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.