Tues 8/30/2011. Won't get fooled again.

(Update Wed 8/31/2011 12:20PM EST)
Quick lunch update. The System is still neutral with support currently at 1212.51 where a new short would be entered after a 30% retrace. My personal swing short position virtually reached my max pain range at 1233/1236 (50% retrace of 1371). I'll wait for a decent pullback to decide if I'll be exiting. I might explain in more detail later, but DRSI has evolved to marginally support my preferred count despite the the EDT elimination, because the rally still did not make a new DRSI high today. We are right on the edge here of my primary and secondary counts, and I think either count should lead to 1180-1200ish imminently (i.e. even a wave B 30% retrace of 1121-->1234 would reach 1200), although another slight high above 1231 would work best in either count. The System does not pay attention to waves, so it just got out of dodge when certain levels were broken and will try its luck again later. I'll re-evaluate the patterns and bigger picture tonight, but I think the evidence still supports a dead-cat bounce. Interestingly, this same thing happened for a couple days into the first trading day of July and August to make me doubt the count. Window dressing? Month-end OPEX? Today's low at 1219 now seems critical to me from a structural standpoint. Although I think the risk is very small, if SPX can make a convincing new DRSI high with another 20pt surge higher before making a 20-40+pt pullback, we will likely be in a bullish wave 3 up. Good luck.
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The WHO gave us some wise words to use in the market right now. SPX is in a confirmed bear market by my custom rules and those of quite a few others including OEW. Rallies like we've seen the past few days are doomed to fail in bear markets. Don't lose perspective. The question is when. Unlike 2000-2003 and 2007-2009, we "won't get fooled again".

Today's action did not clarify my thinking. Mid-day, I was ready to demote my preferred count based on a break of the DRSI low seen at 1169, but then the EDT exception appeared to rear its ugly head. I can count an EDT 2 ways with the more proper version needing 1 more test of 1220-1225. All of the reasons I gave last night are now stretched but still valid. We have the typical negd seen in wave 5s and my preferred count allowed a run to 1220-1233. TICK was near 1000 again. VIX was up. NYADV was high with a fairly small change. In my old system, today's close above yesterday's high after a 20dSMA break would generally be considered bullish, but, it was inconsistent at the 20dSMA and at reversal points, so I ditched that system in favor of the new one which says SPX is most definitely not in a bullish configuration.

I bumped the System stop up to 1220 from 1214 to allow some volatility, and Mr. Market still got us. Damn. Although the last 6 trades have seen 3 winners and 3 losers which I don't like, the last 5 trades have actually profited about 0.5% in total despite being stopped out twice by pennies, and the one before that was the 15% winner during the crash. My 60min chart shows when the System enters and exits 100%. Some trades do a little better or worse than depicted due to partial proft-taking and reloading along the way, and one example of that was last week when the short entry was around 1169 and the exit was just below that, but the System actually made 1% as blogged near real-time. Regardless, over time, the entries and exits on the 60min chart give you an approximate idea of profits and losses. If one were using a 3x ETF, the 1-month gains would be around 50% right now. I am absolutely positively not trying to claim that is normal. The current volatility is not normal. The point is that the System was successfully backtested for volatile years like 2001 and 2008, and volatile periods will see more whipsaw and larger moves which will usually hurt winning percentage, increase win/loss size and help profit potential overall if you have the nerve and trust. Currently, System support is at 1203.84, and the System is still in short mode, so it will enter short once SPX falls below 1203.83 and retraces 30%. 2 or 3 whipsaws are not the norm but certainly not uncommon. That 1203.84 support level will rise if SPX rallies in the morning. Personally, I hung on to my swing short position (over 2% underwater) because my theme has not been broken yet and a 2-4% drawdown was a known possibility to attain an 8-12% gain. Successful trading requires trust and expertise in a proven system, not hope in an outcome, and I will continue to trust my indicators.

Let's talk about what might happen next. I updated my 4 public charts. The 5min chart suggests the possibility for an EDT that ended at 1220 or needs one more slight high. There is an OEW pivot at 1222 and there are Fibs at 1225-1230, so SPX is unlikely to break through my upper 1220-1233 range without a sizable pullback first. I will be analyzing that pullback to determine whether I need to exit my short position and promote my secondary count which projects a rally to 1260ish. I could lay out nearly the same 3 scenarios I did last night. My preferred bearish count would allow one more small jaunt above 1220, but then we need to see an impulsive overlap of 1191 followed by a corrective rally. If we assume SPX will top around 1222 +/- and if we assume SPX will drop to 1050-1100, that means SPX will drop 125-175pts. Using reverse-engineered FIBBEWIE, that means SPX should first drop 30-40pts probably to the 1187 OEW pivot area with a test of 1191.

There is a lot of news coming out in the next 2 days that could shake up the market, and then we have the Obama stimulus news next week. There is precedence that the the next down leg will only last 5-10 days which would currently take us to Sep 7-14. If you see SPX drop below 1191 and weakly rally, buckle your seat belts. If SPX behaves differently than I expect, I'll be looking for an appropriate exit for my short position. Good luck.

P.S. I just noticed that ISEE was only 56 today. Sub-60 has only happened 4 times in over 5 years. Those 4 cases led to rallies of 1,2,3 and 4 days and mostly occurred after a bottom (not right on the bottom), and all of them were followed by new lows below the previous bottom including the 2010 flash crash and the August 2011 crash. I suppose that would fit the scenario for 1 more EDT leg to 1220-1225ish followed by a sub-1102 low. That is a small sample size, but the dichotomy in the equity versus index put options was very large, so the smarter money adds weight to it.