October 27th Update

SPY

My short discussed on 10/19 didn't work out, and I was stopped out.  This rally has been very sharp and intense.  I had expected a better B-wave pullback.  That's fine, as that's what protective stops are for.
Below are daily and 4H views of the SPY.

We appear to be completing the fifth wave of minuette degree (c).  I heard a wise phrase from a trader once who said, "let the market commit to you before you commit to the market".   I will be waiting for a breach of the subminuette degree wave iv of (c), or around 119 on the SPY.


USO

Crude appears on the verge of completing a possible a-b-c retracement, or bear market rally.  I will err on the side of safety here and wait for an upside pop over the subminuette wave iii high which appears to be in progress, followed by a breach of the subminuette degree wave iv low.

It would be prudent to consider the possibility that my proposed (c) wave could possibly be a iii of (a), making this whole rally a very strong (a) wave.  I think the chances of that are remote, however.

October 19th Update

SPY

I'm now short the SPY.  BEARISH SPY 121/118 VERTICAL PUT.
My decision to go short is based on three things.

1. First the put/call ratio for equities is down to an important relative level (see PPO indicator on the left graph). 
2. Second, I can potentially count five completed waves of minuette degree.  
3. My wave momentum indicator is big time divergent with price.  Notice the high occurred around where I have the wave (iii) label on the price chart. 

If the next corrective move lower is part of minute wave ((b)), then we'll likely get a 50% or 61.8% retracement of ((a)).  I favor this scenario, since it sets things up for a continued rally into year end.

October 13th update

S&P

We are certainly at an interesting juncture.  If my minuette degree waves are correct, then we completed five waves up around noon on 10/12 for the entire rally going back to the 10/4 low. 

The question now is, what from here?  Elliott Wave theory says that five waves defines the one larger trend.  The problem is that it also terminates the one larger trend.  Below I show two possible Elliott Wave scenarios for this market.
The first scenario suggests that the 10/4 low was an intermediate degree wave termination, meaning that this rally is only an A-wave of an A-B-C rally.

The second scenario suggests that intermediate wave (1) actually terminated last month, around 9/22.  We saw another low on 10/4.  The A-B-C correction in this scenario, where the B-wave makes a new low is known as an expanded flat.  It's actually fairly common in fourth waves.

 

Below I show how the second scenario could look.  The fact that the proposed minute degree ((a)) and ((c)) wave are related by a fibonacci 161.8% lends extra weight to this count.  Normally, you could simply go to a lower time frame and count three or five waves to determine whether a wave is a B-wave or a fifth wave.  In this case, however, the fifth wave was a diagonal, which develops in corrective mode.  That makes determining the actual endpoint much more difficult.

One of my main problems with the above scenario, however, is that minute wave ((v)) (not shown) of minor wave 3 is truncated.  Truncated waves are very, very rare.  If this turns out to be correct, it will be the first truncated fifth I have encountered, and on the daily time frame no less.

In summary, we are due for a correction.  At a minimum, we are due to correct the five waves of minuette degree going back to 10/4.    Alternatively, the correction will be five waves down of minuette degree and begin the next leg down taking out the 10/4 lows.
To know which is the case, we will watch price action closely.  A B-wave unfolding will be three waves down or some variation, with the component A-wave and C-wave likely showing a fibonacci relationship.  The 50% and 61.8% retracement area of the prior five wave advance are also good spots to watch for momentum to stall on the hourly time frame. 

Oil

This post is already getting lengthy, but I have to talk about oil, because I got short today.

I had been pretty sure for the last couple of days that the advance was over, but I really wanted to get a breach of the prior fourth wave.  In this case, I was satisfied with a move below the fourth wave of subminuette degree, since minuette degree wave (v) formed an ending diagonal pattern, which is terminal.  A breach of the fourth wave of the diagonal, therefore meant the diagonal had ended, and the diagonal itself meant the one larger degree (or minute degree wave) had ended.
My trigger entry point was at 32.50 on the USO, bearish via a VERTICAL USO 32/29 PUT spread. 
We traded back up to the 61.8% retracement of the entire minuette degree decline, but turned back down into the close.  I will call no-joy on any move above this week's highs, or 33.50 on the USO.

October 11th Update

Looking for new lows in SPY and USO.

SPY

I revised my previous count, since I see a potential a-b-c formation completing on the hourly chart  (It's barely visible on the daily chart).  Minute wave ((c)) appears to be an ending diagonal formation.  Even if this labeling is correct, this could still easily turn into a corrective combination after a significant correction.  I still think the best course of action is to look for a short entry and re-evaluate near the bottom of the range.  My entry will be a downside breach of minuette wave (iv), or 118.60.

USO

Similarly, I think USO could be completing it's advance.  Unlike SPY, this move up looks impulsive.  There's a distinct difference in their wave patterns, however.  I think this impulse wave up since 10/4 could be a C-wave in an expanded flat (a flat where the B-Wave makes a new price low).  In other words, minute wave ((iii)) bottomed on 9/27 in this scenario, and the new 10/4 low was actually minuette wave (b) of an (a)-(b)-(c) correction.

The chart below is of crude futures.  I'm looking for a move below 32.50 on the USO, which I am proposing for micro wave ((4)) of subminutte 4 of minuette wave (c).

October 7th Update

S&P 500

An A-wave up followed by an A-wave down?  When I just started learning Elliott Wave theory, some of these concepts were very difficult to grasp.
Just look at the situation we have here.

We have a bear market rally, beginning with an impulse wave higher.   It is correcting the larger degree trend, so it will ultimate subdivide into three waves or a combination of three wave structures.   The fact that the first wave up is an impulse tells us it's a zigzag, or wave W will be a zigzag if it turns into a combination.   We only have the A-wave.  I've chosen to label it as minute wave ((a)), though the specific degree may have to be amended later (you do not always know the exact degree in real time, but to paraphrase what Prechter and Frost say in their book, it's usually not that important in making relative forecasts). In any case, assuming minute wave ((a)) up is accurate, we still need ((b)) down.  Wave ((a)) is five waves, but ((b)) will correct the one larger degree trend, which is the entire ((a))-((b))-((c)) rally, or minor wave 4 up.  Therefore ((b)) down will subdivide into three waves, (a)-(b)-(c).  So if you think about it, you will always have an A-wave followed by an A-wave.

It's currently 1:30pm central, and we have only one and a half hours remaining.  I think we will rally into the close as I predicted in my previous post.  There should be plenty of opportunity to "buy the dip" next week.  I wont be actually buying of course, but rather selling the right to be short.  After a full week of vertical rally, it will take a decent sell-off to force profit taking, and turn folks bearish again.  If ((b)) ends up being shallow, I will simply step aside.

And speaking of folks getting bearish again, I wondered how bullish this week's market action turned traders.

Basically, traders are by no means bullish yet.  They need a lot more convincing, which is where wave ((c)) up will come in.

October 6th Update

S&P 500

We still haven't gotten the pullback that I've been waiting for, but this is how bear market rallies work.  I do think we'll get some selling tomorrow, but it's not the buyable dip I'm looking for, and I fully expect a rally into the close to complete a bullish week.
Nothing has changed since my last post, in terms of my strategy and expectations.  I still think we are in a minute degree ((a)) wave up, as I cannot see this pattern as anything other than a singular impulse wave with strong extensions.  We still need ((b)) down and finally ((c)) up. 

October 5th update

I haven't posted in a few days, since there really haven't been good opportunities to discuss.  At some point I may widen my scope to other products, but for now I have my favorites, and I find being patient and waiting for good setups is the way to go.  Having said that, things are starting to look interesting again.



S&P 500

This 2 day rally is not over.  Why is that?  As bearish as the daily (top) chart looks, look at the 2H (lower) chart.   We have five waves up accompanied by a clear cross of the signal line over the base line.   We are in a bear market, so this is a bear market rally.  But even knowing that, what is not entirely clear to me is the degree of retracement that is ahead.  Going back to the top chart, if say the orthodox top of this decline occurred on 7/7, then this will be an intermediate wave (2) and likely be sharp, and retrace as much as 61.8% of that decline, targeting 125.03 on the SPY.  Alternatively, if the top actually occurred in early May, which was the technical high, then the five wave move down starting in July was only a third wave of minor degree.  In that case the retracement will likely be sideways, and a typical shallow 38.2% of the third wave, or only 118.42 on the SPY.

I've decided I would like to play this move higher, so I will try and sell a vertical put spread tomorrow.  That strategy will make money in either of the above scenarios.  Additionally, if we get anywhere near the 61.8% retracement, and definitely if we surpass it, I will know this is an intermediate degree wave (2).
The unlikely, but possible scenarios are:

1. That we are in a new bull market.  It's almost impossible to say that with a straight face, but just to entertain that for a moment, we would get a five wave move higher of minute degree, and eventually exceed the May highs.  The above strategy is still profitable. 
2. That my wave count at minuette degree is wrong all together and "the dip" I'm expecting tomorrow makes new weekly lows.  This is where I could get into trouble, and I will be placing my stop at the Tuesday low.

I'll be looking for a good entry tomorrow.  If the /ES retraces all the way to the base line on the 2H chart (lower) or around 1104, which I think very likely, I will look to put the trade on there.  Additionally, I will want the signal line to either remain above the base line, or cross back above it.  I tend to watch the futures, and play options on the ETFs, so something like selling an SPY 110/107 NOV11 PUT spread is what I'll be looking at.  I'll receive a credit for selling the spread, and higher prices, time decay, and lower volatility will all work in my favor.  The tricky part will be how long to stay in the trade and where to take profits.  If the next impulse wave higher ends up relating to the first wave at a ratio of 100% or less, then I will give the shallow retracement scenario the benefit of the doubt.

Oil

Oil has been stair stepping down in a very odd fashion going back to May.   The waves are all very close in time and amplitude, so I do not have high confidence in my wave counts at degrees below intermediate.  The trend picture is undoubtedly bearish on the daily chart.  Much like the stock market indices though, we are getting a short term rally, which is probably an opportunity to look for a short entry.   It may be worth trying to watch for a signal line cross back down over the base line on the 1H chart, for a short play.  The wind is already at our backs, as they say looking at the higher time frame.  I haven't really looked at it yet, but buying a vertical put spread slightly out of the money and a couple strikes wide is probably the way I'd want to go.

Silver

Looking at the lower 4H chart, my best guess is that it's in a triangle wave b of  maybe subminuette degree. If so, it'll continue sideways to down, and eventually break out to the upside.  That breakout will not make it very far, however.  It will most likely stop and reverse at an area near the 38.2% retracement of the prior down move or around 31.659 on the /SI.  This is another case of letting the rally happen and watching for the next break down.