Thu 8/16/12. Daily Updates.

This post is dedicated to TriGone's questions/comments from my previous post.

Based on SOS and overbought turn signals and the OPEX magnet theory (strong attraction or rejection), I expected a downturn in the last week or so. But, the market went sideways to work those conditions off and has traded primarily 2-3% away from max OPEX pain the last 2 months which puts a big dent in the theory.

The System remained neutral until today which allowed for an exploratory short trade which failed. It had been bullish from 1345 to 1407. Since the System was merely neutral, if I would have stuck with a half-position as recommended and possibly tightened my stop especially as overbought "turn" conditions were worked off, we'd be looking at a 0.3-0.5% loss instead of 1%. Also, not to make excuses, but I used a slightly looser interpretation of my 4-hour candle support which triggered at 1400 rather than 1393 which would have not triggered. To briefly explain, the 1393-->1407 rally produced new 4-hour candle support at 1393. SPX traded within that range for days but ultimately produced an internal sequence of 4 candles higher with support at 1400. Perhaps I let my personal bias leak in, but I justified using that internal support based on the tight stop and large number of candles. But, external support at 1393 as I've used in all my previous System iterations held, so I won't make that mistake again. In any case, losses are part of trading and certainly one loss doesn't hurt my confidence in the System especially since it's previous 3 triggers were successful albeit unofficial in one case and canceled in 2 others due to large gaps not to mention a lot of backtesting. I'm not deterred.

I still think risk is much greater than reward at these levels. I don't think I've got an explanation better than anybody else for the low-volume churn, but SPX will generally not fall sharply until the USD rises sharply in recent years.

In terms of explaining the general success of Tony Caldaro over other Ellioticians, I believe it has to do with 2 things: a slight bullish bias and use of quantified alternate indicators. He openly discusses cycles, RSI levels and cross-market divergences but uses a mixture of proprietary indicators unrevealed for most. I've followed Tony since about 2005. He's been primarily bullish except for part of the last bear market. I can't speak to pre-2005, but he was many months late to the Aug/Oct 2007 tops and was generally even expecting things to hold together before the fall 2008 collapse and not expecting the last multi-month downleg to lower lows. He rarely predicts exact dates as tops/bottoms in advance or hindsight but instead speaks in terms of primary/secondary counts and odds/setups as you'd expect a good Elliotician to do. Those are the facts as I remember them. Having said that, he does adapt without being excessively stubborn and his bullish bias is one that would have been generally more successful than the alternative, and he deserves credit for being bullish for large periods that the majority were bearish in 2007, 2009 and other periods. Since the US market is bullish over time and bull periods last much longer than bear periods, I think a bullish bias is justified using objective technical and fundamental data as Tony does. Most of the time that the economy hiccups, it recovers quickly and most recessions (until recent years) have been shallow, so it makes sense to expect turns about the time the data and indicators approach previous bad levels. I'd call it an objectively-based slight-bullish bias and one that separates him from the rest. Unfortunately, as much as I respect Tony and his work, I could never quite make it work with my style of trading, and I don't think his public information provides the basis for a trading system except possibly longer-term trading since there are too many count adjustments and pivots albeit better than most. I've tried to take my learnings to create an actual short-term trading system, and my trades are a matter of public record which is not as gray as EW analysis, however successful that may be.

That's my 2 cents. The System is slightly bullish now but was stopped out of a short trade at 1415 and currently has no active trade. It's likely going to take a trip below the 20dSMA (rising to 1390) or a couple more days of churning higher to get the System bearish or neutral again. I still anticipate the bad underlying economic data to show up in a stock market near you soon, but hopefully the System will catch the next large trends either way. Good luck.