Thu 24 Jan 2008
S&P II
Posted by ray under Written Plan
Today I continue tracking the S&P. I’ll do this until the S&P either confirms or negates the bear market scenario. I expect this will occur sometime next week.
In today’s blog all numbers are basis cash.
The market followed the 80-min (daily trend) roadmap until the last 80-min bar whose direction I anticipated but not its magnitude. By moving above 1340, the market broke the symmetry with wave-2 (65.25 magnitude) and skipped a degree. Figure 1 shows this.
FIGURE 1 80-min S&P Daily Trend
Figure 2 shows the next degree in the Ray Wave Count: 5-day (weekly trend). For this count to remain valid, 1346 needs to hold i.e. we will not see a print at 1346. Such a print (1346) will invalidate the count and bring us to the next degree.
Figure 2 5-day S&P Weekly Trend
Figure 3 shows the retracement levels for the current Market Profile’s directional move; a move I call the Initial Price Movement (IPM). The minimum retracement is 33% (1347) and any development should hold below the 50%, 1385. Note that a move to 1385 means a move above 1346 and a triggering of the last Ray Wave degree (18-day, monthly trend) if there is a bear market in progress.
FIGURE 3 Market Profile Retracements
Returning to the 5-day analysis: Since wave-(2) was simple, we can expect wave-(4) to be complex. The most common complex formation is a sideways pattern.
In the light of the Ray Wave structure doubt (lean against which degree?), and the high uncertainty of the zone in which to take a trade, I am in no hurry to initiate short positions. I’d be looking to next week to indicate the level at which I’ll be looking to take a trade.
In any event, I would not initiate any shorts in the current climate. The volatility is too rich for my blood. Prior to this move, the ATR was about 22 +/- 10. Yesterday the pit session had a 69 point range (greater than mean +3 standard deviations) and the day before, we saw a range of 47 points (greater than mean +2 std). And that’s only the pit sessions!
Another way I measure volatility is with Bandwidth (http://www.bollingerbands.com/services/bb/?page=5). Figure 4 shows the context to the current volatility. It shows we are at 0.15 magnitude of difference between the bands and the start of Black Swan territory (i.e. outlier territory). You see two red lines. The first marks the threshold of where the market has been so volatile that I expect to see a shrinking of volatility. The second represents volatility that suggests I exit all positions.
FIGURE 4 Bollinger Bandwidth
All in all, for me, patience is the key to these markets, at least for the moment.
January 26th, 2008 at 2:49 am
Ray
Here is one market comment why the FED cut the rates in advance of the scheduled time.
Quote
As we found out later in the week, a good part of the selling pressure may have been forced due to the Societe Generale fraud. Unquote.
Big-time traders who were aware probably sold and triggered the waterfall ahead of the announcement, and herd psychology comes into play, and the rest is history.
S&P has been finding new lows each day, going south, with intermittent little bounces.
January 26th, 2008 at 3:38 am
Thanks Ana. Interesting.
The market has built in another rate cut next week. Will the FED comply now that it knows the fall was triggered by a one-off event? If there is no cut or a cut less than the market would like, that may trigger another sell off.
On the other hand, cutting rates again will pump even more liquidity into the system, liquidity that must ultimately be reflected in rising inflation numbers which will force the FED to increase rates.