People when they hear “Elliott Wave” they roll their eyes. I’ve seen it. It’s because they get caught up in the “I have no idea what it does, how it’s calculated, and that guy Robert Prechtor is always bearish.” Tom DeMark developed his own version of Elliott Wave which instead of a subjective way of calculating if a market is in a wave, it is mechanical using price action. (It automatically puts in the wave numbers) If you want to understand it better, I can send you more details
The most important thing you need to know about Elliott Wave is the personalities of what is happening within each wave. Or what are people thinking and doing in each wave. When I learned this it changed my perception of risk with trading forever. When you read the following it will change the way you think of Elliott Wave and trading too.
Let’s start with where the markets were going into Q4 at the peak. Wave 5: Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed. Yep I was laughed at for being bearish in late August and September.
Now this is where I believe we are now in the market: Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts. All I have heard, is “I can’t wait to short the bounce” Nobody believes the market can go higher. They said the same thing at the lows in April in 2009 and March 2016.
What’s next? Wave 2: Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and “the crowd” haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one. This is where all of the newbie short sellers jump in and get run over when…
Wave 3: Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to “get in on a pullback” will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three’s midpoint, “the crowd” will often join the new bullish trend. The CNBC crowd will get on board with this “cautiously”
Then almost unnoticeable: Wave 4: Wave four is typically clearly corrective. Prices pullback on a short term shallow pullback. Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend. Then we enter Wave 5 which we know is when everyone is fully long.
These can be reversed too for the downside too. Consider the move down in Q4 was a five wave move for the S&P and Nasdaq and in near the bottom Charles Schwab was running commercials on how to short stocks AT THE FRIGGEN LOWS! I hope this helps explain things.
I’m off the desk all day and will return emails later.
US EQUITY MARKETS
S&P bullish sentiment is at 36% and increasing
S&P 500 Index daily nearly at the first Trend Factor price target. Some consolidation is likely
S&P 500 Index 60 minute tactical time frame in wave 3 and nearly at the upside price objective. A pullback from here is buyable
Nasdaq 100 Index bullish sentiment is at 25%
Nasdaq 100 Index daily nearly at the first Trend Factor price objective
Nasdaq 100 Index 60 minute tactical time frame stretched
Dow 60 Minute in wave 3 of 5 up so a pullback is buyable
Dow 60 minute now in wave 3 so a pullback would be buyable
Hedge Fund Telemetry Trade Ideas Sheet. Equity ideas both long and short with one week to six weeks average holding period. Sizing at inception is either 2.5% or 5% of AUM with stops set between 5%-10%.
ADDED 2.5% SIZED SHORTS: CAT, AMZN. REDUCED LONGS TO 2.5% SIZE FROM 5%: GOOGL, NOV, EOG. JUST TAKING A LITTLE PROFIT ON SOME THINGS I BOUGHT LOWER AND ADDING A LITTLE MORE SHORT EXPOSURE TO BALANCE. NOW NET LONG 64% STILL WITH SOME CASH TO DEPLOY IF AND WHEN I SEE IDEAS
FOCUS OF THE DAY – High Yield Spreads narrowing a bullish sign
High Yield Spreads are coming in and within ever sector too. I showed Energy last week with the upside Countdown 13 and it’s across the board
Three Stocks I’m Focused on Today
AMZN adding 2.5% short here.
Still like GOOGL but reduced to 2.5% from 5% as I added some lower
CAT new short with Countdown 13
Euro Stoxx 50 bullish sentiment is at 17% still very low
Euro Stoxx 50 Index daily nearing the 50 day
German DAX Index daily nearing the 50 day
UK FTSE 100 Index bullish sentiment is at 40% and improving
UK FTSE 100 Index daily still looks good on the upside
Bloomberg Automated Technical Pattern Recognition Screens
ATPR identifies when major chart patterns are just starting to form, alerting investors to nascent shifts in sentiment. For more information on this strategy please email us and we will send a detailed explanation.
US Stocks – Seeing more long ideas lately
DEMARK SCREENS – Daily Upside/Downside Exhaustion Signals January
Daily/Weekly DeMark upside (sell signals) /downside (buy signals) exhaustion Countdown Sequential and Combo “13’s updated daily. Currently we are only screening the S&P 500 universe and daily in this beta stage.
The DeMark Indicators are designed to assist the user with buying into weakness and selling into strength to anticipate trend exhaustion. Selling into a rally and buying into a decline often afford the opportunity to exit a trade without too serious a loss if wrong. If you would like more detailed information on the DeMark Indicators, please email us.