November 3rd, 2008 11:47 pm Market Forecasts, Trade 40 Comments
 Booooriiiiiing!!!
Boy, today’s tape was mind-numbing - almost as bad as Friday’s mental torture. I’ve said it before and I’ll saying it again - I can’t wait for this election to finally be over and done with. In my mind it really doesn’t matter who actually will become president tomorrow as it should have very little impact on our economic outlook looking forward. Again, this only relates to the markets - in respect to the future of this country this might actually be the most important and historic election you will ever participate in (assuming you’re a yank and weren’t too lethargic to get your fat ass registered). Whether you care about politics or not, the market is taking a wait & see attitude and I expect the coming days to be more interesting. I’m running a bit late here, so let’s dispense with the formalities and get right to the charts.
I know it’s messy, let me walk you through it. I see two main probabilities here, both of them incur a drop probably starting tomorrow or Wednesday (indicated by the red line). Both scenarios also rank about the same in terms of probabilities as indicated by the percentage bubbles.
It seems that the market is going to embark on a large move towards the middle of this week, and it’ll be either to the upside or downside. I guess most of you suspect this much, and the only question remaining is where the fork in the road is going to be. Based on the momentum I’m seeing in the market right now (more about that later), we are overbought at the moment and thus I do expect a pullback and that soon. Where the pullback occurs, in my mind will also give us some indication as to which scenario is most likely going to play out.
- The Rally: Based on the fibs, which are also fairly closely backed up by 2sweetie’s retracement levels, we should reverse to the upside around 912 or 886 on the SPX. After pushing through 969 again (which is strong resistance) we would probably bounce off of 1025, retest 969 and then proceed up towards 1075. Berk talked about this early this morning as well, and I will post another chart.
- The Drop: A.k.a. the triangle we discussed last week. I think the earliest we would reverse towards the upside would be 886 to complete wave {d}, but I would get more confident if we push towards 860 or a bit below. After that {e} would top around 855 (completing 4 of (3)), after which we would embark on 5 of (3) most likely ending around 754 (another retracement level).
Obviously, entertaining the rally scenario indicates that I suspect that wave 5 of (3) has ended on October 28th, in would then appear to be ending diagonal. I have considered that idea briefly last week but didn’t take it too seriously. However, the momentum last week has been very bullish and we don’t want to limit ourselves to the bearish side when the market presents us with evidence that we are tracing out more than a short consolidation rally.
If we forget about Elliott Wave Theory for a second, here’s another way to look at the recent market activity. This was sent to us by one of our members (I forget who it was, please make yourself known so I can give you credit), and the idea here is that we might be tracing out a Head & Shoulder pattern. Strangely enough this would almost be identical to the rally scenario and wave pattern I presented previously. Food for thought - and this chart is actually why I am assigning both wave counts the same probability.
Exhibit A: The TED spread - it’s narrowing and is pointing down. We can debate about the fact that it the only reason this is happening is due to central bank guarantees, but that doesn’t change the fact.
Exhibit B: Spread between Moody’s 3 month Corporate BAA yiels and the 30-year T-Bond yield - has also narrowed to 5.18% (sorry, I don’t have a chart for that since I have to do it manually). I know, that is not a huge decrease, but it’s starting to move up. Frankly, what has triggered the narrowing is that the TYX has gone gangbusters last week - it’s at 4.369% today. The TNX also has been melting up and bonds find themselves at a support line right now. If they breach that line in the coming days this yield spread should narrow even further and I expect that a rally in equities will play out. If the line holds and assets are flowing back into T-Bonds then I expect this spread to widen again quickly, since the Moody’s yields have actually been on the rise. A widening spread would give credence to the triangle/drop scenario above. Hope all this makes sense to you lower leeches.
Exhibits C, D, E: Most of my stochastic and MACD indicators on various charts are screaming overbought right now. All the indexes are way overbought on short and medium term basis. Another indicator many of the pros use is the NYSE McClellan Oscillator shown above. If you ignore for the moment the long spike down it becomes clear that 60-70 indicates an overbought condition while -60 to -70 means that the NYSE is due for a bounce (like about two weeks ago). Well, right now it’s ringing ‘overbought’, giving additional credence to my trusted stochastics.
But again, all these are medium to short term indicators, and although they suggest that a drop is coming, they do not discredit the rally scenario mentioned above. I just want to be clear on that - at the time we reach some of those ‘fork areas’ I drew out in my first chart many of those momentum indicators should be either in neutral or perhaps even oversold territory.
So, in conclusion, the next 2 days should be very interesting and probably a bit volatile, but in my mind not present much of a surprise. We proceed down and then the market will show us which way it wants to swing. We will keep you updated as things unfold and apprise you of any changes in how we assign the probabilities.
I have nothing to add to my last posting about Gold - it’s proceeding downwards and nothing has changed. I loaded up on some GLD puts and am prepared to give them a lot of leeway. Should we encounter a surprise rally that pushes up above some key levels I will let you know the minute I cut those positions.
I closing - I would suggest you keep your trading activity very light in the coming days. I myself picked up a few puts today in anticipation of a drop (go back to today’s intra-day posting for the symbols), but I will be very quick to take profits.
Whatever you do - go out and VOTE tomorrow, no matter who your favorite is. Always remember that many of your forefathers (as well as mine) gave their very life just so you can get your lazy butt off the couch, march to your local voting booth and exercise your your right to vote. Never ever take this right, as guaranteed by our wonderful constitution, for granted.
We the people - tomorrow we can make a difference!
Cheers! | 
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