January 2012 Month End

I thought this would be a good time to look at some weekly charts.

SPY

What a phenomenal rally we have had in the equity markets.  Let's look at where things could be from an Elliott Wave perspective.

The move down from the May 2011 highs can be counted in five waves as an impulse wave.  This is very important because it confirms that the larger trend is now down.
Having said that, we have retraced almost 80% of that move, and in fact are currently at the precise 78.6% fibonacci retracement.  This sure is a good place for a short term top.   I say short term, because we do not have a complete Elliott Wave structure, despite the levels we are at on the upside.

My current theory is that we are forming a large triangle correction, which will subdivide into A-B-C-D-E waves.   Fibonacci won't help very much in picking an ultimate target, given that we are already at the 78.6% retracement level and 100% or more will invalidate the impulse wave entirely.
My next best guess is that we ultimately tag the prior wave 2 high at 135.7 when the corrective formation completes.  I've marked that level with a pink horizontal line.

Summary: 
Long term I'm bearish since we had five waves down.  I will only change my long term stance if we take out the May 2011 highs.   We seem to be forming a corrective triangle that only has three out of five legs so far.  Shorter term I'm expecting a decent correction.  I have a target of 125.38 on the downside for wave D, which is 61.8% of wave B.  Wave D should trade around the lower boundary of the triangle, but it can exceed it a bit.  My ultimate long term upside target before the stock market heads down for new lows is 135.70, which marks the July 2011 highs.

Crude

I know I said we were looking at weekly charts above, but weekly in crude is a bit noisy and doesn't really provide a good longer term picture.   Therefore I want to look at a monthly chart of the futures.

Summary: 
After the destruction in 2007, we are retracing our way back to the Fibonacci 78.6% level.  We have a three wave (A)-(B)-(C) corrective move higher already in place, but based on what we have seen since the May 2011 highs, I think we could be seeing a ((W))-((X))-((Y)) corrective combination that may take us to the 78.6% level at 123.29 in the futures before the bear market in Oil resumes.


Silver

Here I want to look at weekly and daily charts of silver futures side-by-side.

I've had my own opinions, but charts never lie.   The weekly chart is showing in red a distinct A-B-C correction from the bubble high of 49.82.  The C-wave more visibly subdivides into five waves satisfying alternation, and relates to the A-wave in a nearly perfect 1-to-1 ratio.  We have rallied very sharply off the lows on 12/26 of 26.145.

I made good money on the short side at the end of 2011.  I've remained bearish, though, and have been getting my lunch handed to me.  Looking at the daily chart on the right, the rally can be interpreted as either an A-B-C with a visibly subdivided C-wave.   Also, it can be wave 3 of a five wave impulse wave.   Momentum on the daily chart seems to lend credence to a third wave.  In this case, it's too risky to continue to take bearish bets.  I've been short for a couple weeks, and will look to bail out after the next short term correction.

Intra-Day Silver update

Silver made a minor new high this morning.

Assuming that my ending diagonal wave count shown above is correct (ok a big assumption considering my recent performance with silver) going back to the 1/13 low of 29.42, we just completed the fifth wave this morning, and should see a sharp downside reversal that retraces the entire diagonal in 1/3 to 1/2 the time it took to form.  Notice how perfectly we tagged the upper line connecting iii.  In my experience, one of the guidelines of alternation relating to diagonals makes likely that at least one of the five waves will be complex.  Normally it's the third, but in this case it was the fifth (or subminuette degree v).  Notice also the lower relative momentum compared to wave iii.  This bolsters the fifth wave count.

That means that we should see 28.62 on the SLV by 2/2 or 2/3 at the latest.  I decided to sell SLV 32/34 VERTICAL CALL SPREAD here.  Collecting $0.95 in premium  will help minimize the damage I sustained with my short trade.  Of course, the flip side is I just made things worse if silver continues to grind higher without any sustained correction.


Both of my trades in silver are defined risk if the worst case scenario plays out.  It will definitely sting, though.

Anyway, always honest, let's see how it goes over the course of today and Monday.

9:20am MST update
I adjusted my downside price target.  I was looking at the futures instead of SLV when I first wrote this update.

GDX

I believe the long term trend in GDX is down.  Nevertheless, I'm definitely glad I got out of my short position, because this has been a violent bear market rally the last couple of days.

After the completion of an a-b-c pattern on the upside (at this point, we might have a subminuette degree a up completed, but it's too soon to be sure), I'll look for signs of a reversal and consider getting short again.

Silver

Silver futures have done the unthinkable, and have taken out the 12/2 highs of 33.74.

We also appear to have completed the middle section of a third wave on the upside.  Due to the extreme bullish wave patterns and momentum in evidence since the 12/29 bottom, I have no choice but to factor in an intermediate term bullish scenario for silver.   What I'm looking for here is a correction to the prior fourth wave of one lesser degree near 31.52 on 1/25.  When price gets there, momentum should provide some clues as to whether we will head back up to new highs.

S&P 500

It's possible we put in an intermediate term top at today's high.

Confirmation will come when price trades below 1301.5 in the futures (the prior fourth wave of lesser degree).
I haven't decided whether I want to attempt a trade here.  The problem is the higher degree wave count is very uncertain.  My working theory is that we just completed the C wave of an A-B-C-D-E triangle.  That picture will take time to clarify, however.  If it's true, it means the next several months will be sideways to up on the weekly charts.


Crude

Crude oil futures are looking quite bullish here since 1/22 with a (i)-(ii), i-ii setup.  A thrust to new highs on higher momentum into subminuette degree iii will confirm the bullish outlook.

I'm long via the bullish USO 38/40 VERTICAL CALL SPREAD.

Intra-Day out of GDX, looking to get out of silver

GDX  

I closed out my GDX short this morning, with a profit.

I have two problems with a continued position in GDX from the short side.  First, I can't count five waves down.  I see a potential three wave a-b-c down, however.  Secondly, momentum is not particularly bearish, given the move down that we've had.

Still, this turned out to be a profitable trade.

Silver

Silver has been killing me.  I've been dead wrong on this trade, as it has taken out upside resistance after upside resistance.  I'm waiting for a decent pullback to get out of the trade with as small a loss as possible.

I'm thinking it trades to the top of this diagonal formation one more time, hopefully on divergent momentum.  Then we should get some selling.  If we manage to trade above that red line I have marked at the top of the chart, that will be really bullish for silver.  I have 23 days until expiration, so we'll see if we can make any downside progress next week.

Intra-Day long USO

Bullish VERTICAL USO 100 MAR 12 39/42 CALL @.88 LMT
See my prior post for why I got long here. 


Also note that it's on the bottom of a rising linear regression channel intra-day.

 Stop loss is on a trade below 37.64.

Intra-day crude setting up

I thought I had missed the chance to get long crude at minute degree wave ((ii)).  Luckily it looks like a complex expanded flat is forming.  I'm expecting a pullback to the 61.8% retracement of ((i)) at 99.11 in /CL.

We still need subminuette degree waves b and c of (y) of ((ii)).

I'll be looking at the USO  Bullish 39/42 VERTICAL CALL spread.

January 19th Update

Silver

Well, I suppose it's time to eat some crow.  Silver blew through the resistance level that invalidated my working count before reversing lower today.

Having said that, the point isn't to always be right (though that certainly helps), but rather how to react when you realize you are wrong.

Here is a 2H chart with re-factored short term wave counts.  I zoomed down a little bit further in order to figure out where I might have missed something.  I generally don't like to have to keep track of too many time frames, as it starts to become information overload where you're not sure what to pay attention to. 

The key is the move down from the 1/10 high, which I have labeled as minuette degree wave (iii).  We see three waves down, followed by three waves making a new high, followed by a five wave diagonal down to 25.421 on 1/13.  My new preferred count has this all as part of minuette degree wave (iv).  In other words, the five wave move down which I had previously shown as a first wave is actually a C-wave destined to be fully retraced by the next impulse wave.
Where I got thrown off track in my prior analysis comes from the moves following the diagonal in (iv), which occur in three-waves.  We have a three wave a-b-c up, followed by a three wave a-b-c down.  When we received yet another three wave a-b-c taking price to a new high, I realized where I went wrong.  What we have is an ending diagonal pattern of subminuette degree in progress.
So now naturally I'm asking myself if I should bail on my short position.  The first thing I needed to determine is how much longer it would take this formation to complete.  Based on the time it took subminuette waves i, ii, and iii to complete, I'm estimating either end of day tomorrow or at the very latest Monday for wave iv.  I figure the very longest it would take for the final wave v would be by Friday of next week. The next factor is how much higher will price go.  We know that iii topped out at 30.9 pre-market today, and v will exceed that.  We also have a ceiling at 31.5, which is where minor wave 1 down ended on the higher time frame (see the daily chart below).  Wave 4, which is what this likely is, cannot overlap wave 1.  If it does, well then this is not a wave 4.  I very strongly believe it is, however.
So we're looking potentially at 1/27 and a level between 31 and 31.4.  When I plug those variables into my risk profile graph, it basically tells me that I'll need SLV to trade down to the 28 area by 2/10 to break even, and to 27 or lower to get interesting.
While I could close out this trade at the bottom of subminuette degree iv tomorrow or Monday, and simply wait for wave v to near completion and re-establish a new position, I think I'll just leave it alone. 
Worst case, I'll take a small loss.  Possibly I'll break even, but I could even end up making money.  The best part is, I can still put a March position on at the top of wave v with a higher strike.   I think between the two, I'll come out ahead.
Here is the daily chart for your reference.

GDX

Unlike silver, GDX has been relentlessly selling off since the 1/12 high completing minor wave iv.

There is nothing to do here other than let the trade work.  You can see we're almost right on top of the lower boundary of the linear regression channel.  I don't think it will provide any support, however.

January 18th Update

Crude

Boy, oh Boy...

For whatever reason, these movements have made it really tough for me to recognize the patterns lately.   Every time I think I have my finger on the pulse, my count gets whacked.
In any case, I think I may finally have a working count here on both intra-day and daily time frames.

Let's start with the intra-day chart.

Working from the left hand side, 12/27 is where the prior bullish impulse wave up ended, that I'm labeling minor degree wave 1.  We have three waves down, followed by three waves up making a new high, followed by another three waves down.  I have decided these are all part of the same correction, and form a minute degree ((w))-((x))-((y)) correction for minor wave 2 down, which ends just shy of the 50% retracement of minor wave 1 (follow the dashed green line). 

My prior post on crude, where I was calling for a continued move lower was invalidated by a five wave impulse move higher from Friday morning through Tuesday at 8pm.  In other words, the next leg up is now officially underway.

Now to put these moves in perspective, next is the daily chart.

As you can see, intermediate wave (4) ended on 12/17.  We then have a minor wave 1 up, followed by a very complex minor wave 2 ending on 1/13 which I discussed in detail above.  On the right edge, we have minute wave ((i)) of minor wave 3 up. 

Summary:  Based on all this analysis, I'm now finally getting short term interested in crude, from the long side.  As the intra-day chart shows, I probably already missed the chance to get long at minute wave ((ii)) of minor wave 3 which seems to have reversed just shy of the 50% retracement of ((i)).   The next opportunity is as close as possible to the termination of minor wave 1 at 101.43.  The reason, of course, is that minute wave ((iii)) will likely be the longest wave, and ((iv)) cannot enter the territory of ((i)).
As always, I'll play this via options on the USO.

Silver

Nothing has changed with my intra-day view, so please see my prior post.  I will show a daily picture, however.

You can see where I'm calling minor wave 4 complete, just above the prior fourth wave of one lesser degree.  It's also notable, that this is just shy of the 61.8% retracement of the third wave, which is very unusual.  Most fourth waves retrace 38.6% and sometimes 50%, but rarely reach the 61.8% area.  These things together all make a very compelling argument that the next leg down will begin in earnest soon.

Equites (/ES)

The market continues to grind higher.  My best guess is that we'll reach some kind of short term top after this minuette degree wave (c) completes.  I say "guess" because I consider my confidence level to be pretty weak on the labeling of this chart in general.

Unlike minuette wave (a) which was basically just a singular line, alternation suggests that minuette wave (c) will likely show very definable five wave subdivisions.  This is already evident.

In any case, after some kind of correction, I expect another rally intermediate term.  I really don't think this is over yet, despite my bearish long term views.  In Elliott terms, I think this is a complex C-wave in a large scale triangle correction, which means we still need D and E.  I think this could drag out for months.  I suppose this is good in the sense that we can put off some bad economic times for a while longer.

Intra-day Silver

One might think that silver has been looking pretty bullish recently as it continues to revisit the upper boundary of a rising linear regression channel, or at the very least that it hasn't been looking very bearish.

But not so fast, let's see what the intra-day Elliott Wave patterns are telling us.

From the recent high at 30.675, price moved down in five waves.  There are two things to note about the five wave move, however.  There is wave overlap, and the price action is contained within converging lines.  Additionally, price made a three-wave corrective rally following the 29.387 low made on Friday morning, of which the A-Wave was another triangle.  Price has not been able to break that 30.675 level, at least yet.  Subsequent to yesterday's rally high, which we are now revisiting, we had another correction.   I can find no way to count any of the move higher off the Friday low as an impulse, so my conclusion is that 30.675 should remain in tact, despite being tested today.
If that turns out to be incorrect, then the larger count on the daily chart will have to be re-evaluated.  Keeping in mind that this was part of a fourth wave rally on the daily time frame, and that we are well within the target area for the retracement, I'm still pretty comfortable with my short position.  The effect of all this net sideways movement will actually work out very well in my favor since my instrument of choice was a long vertical put spread.  The short out of the money option will decay faster than the long option, particularly when the long option is in the money.
We have 30 days until February expiration, so I really only need the selling to happen within the next couple weeks.  I think that's plenty of time.

Updated bigger picture outlook for Natural Gas

See my Bigger Picture page for my updated view on natural gas.

Updated bigger picture outlook for crude

See my Bigger Picture page for my updated view on crude.

January 12th Update

Crude

I have to start with crude, since that was by far the most interesting development today.  Crude made a sudden large downside reversal today, ending the day down 1.89%.  I'll be honest and admit that this move caught me completely by surprise.  As it is, I have no position in crude, but I've been following it closely trying to get a working wave count on both intra-day and daily time frames.

Whenever you get a powerful move like this in either direction, odds are you are in an impulse wave.  So I have thrown all my old counts out the window and started over with the daily time frame.

First, lets assume for the moment that the rally higher from 12/16 to 12/27 was a five wave impulse wave.  It defines the larger trend as still up (unless it was a truncated fifth, but those are rare so let's put that aside for the moment), but it fails to make a new high over the prior third wave at 103.48.  Therefore I'll label it as minor wave 1 of (5).  After a small correction price rallied up to new highs in three waves.  Today's sell-off pretty much invalidates any possibility of a diagonal fifth, so my assumption is that minor wave 2 of (5) is still unfolding, and will be an expanded flat formation.  In other words, an a-b-c correction where the b-wave makes a new price extreme, in this case, higher (see my education page for details on flats).  I've labeled minute wave ((b)) completing on 1/4 at 103.74.  So we potentially have an ((a)) and a ((b)), and still need ((c)), which will be a five wave impulse.  
Assuming this count is correct, we can predict where minute wave ((c)) is likely to end.  Second waves commonly retrace most of the prior move, and fibonacci retracements of 61.8% and 78.6% are very common.  I have both of those on the chart.  Also, waves A and C typically are related by a fibonacci  level.  In an expanded flat, such as this, the C-wave will typically be longer than the A-wave since the C-wave normally effects a deeper net retracement.  Therefore, I've put 1.618% and 2.618% relationships on the chart, as ((c)) would relate to ((a)).  
As you can see, the 2.618% ((c)) extension and the 78.6% retracement of minor wave 1 form a nearly perfect cluster.  Therefore, minute wave ((c)) and therefore minor wave 2 will likely end around 94.45.

Summary:  Today's sharp drop alerted me to a high probability third wave in progress.   After doing some analysis, I've determined this is likely a subminuette wave iii of (iii) of ((c)) down, which will find it's ultimate termination somewhere around 94.45.  We'll see how this all plays out, but for now I'm still intermediate term bullish crude, despite today's turn of events.

 SLV and GDX

I have short positions in both of these.  Silver futures completed a five wave impulse up this morning at the top of the linear regression channel.  GDX also made another run to the top of its linear regression channel, completing a (w)-(x)-(y)-(x)-(z) corrective combination to the upside. 

My short positions in both of these was established Tuesday morning, and despite today's intra-day new highs, I remain convinced these are both about to roll over.


Equity markets


I continue to rejoice that I have no position in the equity markets, because the wave count is anything but clear.  Still, it's fun to try and figure out what it's doing, even if I won't act upon it.  This is definitely a situation where I would wait for clear signs of a trend change before taking a position, rather than try and pick a high probability short term top as I often do.

You can see from the chart above that the move down from 12/7 to 12/19 met pretty much all the rules for an impulse wave, yet it has been fully retraced and exceeded to the upside, invalidating an impulse wave.  Therefore, I have tentatively relabeled it as an a-b-c (in red, but not labeled), followed by an (a)-(b) with (b) making a new low.  This is not ideal, but I cannot come up with a better label at this time.  Additionally, since the market continues to grind higher, despite what appears to be a completed five wave pattern for (c) (ending on 1/3), my assumption is that it's a corrective combination ((w))-((x))-((y)) at minimum.  In this case, the final ((y)) would be composed of an (a)-(b)-(c) of which only have an (a) and the start of (b) so far.

Anyway, these labels are only my best guess, and there is plenty of head scratching going on.  Instead of getting caught up in all the minutia here, it's important to remember that these are still three-wave corrective moves, and that the five wave impulse down from May 2 high is still dictating that the larger trend is down.  Shorter term, however, we have a rising linear regression channel on the daily chart, so why fight it?

Intraday - GDX made a new short term high

GDX made a new weekly high this morning, but based on the wave count, I have no reason to panic yet.

I've marked on the chart where I got short.  From Tuesday's high, it came down in a three wave corrective pattern, rather than the five wave pattern I was expecting.  It also remained within the linear regression channel boundaries.  Price then moved back up in another three wave corrective pattern, again remaining within the channel.   
Notice that the momentum remains depressed despite the new high.  This reinforces my wave count. 
If my wave count is correct, we completed a (w)-(x)-(y)-(x)-(z) corrective combination, which should be the limit.
I'm looking for price to break out of the channel to the downside from here. 

I'm looking for three things to confirm my downside bet. 

1. A breach of the prior (x) at 53.67.
2. The linear regression channel should start to change slope downward.
3. We should get a five wave decline (defining the larger trend is now down).

January 10th Update

S&P 500

Markets probably hit a short term top today, but there is a probability that the market rally is not over.






My assumption at this point is that we are in a corrective triangle formation.

1. If the three wave move higher from 11/25 to 12/7 is indeed a C wave, then it will be the shortest wave, which would be unusual.
2. The 78.6% retracement level of the entire five wave decline from May 2nd is at 1309, which we have not yet hit.

Most likely, the C wave is a complex wave and just peaked today.  We still need D down and E up before we roll over and plummet to new lows.

If we take out B at 1147 on the next correction, all bets are off and it's time to look for short entries.

Crude

The form the final fifth wave (5) is taking in crude is not clear.   It could be an ending diagonal fifth, or it could be a simple five wave impulse.

We'll know for sure soon enough as the proposed wave iv develops.  Before that happens, we need a completed iii.  Either way, intermediate term is bullish for crude.

Silver

I got short silver today, as I've already mentioned in prior posts.  Looking at the chart below, you can see why.

Here's a list of bearish signals for silver:

1. It has rallied up to the exact level of the fourth wave of one lesser degree (or in other words the fourth wave of the third wave down) at 30.283. 
2. It has hit the top of the linear regression channel on the daily chart once again.
3. Momentum has stayed bearish on the daily chart, remaining below the zero line.

Silver is destined to roll over again soon.

GDX

I'm also short GDX as of this morning. 

The linear regression channel has expanded due to the stretched out nature of iv of 3, but note that this correction took a (w)-(x)-(y) combination, where (y) is 78.6% of (w) at today's high.  Also notice that much like silver, momentum was never able to get out of negative territory.  I feel this is a good area for a turning point back down.

Intraday - Silver needs one more tiny push higher

This appears to be an intra-day fourth wave currently in progress.  As I said in my prior post, I'm already short via a put spread on the SLV.  Still, we'll likely get one more small push higher, probably on the close.  Since the second wave appears to be sideways, the fourth wave will probably be brief and sharp against the trend.

Short GDX and SLV

Well it took a few days, but patience paid off.  Price got up to my target on both SLV (silver) and GDX (gold miners).  See my prior posts for details.

As you can see price is now at the upper end of the channel on lower relative momentum.  That is the signal I've been waiting for to get short both of these.

Positions:
Bearish VERTICAL SLV FEB 12 29/25 PUT
Bearish VERTICAL GDX FEB 12 54/50 PUT


As far as silver goes,  I'm not sure of the intra-day wave count, but I'd rather be short here at resistance with the bearish bigger picture on the daily and weekly time frames.  The spread will provide some protection against time decay if it doesn't reverse right away.

January 6th Update

GDX

I might as well talk about GDX first.  Basically, there was no trade to take today.  On Wednesday, price hit the upper linear regression channel on both the 4H and Daily time frames.  That was when I was alerted to the short opportunity.   Do to the momentum internals, however, I feel like it's possible it could run up to the top of the channel one more time before rolling over.

I will remain on the sidlines until one of two things happens:

1. We run up to the top of the channel on the 4H chart on lower relative momentum (compared to the last upper channel touch/cross).
2. We pierce the last significant price support (at 52.75) on the 4H chart.  Basically, if we starting seeing lower lows, then we can be more confident in a trend change.

As you can see, price neither made significant new highs or lows during today's trading.   It is also notable that we are now sitting on the bottom channel line on the 4H chart, which may provide support.

All that being said, this could be a fun trade, if it ever manifests.  We'll just have to see what happens next week.

Silver

/SI is chopping around much like GDX.  This isn't too surprising considering the precious metal connection, they're like distant cousins.

You can see the linear regression channel on the 4H chart has now turned down.  If you consider that it is potentially capturing two fourth waves ( iv of ((3)), and ((4)) of c ), it is explainable.  Still, this sideways action is starting to distort the wave beyond an allowable good wave form (refer to Prechter's Elliott Wave Principal) for an impulse wave.  I want to see a breakout soon, one way or the other before I even consider putting capital to work. 
By the way, this is another case where momentum is bullish, as it holds above the zero line. 
Still, my wave count could be wrong.  An alternate count for the prior rally starting on 12/29 could be a double zigzag a-b-c-(x)-a-b-c, or in other words (w)-(x)-(y).  I still don't like that count, as it does not account for all the sideways corrective action on the right-hand side of the chart.  The fourth waves seem to fit the chart much nicer, so that remains my view for now.
Currently, I have no skin in this game, so I can just curiously watch until an opportunity presents itself.

Crude

Take everything I just said about silver above, and pretty much verbatim can be said about the 4H crude chart.

The only real difference with crude lies in the bigger picture view, which is far more bullish than for silver.  Crude has higher to go on the daily and weekly charts, in my opinion, but it will do it in a very choppy fashion.  For people that like volatile markets, crude should be fun in 2012.

S&P 500

Equities have been pretty much going sideways too, with a slight upward bias on the 4H time frame.

Both momentum and price action point higher here in the short term. 

Longer term is a bit more of an issue, as the wave count is not very clear to me on daily and weekly time frames.

Let's take a look a the daily for a minute, however.

 First let's consider the facts.

1. It is possible that we have a five wave impulse down from May 2.  This possibility is too important to discount.  
2. All of the upward action from the October lows seems to be three wave corrective mode in nature, implying that the larger trend (down) will resume at some point.
3. We are in the middle of a rising linear regression channel on the daily time frame.
4. The VIX has be signaling bullish trader sentiment for a couple weeks now. 

Summary,  I won't fight this uptrend short term, but I still feel like the larger trend is down.  The safer choice here is to wait for the linear regression channel to turn down, and look for a good short entry on a rebound rally.

GDX

Last night I talked about a short opportunity in GDX. 
As I look at an intra-day chart, I see only higher highs in momentum, despite what looks like a complete five-wave count. 
I would like to see a retest of the upper boundary of the channel on lower momentum.  Alternatively, if price can take out yesterday's low of 52.74, that will be a good enough indication of a turn.

January 5th Update

GDX

The gold miners ETF might be a good short opportunity here starting with tomorrow's open.

GDX came up in my daily scan for shorting opportunities since it was at the upper boundary of a falling linear regression channel.

When I started my Elliott Wave analysis I noticed that all downward price action going back to September was occurring in three-wave corrective mode, rather than five wave impulse mode. That tells me this whole move going back to September is a diagonal, rather than disparate impulse waves forming a larger structure.  

In summary, we will most likely travel back to the lower end of the channel one last time, but then we will probably get another big rally as a higher degree retracement occurs such as a wave ((2)) up.  This shorting opportunity is very short term in nature, but I'll probably give it a try if the setup is good in the morning.  I'm thinking about a BEARISH FEB12 55/51 VERTICAL PUT spread.  The risk is defined, but at 4 points wide it should capture most of the small downside move.

January 4th Update

Happy New Year everybody.

I have a lot that I want to cover today.

Before I get into specific markets and charts, I wanted to discuss my own setup.  The way I look at markets and interpret charts may change from time to time as I try new indicators and chart setups.  Ultimately, I want to keep things as simple as possible, but at the same time, I'm always looking for the best tools keep me honest, and provide perspective.
I went through a period last year when I tried the Ichimoku chart indicator.
I've also used Wilder's ADX in the past.
Both of these are very good at identifying trend and trend strength.  Ichimoku also identified support and resistance levels, which was a good bonus.

I'm trying something new beginning with the new year.  To complement my Elliott Wave analysis, I will also overlay a linear regression channel.  For the time being, I'm limiting the length to 21 periods/bars rather than the entire chart.  I made some code modifications on the study on my platform so that the channel will change colors depending on whether it is sloping upward (green), sideways  (gray), or down (red).

The philosophy:  When the trend is up (green), you can buy on a move to the bottom of the channel.  Conversely, when the trend is down (red), you can buy on a move toward the top of the channel.  When it's going sideways (gray), either the trend is changing, or the market is consolidating in a sideways corrective wave like a fourth wave.  I've even setup scans for these very conditions to find trades.  You still want to know the underlying trend strength of the scan results, and I use ADX/DMI to rank them in a watch list (ie. "DI+ minus DI-").

Speaking of scans, one of the things that came up in my scan is UNG, which generated a sell signal.

You can see from the chart above that UNG has moved to the top of the channel in a very decidedly down-down-down trend.  Going short seems at first glance like the easy play, but notice the huge momentum divergence with this recent low.  To me that throws up a huge caution flag that this may actually end up being a turning point, so I'll pass this one by.
Note, that I have no intention of going long at this point either.  This is something to keep an eye on in the coming weeks though.  If we break out significantly above the channel, and actually move the slope of the channel higher in the coming weeks, it may be time to start considering a long trade.
In other words, if and when UNG generates a buy signal in my scans, which means it will be at the bottom boundary of a rising channel, I will consider taking the trade very seriously.

Now let's talk about my favorite markets of 2011.

Crude

As a general refresher, we'll start with a daily chart, which shows crude making its likely final fifth wave.  On the far right of the chart, I have a subminuette wave i and ii out there, though this could just as easily turn out to be a diagonal making them a and b, since this is an ending fifth.

As an aside, notice how the linear regression channel is capturing part of the fourth wave.  It has no ability to distinguish relevant price action from that of disparate waves, which is why I limit the indicator to 21 periods.  Over time as the wave further develops, the channel boundaries will increase in significance.  The number 21 really has no large significance behind it, and I may tweak that value over time. 

Now lets drill down on a 4H chart.

What we have is a very strong five wave impulse wave higher from 92.52 all the way to 101.80, followed by a small a-b-c correction.  The next thing we would normally expect is a third wave, which is normally the longest wave, but the next wave higher is only 61.8% of the first wave and is nearly complete.  That leaves two scenarios that I can see.  First, that this is a 1-2,1-2 setup, or in other words the first wave of the third wave.    More likely in my mind is that this whole move higher is actually an a-b-c, completing the first wave of an ending diagonal fifth of the next higher degree (see "the diagonal" on  my education page).  The first confirmation of this count will be a move below 98.23, or the proposed c-wave low.    The second confirmation will be new highs.

The bottom line is I'm short term bullish on crude as we finish the impulse on the 4H chart.  After the completion of this impulse, we should get a decent correction as the second wave of the diagonal unfolds.  This will still be a correction in a bull market on the daily chart, however.  Positions in crude should be to the long side for coming weeks, though I have no positions at this time.



Silver

Silver has reached the top of the linear regression channel on the daily chart, and in fact generated a sell signal in my scans.

In my estimation, it is completing a fourth wave.   You can see that it is in the area of the prior fourth of one lesser degree, and appears to have reversed at the 50% retracement of the prior third wave.  This would not be a terrible place to get short again, based on this analysis so far, but let's drill down to a 4H chart first.

If this is a correction, we need a three wave a-b-c at minimum.  So far what we have is a subminuette degree wave a-b, followed by three waves in c.  In other words, we still need the rest of ((3))-((4))-((5)) of c.  So despite what looks quite bearish on the daily chart, we still need to complete some wave structure on the lower time frame (and revisit the top of the channel 2 more times) before it's time to get short again.

Equities (SPY and IWM)
I've saved the most difficult for last.  Stocks had a large correction starting in May last year, but the wave count is very unclear to me.  I've decided to chart both SPY and IWM on a weekly basis to get a bigger picture view before delving into the day-to-day action.

Starting with SPY, the market seems to have made an A-B-C corrective move lower, rather than the five wave impulse I was expecting.  The only clear impulse I can see is in the C wave above.  Just to ensure this is not an anomaly, I also looked at IWM, which mimics the Russell 2000 small cap index.

As you can see the picture looks almost identical.  In addition, since the October lows, we appear to be making three wave corrective moves higher.  So the downward action is three wave corrective in nature, and the upward action is also three wave corrective.  That is a recipe for disaster, as it's really difficult to know which direction encompasses the larger degree trend.  I have no choice but to step aside for a while until we get new weekly price extremes.

And just to show that the daily chart of the /ES futures are just as sloppy corrective.   I can't even make a recognizable pattern out of this yet, though it sort of resembles a contracting triangle, but there are problems with that conclusion as well.

To summarize, there is no trade here, time to move on.