Friday, September 14, 2012


What a finale to the saga! Ben will print $40 billion a month till the time he meets the objective of reducing unemployment or inflation goes out of control. Markets loved it. We went up 40 points into two days.

Any super bearish model of the markets is shot to dust. This market will be injected with $2 billion dollars every trading day that will be leveraged to the hilt and put to work in the stock market. Does not guarantee that we will never have dips (these banksters make money both on the way up and down). Algos will run wild. Only those who have access to infinite amount of money will control the tape and terms like fundamentals and investment will soon be lost. Follow the tape or you will go by the way of the dodo.

So far, I only had bearish models for the next year or so. Yesterday changed everything. Ending Diagonals turn into 1,2,1,2 moves with powerful 3 wave to the upside to follow.

We will get dips and every dip will be bought. As a matter of fact, many people I admire and follow predict a dip as early as next week. I concur. And I hope! As you know, I closed my long term positions in my 401K at around SPX 1380. I will be thankful, if I can get in at 1430. I explain later why.

Here is some research on what happened previously, from a technical perspective alone, when the market jumped this much. The week closed with the weekly SPX candle jumping and closing outside the Bollinger Band (14,2).

As recently as April of this year, we had a similar situation, NYMO closed outside its BB upper band for two days (April 26th and 27th) and SPX pierced the BB upper band too. Monday, April 30th,  brought a red candle but Tuesday, SPX set a higher high. This setup a nice little divergence with NYMO that started a very big correction.

Though the chart reflects the same pattern today, I don't think today's environment matches that of April. We are talking about $2 billion a day here injected into the market. Bring it on sellers!
As a matter of fact, every dip will be bought. I myself wait patiently for a decent dip to get back into the game. The low of this week's bar is about 1429 and is a good target for the coming week. I explain why.

But how much of a dip?
I did some 'research' yesterday. Just eyeballing the numbers. I looked for patterns on the weekly SPX chart where the weekly candle closed outside the upper Bollinger Band. Then I drew vertical lines at those candles. The green colored lines were where the following week continued to set a higher high and closed in green with close higher than previous week. These candles were found in early wave 3s. I found another set of candles which I marked with yellow vertical line where the next week brought a red candle and possibly a lower low but in the ballpark of the marked candle. These represent shallow retraces, say wave 4s, in a bullish wave 3 and are usually followed by further gains for multiple weeks after that. The third set has been marked with red vertical lines. These candles were immediately followed by sell-offs. They represented the end of the 5th wave. I see two samples that led to major retraces (100s of points on SPX). Here is the chart -

I am tending to believe we will see a wave 4 type of shallow dip. The next week's candle may be red. It may visit 1429 which was the low of this week's candle. It may even continue playing in this range of 1430 and 1475 for few more weeks frustrating all but the most nimble of traders before making a break for 1517 and above.

Why 1517 or so?

In my research on Wolfe waves, I found that relationships between waves in the same direction is more often 127.2 or 161.8 fib. I have a chart below that shows these numbers for 3 large waves to the upside. I don't think setting an all time high before the elections will be allowed :-) but 1517 looks plausible given that is 127.2 fib of the most recent wave to the upside.

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