Trader's Tips Stock Market Newsletter

Published January 24, 2010
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Interim Report

As seen on the chart below, a clear breakout from the OEX weekly Wedge looking pattern is now a fact. It came on heavy Volume, reflecting institutional selling. This market situation increases the odds of a top of minimum mid term degree, most likely confirmed in place.

OEX  weekly chart

The same breakout event is also observed in the tech market, here represented by QQQQ Weekly.

qqqq  weekly chart

The final market peak came within the 01/29, (+/- 1 week) time window of the weekly Gann Angle cycle convergence, earlier published in the Outlook 2010 Report.

This GA marks 90 trading weeks from the Oct. 2007 major high and 360 trading weeks from the 2002 major low. So the market has reached an important time point, which could cause a change in the market tide. When Price & Time meets, change is inevitable. For a new weekly GA projection, see chart below.

OEX  weekly GA chart

Using the Elliott Wave Principle a Primary degree wave 2 from the March 2009 low is likely ended, at the 50% retracement level (of the Oct. 2007 - March 2009 decline).

Such breakouts can often give good trading opportunities and especially this one... with a huge Risk/Reward potential. As mentioned in an earlier update, wave 3 impulses of Primary degree don't come around often and the potential loss can be small, compared to what you can get from a trade like this, in case this scenario really turns out to be a correct one.

Personally, my strategy is to enter the market (going Short with CFDs) on any snap-back move towards the now broken wedge support area, which should now act as stiff resistance instead. If so, because of the tight wedge pattern range, the Stop will be placed right above the recent high at 530.74.

Because of the sharp sell-off, the question is if this wedge area will be tested from below at all. Who knows, a bounce could also quickly end up against the now broken channel support on the daily chart. So in case a snap-back move stalls before the weekly wedge area, a strategy involving going Short on a break of the pivot point is also looked at. It depends on the market developement in the coming days.

The coming trading week (01/27, +/- 1 day) contains the next daily GA, so given the near term sell-off going into it, a reaction to the upside starting around that time, is not out of the question. Friday's close came near a key Fib. support level, as seen on the daily chart below.

OEX  daily chart

Until proven wrong about this wave 2 top scenario, (a move beyond the recent high) another possible way to enter the market is from now on to act on upcoming daily 5 - 20 EMA crossover signals to the downside, in an attempt to catch larger chunks of upcoming impulse trends and especially the big one... wave 3 of 3.

A strategy using moving averages could work out, since we are now probably dealing with a steep five wave structured wave 3, causing a volatility (fear) explosion, like we saw near the end of 2008. In fact, the VIX (chart below) has already overcome strong trendline resistance, closing above it Friday.

OEX  daily MA chart

daily VIX chart

Fellow traders, in my opinion, we don't have to become "Buy and Hold" stock investing victims of another possible financial meltdown but could instead prosper by being patient and implementing techniques like those discussed in this interim report. And the loss could be modest, in case of further delay in a wave 2 termination, by keeping a tight Stop. Even in case of several whiplashes and re-entry attempts have to be done, the potential reward could still make it worth the efforts, by climbing on the Primary wave 3 bandwagon a bit too early, rather than too late.

And imagine the exciting stock investment Bull opportunities that will show up in the future, when the market could be back to much cheaper and fair P/E levels and with it... a Bear market likely ending. Anyway, it will be quite interesting to follow the market developement in the coming months and i'll try keep you updated about it.

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Good luck trading,

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