost certainly confirm the 1173-->1200 structure is complete, so we'd have to favor ABCX (i.e. WX) from 1173 if SPX plans to go higher. From 1192ish, Y=W at 1219. That seems too close to the 1227 top and well beyond a 61.8% retrace of 1227-->1173. From 1192ish, Y=W*.618 at 1208-1209. Obviously, if SPX drops to 1190 or 1195, you'd adjust the target slightly. But, with 1207 being the pivot many Elliotticians are watching and being a 61.8% retrace of 1227-->1173, that does support 1205-1210 being a target zone as I proffered a day or two ago. Of course, if 1173-->1200 completes an ABC correction that will not expand, I'd expect SPX to drop below 1187.

In sum, if USD breaks below its 50dSMA and SPX can hold 1187 (and probably 1190-1192 around the old broken downtrend), SPX has a very good shot at 1205-1210 initially with higher prices possible depending on if USD and VIX look setup to go even lower at that point. Copper looks fairly flat today after retracing about half of its 8% plunge earlier this week, so that might not give us any clues today. I expect financials (XLF) to rise to 15.15 but nothing solid to look for today. Good luck.

(Update Thu 11/18/10 3:00PM EST)
VIX is at 18.90. That is down nearly 4.2 pts in less than 2 days. It is not out of the question for VIX to drop another 1 pt in the next trading day or two around OPEX breaking the October 17.90 low and maybe even reaching the VIX range of 17.07 to 17.53 established on April 26th, the SPX 1220 top date. The VIX trend line from 2006 is a little below 17. A new VIX low could even happen without a new high in SPX. My evil senses are torn between whether or not SPX would want to break 1207 in such a scenario. Staying below 1207 would embolden some bears with a potential 1-2-1-2-1-2-1-2 count with another nested 1-2 overlapping 1174 next week only to see the whole structure crushed in my LDT scenario at end of month meaning Mr. Market could trap more bears. On the other hand, getting above 1207 might wipe out many bears who are hanging on to the nested 1-2 setup making them assume 1227-->1173 ended wave 4 or at least A of 4 with only one more lower low slightly possible, so they would be less prone to chase the downtrend until it made 2 lower lows which is where my evil LDT scenario would end wave 1 with a sharp short-covering wave 2. One thing that bothers me is the other VIX wedge legs were much longer with obvious ABCs, so a sharp fast final leg down doesn't quite seem to match the other legs, but then again I don't give much weight at all to VIX counts and the pattern could be sufficient enough. Still, if we do get a longer VIX zigzag down leg, it would favor a new SPX high.

USD is still above its 50dSMA and if that holds with SPX rising to 1205-1210 and VIX making a new low, we might have one of the shorting opportunities of the year with an expected VIX explosion and USD wave 3 to follow. USD had positive divergence at its bottom, exploded higher breaking pivots without divergence and has since seen RSI surpass the RSI level seen at its last major pivot high of 83.56 despite price only reaching 79.46...another positive divergence of sorts. A new USD low is highly unlikely at this point but it's traveled far enough above the 20dSMA to make that the line in the sand with a piercing allowed.

AAII bullish sentiment dropped from 58 to 40 this week, but bearish sentiment hardly budged so a good chunk of bulls went neutral. A lot of people are now saying SPX 1173 ended the correction, so I'm sure bullishness is back up quite a bit as VIX validates.

Consumerindexes.com shows discretionary spending basically flatlining for the last 3 and a half weeks at a level only a tiny tiny bit above October, so we are not yet getting a solid sign that August was a spending bottom since we are not that far off the bottom and merely stabilizing. Hopefully, the end of November and December will make a strong move one way or the other so we can determine if August was an intermediate-term spending bottom which would portend a 1-2 month 10-15% rally beginning in Jan-Mar.

Friday will be a Marker Day in the System since today is a 20dSMA test day. So, a large gap OR a close beyond Friday's hi/lo will set the next trend with a few exceptions like small NYAD change, TRIN extreme and large following day gap.
(Update Thu 11/18/10 12:00 PM EST)
Dr. Copper. It took a nosedive yesterday of over 8% before ending 5% down. Today, it is a little over 1% up, but it's certainly not showing the enthusiasm of the stock market. I'm still favoring the SPX wave 2 bounce to as high as 1207ish, and copper appears to be another good clue to watch for confirmation given its situation. Read these sources.

http://www.safehaven.com/article/19004/the-technical-take-copper
http://ewtrendsandcharts.blogspot.com/
http://chartramblings.blogspot.com/2010/11/copper.html

BTW, if I apply dynamic RSI to copper which has been rising since June (portending the Jul/Aug SPX bottoms), RSI15/16 has fallen to the levels seen in Jun/Jul which means any lower copper prices will likely signal the end of the Jun-->Nov uptrend unless we see posd which could very well prove to be temporary. In my SPX evil plan for an LDT down to 1145ish, that's probably what would happen.

In my perfect world, on Fri/Mon, USD would drop near its 20dSMA, VIX would drop to a slight new low, copper would fail to make a new high, financials would continue to lag and SPX would either stall at 1205-1210 or exhaust quickly at 1228-1231 with my daily indicators giving odds of a 1-2 day reversal. I can only dream.


(Update Thu 11/18/10 10:30 AM EST)
Wow! I honestly feel sympathetic to any people who were holding short positions, since I've been there plenty of times, but the sun will come up tomorrow. My evil plan called for a rise to 1194-1207 into OPEX followed by a lower low. But, this rally is steeper than I expected for a wave 2, so I'll re-evaluate the indicators tonight. For now, SPX has pierced its 20dSMA and broken the downtrend line from 1227. I can't produce any stats but my recollection of manually backtesting the System to year 2000 is that large gaps to or thru the 20dSMA tended to establish a new trend (up in this case), but today's gap continued running to the 20dSMA rather than leaping over it at the open so I'll need to go back and look at such a condition. It is worth noting that the System would have avoided this gap up by exiting the short trade from 1191 at 1182 yesterday after profit-taking at 1180 since the hourly trend narrowly but definitively turned up yesterday as I posted.

VIX has plunged below its possible wedge breakout and 20dSMA. My alternate VIX count could be in play in which case VIX could drop below 18 again. Volatility does often slide in the day or 2 surrounding OPEX. USD is down but right at its 50dSMA and still well above its 20dSMA. VIX and USD are big clues to me. If VIX and USD continue lower as I suspect, VIX may want to retest its 17.90 bottom and USD may want to retest or at least approach its 20dSMA which would support a higher SPX. I'm just not sure how high yet. I have a new SPX high alternate counts, but, for now, nothing has broken the wave 2 possibility in my evil plan. I think this rally will carry into tomorrow and possibly even Monday, so I'm hoping my daily indicators will give me a reversal sign as early as tonight (preferably below 1210) in order for me to take a personal non-System short fitting my evil plan. If not, I may have to wait for a new SPX high. The 4.5% drop from 1227 does NOT satisfy the predicted 10-15% downturns based on discretionary spending and energy consumption analysis and S2EW. I mean, if SPX had dropped 8-9%, I'd consider it but not 4.5% especially when there are still 2 weeks of time left and possible VIX/USD/SPX counts supporting much lower. So, if the downturn didn't start Nov 5/8, it should start by Dec 1 and we should know the likelier 2-month path by Monday. Good luck.

(Update Wed 11/17/10 8:00 PM EST)
The System is neutral. The System will not enter a buy signal under any condition tomorrow given the daily downtrend and distance of the 20dSMA above. The System may enter a sell signal if SPX rises enough to get hourly stoch above 50 before falling. Today's action did not clear up any counts or exceed any pivots. It did relieve the daily indicators that were calling for a flattish day or reversal upward. Now all the indicators are fairly neutral, so the key is likely the USD which needs a breather. I am still leaning toward a rally above 1194 and below 1207 into OPEX before falling to 1150-1165 into Thanksgiving. But, choppy weakness into OPEX with a rally Thanksgiving week is my alternate. I am awaiting a large bounce before shorting, most probably before the System indicates doing so. My evil LDT count would technically allow a rally above 1207 and a lot of Elliotticians will watch 1194 and 1207, so I will use 1210ish as my stop if I do decide to short at 1194-1207 to avoid getting caught in a final EDT 5 of C or 5th wave from 1011 above 1227 even though that is a longshot alternate to me. Good luck.
___________________________________
I discussed my System status and technicals in my Tuesday night post. This post is commentary and strategic.

Commentary:
The Fed is defying the Constitution and Congress. I am with Karl Denninger and others that point out the Fed is not following its mandate for stable prices since that means keeping monetization in line with population and productivity with zero inflation and zero deflation. And, the Fed has been performing unconstitutional acts such as buying MBS which are not 100% officially guaranteed by the US government and are bad investments at taxpayer expense to boot. What's even scarier is when Ben Bernanke was asked whether the US would eventually buy stocks directly like other countries have resorted to, he said he didn't think things would come to that whereas he should have immediately said that's not in the Fed's mandate nor is it constitutional.

Regardless, I think the Fed is playing a chess game with the world. I'm not smart enough to connect all the dots yet, but I don't think it is a coincidence that the European debt crisis is rearing its ugly head after QE2 started. Somehow I think the asset ramp, margin compression, speculation encouragement and poor economic prognosis are intended to hurt Europe and Asia worse than the US, and the US is still in the enviable position of having the world's reserve currency and world's largest economy which makes it a safehaven of sorts. I sense that the Fed sees the writing on the wall, wants to save the banks and the US economy as best it can and thus tries to position the US in a relatively better position than its brethren even if that position stinks. I can easily say that the Fed played a large part in the tech, housing, asset and financial bubbles, but I can also argue that the world forced its hand. Many people point out that when the big companies (especially banks and financials) are allowed to operate without much regulation, even less enforcement and still less meaningful punishment, that gives them a market advantage which fuels the same behavior from both large and small competitors lest they go bankrupt. The same thing can be said about the world. China and other countries manipulate their currencies, allow slave labor, allow mass pollution, have virtually state-run industries, spew QE like Japan etc to give their economies advantages or just keep them afloat. But, those advantages hurt the US economy, force our companies and jobs overseas and fuel asset inflation. In that vein, the Fed is just trying to keep up with the Jones hoping to delay the inevitable debt collapse and hoping to position the US "relatively" favorably when it does collapse. Karl Denninger has it right when he says the US needs to get some balls and make the corporate playing field across the globe fair through whatever means necessary. That means "fair" trade. Combine that with a mass simplification of our tax system, balanced budgets and proper justice for all the illegal corporate acts of the last decade, and the US will come out of the pain sitting pretty. Until then, the Fed (that even I love to hate) plays a chess game within the fiat system we live.

Strategy:
While walking last night, I tried to put myself in Mr. Market's shoes and devise an evil plan. Here are the facts and indicators as I see them.
1. My discretionary spending historical analysis projected a significant 1-2 month 10-15% drop beginning in November. Separate energy consumption historical data supported the same conclusion.
2. T-theory projected a significant top in November.
3. On Friday at around 1200, S2EW dynamic RSI confirmed 1227 was either a top or the beginning of an EDT. Since then, SPX has fallen hard and the EDT option looks very unlikely albeit not eliminated.
4. SPX looks corrective down from 1227 thus far (either an ABC or ABCXABC as I laid out last night). I stated that SPX needs to follow through with one or two wave 5s below 1173 probably near 1160 before the count will look impulsive.
5. Sentiment in VIX, AAII and elsewhere was at bullish extremes over the last few weeks supporting an imminent significant top.
6. Most people are expecting a wave 4 (from SPX 1011) down to 1160-1180 or possibly slightly lower with a rebound through Christmas into January or even March. The first part of their forecast has been rewarded with a drop to 1173 but most are expecting this wave 4 to be longer and slightly deeper probably into end of month.
7. McLaren has potential turn dates at end of November, Jan 1 and March 1.
8. Most of my daily indicators suggested today (Wednesday) should be a flattish day or reversal day with a 1% drop possible before the rally. I discussed setups for VIX, NYAD, TRIN and USD last night.
9. This Friday is OPEX and next week is Thanksgiving with max option pain supposedly around 1190 and the following week has the last 2 days of the month which have tended to be bearish in the last year.
10. USD has likely made a significant bottom with the QE2 2+ month trade unwinding in various markets.
11. 1228 was a Fib 61.8% retrace of 1576-->667 and just above the recent 1220 top.
12. S2EW counts 667-->1220 as an ABC. S2EW counts 1220-->1011 as WXY. And, S2EW counts 1011-->1227 as an ABC...thus far. So, S2EW's primary count is a completed WXY from 667 to 1227, a near perfect double, with a possible but unlikely EDT still needed just above 1227 and an alternate WXA count if the rally from 1011 turns into 5 waves with a projection in that case to SPX 1350.
13. Most wave 1 drops in the last few years have been 70-100 pts with an ultimate 150-250 pts in 5 waves in 5-10 weeks. The drop thus far has only been 54 pts in 1+ week.
14. Nobody seems so worried about the Europe stuff this time around even though the contagion IS spreading despite the extreme efforts thus far. Pavolv's dog.
15. There are unfilled gaps at SPX 1218.75 and 1197.75.

When I put all that together to devise an evil plan, I need to get SPX down 10-15% in 1-2 months starting in November without sentiment getting too bearish too early. My whole evil plan is charted below but keep in mind I've not had much luck doing this in the past. If it begins to unfold generally correctly, then more weight can be applied to it. I put a lot of thought into it such as with the bearish-leaning last 2 days of each month, the 2009 SPX 1115 close, trend lines, pivots, Nov and Dec OPEX, holiday trading, typical downleg timing etc. However, calling for an LDT after 1 leg is highly speculative and just my thoughts on how Mr. Market could leave the most people confused and not ultra bearish heading into a breakdown through 1130. Other evil plans lurk. In fact, SPX may very well drop below 1173 Wed/Thu making a 5-wave drop from 1227 look more likely. Bulls would still argue it's an A wave and not chase a B-wave too high and then count a C-wave all the way down to 1150-1160 and not get too worried until 1140 was reached. And, many Elliotticians allow 5-wave legs in LDTs anyway. It's just that OPEX, distribution, the lingering QE2 trade, potential European bailouts and US tax cut news and the October 2007 LDT to kickoff the most recent bear market have me favoring the choppier evil plan below for now. I have not eliminated the EDT just above 1227 or my alternate bullish count to 1350 on my weekend weekly SPX chart, but those counts are secondary and on the backburner until proven otherwise. Getting above 1210 would certainly open my eyes to the more bullish scenarios, but I actually expect a run at 1195-1210 in my evil scenario.

Hourly resistance was broken this morning. The System will issue a sell signal on the next 4-candle reversal and hourly stoch bearish cross by rule, but that will likely require a bounce to the OEW 1187 pivot or higher. Boring day with possible triangulation occurring. Good luck.