Thu 8/18/2011. What wave is next?

(Update Fri 8/19/2011 2:55PM EST)
New low. Count #2 (1-2-1-2) is in the lead in which case we should see sub-1090 on Mon/Tues, but the other counts are not 100% eliminated. There are various reasons for a 10pt pop right now. The System will wait for a 30% retracement of 1155 (currently 1134ish) before shorting. I'll re-evaluate the count/pattern possibilities over the weekend. Good luck.

(Update Fri 8/19/2011 11:20AM EST)
More System profits were taken at the open resulting in just under a 50% short position. That remaining position was stopped out at 1150. Total profit was about 4.5%. The System will re-short on a 2-candle support break which is currently 1130.57.  Personally, I added some shorts at 1152 hoping to add more at 1157-1171. The System normally outperforms my moves but I've had a good feel for the market recently and I'm positioning for lower lows.

Given the whipsaw slightly below 1131 and then above 1150, I can only comfortably eliminate one count which is #1b. Dynamic RSI suggests today's 1155 high would be perfect for Count #2 (1-2-1-2) but it would allow price to go probably 5-10pts higher as long as RSI did not go too much higher. Key fib levels exist at 1157/1163/1171/1180. If SPX were to go above 1155 with a strong RSI move, Count #1a (1-2) and #3 (triangle) would take center stage. Right now, I'm not sure which way it will go. The bottom line is more upside to 1160-1180 is possible, while a test of 1100 is highly probable. My pure gut guess is either more upside or at least sideways action for most of the day, but there was enough rally today to make sub-1130 a bearish sign at this point. Good luck.

(Update Fri 8/19/2011 7:40AM EST)
Futures suggest a gap down just below the 1131 low. I don't like that setup to add to shorts. A gap to sub-1120 would be a short on a retracement. The reason I say that is if SPX made a wedge into 1131, that could be wave "a of b" of an expanded 3-3-5 flat with a "c of b" still needed. Also, supporting that, when NYADV makes a zigzag formation near extreme lows,  it usually leads to a flat day, a reversal up day or a straight up day. Even during the nastiness down since 1356, the zigzag formation happened 3 times. It marked the 1296 bottom, it led to a 4-pt loss during the crash phase and it reversed Fed day from 1102 to 1173. So, there is likely going to be a strong bounce today, and it would be better not to add to any short positions on a large gap down. We can evaluate the bounce for volume/RSI/pattern to see if that justifies adding. A new closing low at 10AM would lower the System stop to 1144.40. I should be able to make a couple updates today. Good luck. 

(Update Thu 8/18/2011 10:25PM EST)
Could the Fed be stirring up trouble as cover to start QE3 and "save" the markets next Friday August 26th at Jackson Hole? I wouldn't put it past them, and it would fit the timeline for a wave 5 low...7 trading days before September 7th. But, decide for yourself with articles like this...http://www.zerohedge.com/contributed/fed-bombed-market-i-ask-why


Not sure how that will play out with OPEX but futures currently suggest a slight downward bias and Europe hasn't even opened yet. Keep in mind when VIX is this high, wild swings will rule the day and shale you out if you don't have a plan. I'm thinking I should increase my stop flexibility beyond .25% when VIX is high like it is. That would have been another way to prevent the System getting stopped out briefly at 1208. Good luck.
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SPY volume basically stayed relatively high for the last hour which had ups and downs ending with a 20+mil down bar but near the late rally top so it could be a reversal candle if it weren't so doji-looking. I call that a messy tie between bulls and bears and with OPEX tomorrow, I suspect a fairly flat open and probably an oversold bounce.

After that last low around 3:45PM, what had looked like a possible 3-3-5 flat forming turned into a wedge/EDT, so here are the parameters for the 3 possible counts I laid out previously for the drop from 1208.
1) 12345
a. 1208-->1131=12345 so SPX should rally to 1160-1180 on Fri/Mon before falling below 1131
b. 1208-->1131=1234i so SPX should fall to 1100-1110 on Fri/Mon before surpassing 1150

2) 1-2-1-2
1208-->1134=1212
1208-->1131=121212 so SPX should fall to 1090 minimum and likely much lower before surpassing 1150

3) triangle wave 4
1102-->1208=a of 4 (triple zigzag)
1209-->1131=b of 4 (double zigzag?) so SPX should rally to 1165-1190 on Fri/Mon before falling below 1131

I suppose I would prefer those counts in the order presented. Count #3 looks highly unlikely because the rally to 1208 was very complex and the drop looked very impulsive. That's not ideal for a triangle. Count #2 doesn't look quite right, the second wave 2 did not even retrace 30% of 1194 and Dynamic RSI for the rally to 1150 hardly bounced which is atypical for a wave 2. Interestingly, Dynamic RSI on the last-minute rally to 1144 approached the RSI seen at the 1194 wave 2. If SPX rallies much above 1150, I suspect it will get broken which would support Count #1, a 5-wave impulse for 1208-->1131.

So, what's the trading plan based on that? Well, the dividing line between counts is 1131 and 1150.
1. If 1150 is surpassed before 1131 is broken, we are left with Count #1a or #3. Since #3 appears highly unlikely and #1a has a slightly more conservative target, I'd trade Count #1a reloading fully short personally as conditions warrant at 1160-1180. The System would stop out of its short position at 1150.44 and re-enter on a 2-candle support break (I take the highest hourly closing candle and then look at the extreme lowest price of its previous candle to establish the 2-candle support) unless SPX solidly breaks above a key MA (the only one possible right now is the 89hEMA at 1186 and falling) or above 1208 (that would be a bullish 3-day candle break) before it falls below 2-candle support. I will not add .25% flexibility in this case, because we're plenty of hours and points into the trend, and breaking 1150 likely confirms the 12345 or triangle count versus the 1-2-1-2 count, and that means 1160-1180 is likely.

2. If 1131 is broken before 1150 is surpassed, the System and I will reload 100% short there and Count #1b and #2 will be in play. They both should drop to 1110 or lower, so we'll have to judge the strength (RSI) and length (>60pts like 1194-->1134) of the waves to determine the active count. The conclusion of Count #1b would lead to a rally near or above 1150 while #2 would not go that high.

So, that's my trading plan for Fri/Mon...short any rally from 1160-1180 to sub-1100...short any drop below 1131 for a ride to 1080-1110. Hope that is clear in advance. Stops will be 4-candle breaks of resistance unless otherwise noted until we approach the September 7th +/- cycle low projection. It appears that futures are already up 6 or 7 pts after hours, but that can change and the pattern is not clear until 1131 support or 1150 resistance is broken in cash hours.

I actually think the most bearish scenario is Count #1a, and that is likely if 1150 is surpassed on Fri/Mon, so bears may get another good entry point. The reason I say that is because it will happen quicker and scarier over the next week or so, and it leaves open a good probability for a huge 10-15% wide September triangle followed by an early October lower low. I'm not ready to jump 100% on the Count #1a horse, but, for kicks, here's a potential Count#1a projection for the next week with bold numbers being future projections.
1371-->1258=1
1258-->1356=2
1356-->1296=i of 3=60pts
1296-->1347=ii of 3=50pts
1347-->1102=iii of 3=w1*4
1102-->1208=iv of 3=w2*2
1208-->1131=[i] of v of 3=77pts
1131-->1170=[ii] of v of 3 < ii of 3
1170-->1055=[iii] of v of 3=115pts=[i] * 1.5
1055-->1090=[iv] of v of 3=[ii]
1090-->1013=[v] of v of 3=[i]...ends 3 and makes v of 3 = 3* i of 3 and makes w3=w1*3
1013-->1144=4=.382*w3=13% rally predicted by discretionary spending=top of price-volume congestion at 1130-1150=likely triangle with huge swings for 3-4 weeks
1144-->1011=5=w1 for a double bottom OR
1144-->918=5=w1*2=near the next 930-950 target zone

I'm sure I'll have to change those projections many times but it gives food for thought. If 1150 is surpassed and we end up in a triangle for another week instead, then I believe 1070-1100 is the likelier wave 5 target with a September rally back to 1180-1220 again. Good luck.