Sat 3/19/11. The Master Plan.

(Update Tues 3/22/11 12:15AM EST)
Please check out http://www.ttheory.com/. I have not visited Terry Laundry's site in many months, but a new cohort of his, Parker Binion, posted an article at safehaven.com that led me back there. Some of you who have visited my blog since last year may recall some of my musings about T Theory's time symmetry technicals. Like me, Terry expected a larger pullback in November, and he caught a lot of flack. However, he and my System were much quicker to recognize the bottom than me personally. Anyway, I find it very interesting that his studies (Peter Eliades A/D Ts, Parker's Money Flow Ts, Golden Ratio Cycles and other time cycles as well as Terry's McLellan Volume Oscillator Ts) all point to late May or early June as a significant top. My consumer discretionary spending analyses point to the same timeframe for a top due to a 5-6 month projection from the Dec 1st pivot. And, Terry's work suggests last week was a likely bottom with a piercing of 1220 being a worst case scenario if SPX does drop down one more time based on the bottom of his proprietary channel which is only ever briefly pierced as the multi-year chart shows even during the flash crash. My discretionary spending analyses also suggest an imminent bottom with a sizable 8-10%+ rally to follow, and March 23rd +/- was my ideal cycle end date. The top of Terry's channel currently lies around 1355.

I also read Tony Caldaro's OEW work about once a week still, and he recently projected 1222 as a probable target area but has now marked 1249 as a likely bottom. So, there seems to be some technical confluence around 1249 being a bottom with a chance of one more low as far as 1220ish. The confluence further projects a May/June top likely at 1365ish but possibly grinding above 1400 with some nasty downside into late 2011 and 2012.

SPX 1249 has three major characteristics of a bottom and those are (1) a significant TRIN spike, (2) a VIX spike above and back below its uBB20 and (3) a reversal candle. On the bull side of the ledger, ABCs often end at RSI extremes, stoch fell back below 30 as I projected in a typical retest, MACD fell below 0 and BB%10 got oversold. The main thing that has bothered me is SPX falling short of the ideal March 23rd cycle end date, but 1249 last week is well within the typical bottom window AND the 1271 bottom occurred 6 trading days before the 1276 bottom in January much as 1249 occurred 6 trading days before the March 23rd projection. That double bottom could play out again as an echo effect but a lower low is not guaranteed even in that case. Another thing that bothers me is that weekly support at 1271 was broken last week which almost always leads to further weeks of downside but SPX was able to recapture 1271 at the close of last week which could weaken the argument a bit.

Today, I pointed out numerous potential reversal signals from 1301ish based on Dynamic RSI, System resistance at 1301, 61.8% Fib resistance at 1308 and 20/50dSMA resistance around 1304 plus a small NYAD change at a bullish extreme in a zigzag pattern. And, when that happens on the 2nd or 3rd trading day of a rally, it is typically rejected. So, I think SPX is at a short-term crossroads. If SPX can pull back convincingly below 1285, it will likely break 1249 to 1242 or possibly 1220ish where I blogged about a large Fib confluence. Bears need to kill any rallies above 1301 on Tues/Wed very quickly. Otherwise, the trend will likely swing.bullish and new highs would be almost certain in the weeks ahead.

Essentially, the next couple days should be critical to determining whether 1249 was a bottom or not. I was already leaning toward the ABC corrective count down from 1344 with the higher Fib confluence around 1220 coming into play, but, after reading the work of Tony and Terry and reviewing my own charts and spending analyses, I'm actually downgrading the possibility of impulsive action down to sub-1170 and upgrading the possibility that 1249 was a bottom. We'll soon find out. Good luck.

(Update Mon 3/21/11 4:00PM EST)
SPX positives: Strong gains, Broke 1294, TICK not overbought, VIX 20dSMA broken, TRIN slightly high
SPX negatives: small NYAD change and zigzag near bullish extremes, the initial test/piercing of the VIX 20dSMA is usually most dangerous making an SPX bounce probable, 20dSMA/50dSMA resistance, 1301 candle resistance, 1303-1313 OEW pivot resistance, 61.8% Fib resistance at 1308, Dynamic RSI has nearly equaled the level seen at 1332, ideal cycle end date of March 23rd still not quite reached although 1249 fell well within the early projection range

I wouldn't exactly call those data points overly bearish. However, VIX, NYAD and all the resistances just overhead certainly indicate that SPX is at an inflection point. There may be some bullish follow-thru tomorrow, but bears need to minimize the damage and/or quickly reverse any large gap up. Obviously my money is on downside. Bears need to get below 1285 (the 38% retracement level of 1344-->1249) with more than a piercing. If bears only get a small down day above 1285 with VIX backtesting its 20dSMA, TRIN spiking and NYAD/TICK moving bearish, they could be in trouble. Even if bulls achieve a breakthrough on Tuesday, there will highly likely be a backtest of 1275-1300. Good luck.

(Update Mon 3/21/11 11:20AM EST)
Strike 2 for bears. Bears couldn't maintain downside momentum once 1260 was breached, and they couldn't prevent the rally from exceeding 1294. SPX is not much more than 3% off its 1344 high.  Futures have been crazy lately and craziness often surrounds OPEX day. However, as I mentioned over the weekend, the System will not turn bullish until SPX exceeds 1301 candle resistance, the 20dSMA at 1304 (today) and the 61.8% retrace at 1308 (preferably held for 2 closes). At SPX 1300, I increased the basis of my shorts from 1278 to 1280, because the current price setup is often where downtrend rallies fail or at least pause.

In fact, Dynamic RSI (currently using hourly RSI 16 for 1344-->1249) is now at 62 versus 62 at the March 3rd 1332 high, and, if I project lower lows will occur for another 2-4 weeks, then hRSI(23-35) is at 57 versus 59 at the March 3rd 1332 high. In other words, RSI suggests that the SPX bounce from 1249 to 1301ish is approximately the same strength as the 1294 to 1332 bounce meaning they could be a wave 2-4, 2-2 or B-X combo. Of course, the overlap of 1294 and the probable 5-wave drop from 1344 to 1294 makes the wave 2-4 combo very unlikely. Counting 1344-->1249 as a 1-2-1 or an A-B-C are the most likely setups. If so, the SPX bounce to 1301ish will complete a 1-2-1-2 or an ABCX...if this dynamic RSI technical setup remains. Either count should lead to a new low, and both should start with 5 waves down. FIBBEWIE would project the more bearish count to end at 1130-1165 which is slightly lower than my projected bearish 1170-1200 projections AND my ideal projected cycle end date of March 23rd is very near AND my favored triangle count into 1326 allows for a 5-3-5 count from 1344-->1249, so I lean towards the double zigzag correction into late March or early April at 1214-1229 or 1170-1200. Obviously, if my bullish criteria are met and bears strike out, I will flip my favored counts to the bullish variety. Good luck.
_____________________________
S2 System Status for SPX
Current Position: Short from 1278 on 3/17/11. 1275-1276 and 1286-1287 were recommended shorting spots.
Daily Trend: Down from 1331 with resistance at 1301
Weekly Trend: Down from 1271 with resistance at 1344
Monthly Trend: Up with support at 1173
Daily indicators: Leaning bearish for the next few days. NYAD small change near a bullish extreme. No daily or weekly RSI divergences. Other indicators are fairly neutral.
Next Projected Cycle Low: March 23rd +/- 2 weeks
Previous Trade: Short from 1331, traded around and exited at 1252-1262.

Many of you have followed my System since the April 2010 top when I first started applying it openly on the OEW blog after refining it in the months prior to that. In my opening posts on this blog on July 5th 2010, I explained this would be a journey and my System would evolve. It certainly has. Late in 2010, I kept promising to update my System rules and charts during the holidays or in early 2011. I haven't done so for a couple reasons. A full-time job, several kids each in multiple activities some of which I coach, blogging, exercising, date nights (with my wife), chores and part-time trading leave me little time for other things. Still, I probably would have found a way to get it done like I did the original rules except for the fact that my System has been in such flux that I almost feel it's a waste of time documenting it too much.

I have traded pretty extensively since 2005, and I've made every amateur mistake under the sun many times at the cost of large sums of money and family strife. Some day I hope I can look back as a highly successful trader and laugh at all my mistakes and teach others, but it takes a lot mroe work than I initially anticipated. I have explored Elliott Waves, Wolfe Waves, economic history, stock market history, various types of cycles, various individual stocks, world markets and US sectors, options, ETFs, endless numbers of indicators, various charting software, spreadsheet analysis, various trading "gurus" and services and numerous custom systems. Some call that analysis paralysis. I openly admit nothing has really proven successful for me.

I've discovered the key problem is me. Most systems and indicators can be made to work (or at least keep you from losing a ton of money) if one uses proper money management which is much easier said than done. In retrospect, trading with leverage, especially anything beyond 2x or 3x ETFs, is a big mistake especially early in a trading career and especially when used as a primary position (in other words, not for hedging or small, distributed speculative bets). The allure is tempting but mathematically prone to massive failure. Another mistake is not sticking with a well-studied system with confidence. Like any business, a trader should study the market, come up with a plan based on those studies and stick with that plan confidently only making adjustments after giving it time to work and if a better plan/system can be formulated.

For the last 18 months, I've tried to rectify the lack of a confident system by creating a System that works for me. To be honest, despite those efforts, my old habits are dying hard, and I have often tried to outsmart the System to my detriment picking tops too often and not recognizing bottoms quickly enough. But, with those painful lessons,  I have gained more confidence in my own system and I have more than a year of real-world experience with it to refine it.

The largest change I've made is to include cycles. To be honest, I think cycles and waves are a manifestation of the fear-greed cycle, so there's no magical time frame or super-cycle theory. My 1.5-2 month cycle is by no means perfect, but I use it as a framework to understand the ebbs and flows of the market going back many years. When I combine cycles with my reversal indicators, I believe I can reasonably pick most significant bottoms within hours or days. Tops are a little more difficult, but, by adding my system's candle rules to the cycle and reversal indicators, I can also get reasonably close. That's the theory anyway. Another change I made was to remove my old 20dSMA Marker rules which are still good to consider but too complicated to be a primary tool. Finally, I tweaked my candle rules. In an uptrend, I look for the last positive (or flat) candle and then take the extreme low of that candle and the previous two candles to arrive at a support level. As with my old system, I can tweak that support level if it sits within a few tenths of a percent of a key moving average or key pivot. And, even if that support level is breached, it doesn't automatically cause a sell signal. Based on what part of the cycle SPX is in and based on reversal indicators, a support breach is often a perfect spot to buy. The opposite is true for downtrends, although the candle rules take a back seat to my cycle guidelines and reversal indicators in downtrends.

Based on these changes, my trading has noticeably improved in the last couple months and I've been much more balanced in my bull-bear perspective. One problem is that the new system is still not as objective as I'd like it. How much is a "small" NYAD change near an extreme? How much TRIN is needed to signal an SPX bottom? It is more an art than a science at this point, since I combine cycles, lots of indicators and candle/trend rules to make decisions. I'm toying with defining a TRIN spike as any jump beyond the last 1-2 weeks' extremes, but I really need to throw all this stuff in a spreadsheet or program to crunch the numbers and test custom scenarios to have much confidence in nailing down exact numbers or criteria. That ain't gonna happen anytime soon. Still, although my System doesn't always tell me to get in or out at X price, it does tell me the trend is now up/down and a bottom/top is likely in, so I'm not going to ride against a confirmed trend direction, and I'll continue to trade around positions to mitigate the emotional effects of intraday whipsaws. To sum it up, I believe the new S2 System is much improved, because it still excels at defining trends and it now excels at defining likely bottoms and tops with reversal indicators and hourly candles helping define entry/exit/profit-taking levels.

So, my Master Plan is to trade the S2 System and completely discard my old habits of trading against the trend. Today, the trend is down. Given that the 3-candle extreme at 1301 has not been surpassed (daily resistance), key moving averages have not been surpassed (20dSMA, 50dSMA), a 61.8% retrace of 1344 to 1308 has not been surpassed and the ideal cycle projection date of March 23rd has not yet been reached, 1249 was a possible bottom but not a likely bottom. Based on Fibs and pivots, the likeliest retracement levels were 1275-1276, 1286-1287-1294 and 1303-1313. The 1289 top on Friday could have ended the bounce from 1249 especially since we have a small NYAD change near a bullish extreme. From 1289, we could possibly see a 5th wave down from 1344 with w5=w1 at 1239. As I blogged last week, there is a VERY strong Fib confluence at 1214-1229. I don't see the next low getting below that. From there, based on typical history, SPX is likely to retrace 40-60% around the 20dSMA. That should coincide with the 1291 and 1303 OEW pivot areas. More than likely, the drop below 1249 will occur in the next week. And, more than likely, the subsequent rally will last 1-2 weeks And, more than likely the total downtrend from 1344 should last 8-10 weeks based on most long downtrends since 2007 meaning an ultimate bottom in mid-April. And, more than likely, the next bottom in April will reach the second VERY strong Fib confluence near key daily/weekly moving averages, pivots and the uptrend line from 667 in the 1170-1200 range. If that plan is to fail, we should see SPX exceed a 61.8% of 1344 after March 23rd. My primary bearish scenario is in red on the chart below with one bullish alternate in blue. I still think the odds are good based on S2EW and discretionary spending that SPX will test or break the 1344 top in May/June possibly reaching 1365ish or 1425-1450. Good luck.