Gee, Think.

So now I’m really glad that I held onto the put position I established
last monday. It seems like the market is starting to head back toward
fear of the Fed because the inflation data is staring right at us. The
fed has promised to be data driven, and now the traders that were really
hoping for a pause are stuck in a bad spot.
This could be a place for me to cut my losses and jump out, but I don’t
think that the fear will subside so quickly, so I’m going to hang in
there.

I’ve been reading more of John Murphy’s “Intermarket Analysis” book
lately. He has a couple chapters that discuss various business cycle
theorys and what they mean for the financial markets. As I understand
it, the idealized behavior is this:
1. Bond prices rise
2. Stock prices rise
3. Commodity prices rise
4. Bond prices fall
5. Stock prices fall
6. Commodity prices fall
Steps 1, 2, and 3 are part of an economic expansion. Steps 4, 5, and 6
are part of an economic contraction. The expansion is positive growth
and the contraction is negative growth. The time between steps 3 and 4
is when the economic growth actually turns negative, but it is decling
from the middle of step two to the midlle of step 5.
So, having read this theory on the business cycle and it’s relation to
financial markets, I’m going to try and plot our position in the steps.
Everyone who’s paying attention to the stock markets can see that we’ve
just experienced a major downturn. We also know that commodity prices
were soaring during this downturn. The commodities were corrected as
well if I remember correctly but I think they are still heading up.
This last week was a great week for the Dow, Naz, and S&P, but are
stocks done falling?
I think bond prices have been falling because yields have been
increasing. I think this means we are somewhere around step 4, which
would nake this an early recession. If that’s true we should see stocks
and bonds continue to fall over the next months. Commodities should
join the fall eventually as well.

Today’s Volume in the Qs was just above 65 million. That’s less than
half the average daily volume of 120 million, making this days activity
exceptionally light. The Qs drifted 10+ cents up, 10+ cents down, and
then settled right on the money at 37.11. Uncanny. I think they
drifted down a couple cent post market hours, but still, what a strange
day. Why is the voume so light? Is everyone too spooked about the
upcoming economic data?
What really confused me was seeing the Dow down 30 points and the Naz up
10 points at the same time today. I’ve never seen a day with that kind
of spread between the two markets. Usually they move in the same
direction, and about the same amount in percentage terms. Today’s
divergence was spooky.

So I’m reading TheStreet.com trying to understand the data that is
alleged to have led last weeks strong gains in the Dow, Naz, and S&P.
So far it looks shaky to me. Hourly earnings rose 0.5% when analysts
were expecting 0.2%. The analysts were more than 200% off their
estimate in the wrong direction! Further, apparently the “Feds stated
comfort zone” is 2% for core inflation. Last quarter’s core inflation
reading was 2.1% and this quarter’s was 2.9%!!! Whoa. Does that scream
inflation? Being fairly inexperienced in following these numbers I
can’t say how significant those numbers from a historical perspective.
Through my green eyes, it sounds like the core inflation number is too
high and the hourly wages are going up too fast. Meanwhile companies
are beating their earnings forecasts. Are they beating the estimates
because the dollar is falling? Is the dollar truly falling? I’d like
to take a quick look at the dollar vs. Yen and dollar vs. Euro this
morning.
So if there is still evidence of inflation, why do we think the Fed will
stop tightening? Especially if companies are still doing so well?
Beats me.
I wonder if this is a corrective wave of a bear market. Maybe it’s got
everyone all excited that we’re out of the woods. Then just when you
think the worst is over we REALLY get whacked.

This is the Qs with Simple Moving Averages (SMA) of the 5 and 8 week period over the past 9 months.

The 5 week moving average moved under the 8 week moving average in the week of 5/8 (5/11 Bernake scared the markets). The spread between the two averages moved a bit closer around 6/12 to 7/1. This was temporary though, and the spread widened again.

There was significant upward movement in the Qs today, more that 70 cents. The weekly moving average, however remains unchanged. I think this is because the the week has just started, and so hasn’t been included in the average yet.

However, the trend still looks to be downward.

This is the Qs (QQQQ) price chart over the past 9 months. I’ve added the 5 and 8 day moving averages as well. I believe that I’ve read that the crossing of the moving averages is a market “signal”. When the shorter term moving average crosses under the longer term moving average heading downward, that’s a signal that the stock in question will continue to move downward. When the shorter term moving average crosses the longer term moving average heading upward, that’s a signal that the stock will continue upward.

In this chart the 5 day SMA is about to touch the 8 day SMA.  It’s probably going to cross moving upward tomorrow, and increase the spread between the two averages over tomorrow.  Judging by the recent pattern, the 5 day average will only cross the 8 day average briefly.  The larger trend of the Qs remains downward, which can be seen in moving averages on the weekly charts.

Elliot Wave Analysis Qs July 16th, originally uploaded by Gare and Kitty.

This is my first attempt at the application of the Elliot Wave method of analysis. Regrettably I have not had much time to work on this image and its details, but nonetheless I am going to post it. At the least, it will be instructive to me. I should be able to look back at this and see where I went wrong. Now that I’ve got that out of the way, here goes:

I have diagrammed the progression of a motive bear wave. I see it as possibly having completed its fifth wave, and thus approaching the A phase correction. I wish that I had the time to be more precise. Having more time I would measure the lengths of these waves. Measuring their lengths in both price and time movements would serve to verify my wave count and also aid in ratio analysis for the purpose of predicting the length of the next price move.

Nonetheless, wave 1 and wave 3 appear to be of approximate equal length in price movement. This means that wave 5 should be related to waves 1 and 3 by some fibonacci ratio, perhaps 1.618. Based on this I would expect the fifth wave now in progress to continue to approximately 35.00. This would approach the 1.618 relation with waves 1 and 3.

Wave 2 appears to be a falling expanding triangle combined with a flat. This would make it a double three. Further, wave four could be a flat. This would coincide with the guideline of alternation between corrective waves.

There are some parts of this wave count that do trouble me. First, the second wave hardly retraces into the area of wave 1. That, and the fact that I just threw this sketch together in about 15 mins!

We will see how my analysis work out. I can’t know either way for certain, but that’s the sport of it!

Okay… So my analysis of the Qs volatility (QQV) turned out to be completely and utterly wrong. The Qs did not experience any significant upward movement this week. Actually they’ve been dropping like a rock, and their volatility is still going up. It’s bouncing off some of the fibonacci levels that I drew in my chart, but its not really treating them as significant resistance.

I knew when I did this analysis that I had not been rigorous because I didn’t have much time to look at bonds, commodities, or currencies. I didn’t expect to be so completely wrong though.

So maybe I should continue my analysis, but with a different strategy. I’ll continue to analyze the markets and come up with my trading thesis. Then I’ll do the exact opposite. If I could have replayed my trading history since March 1st in this way, and including the opposite of my QQV predicition, I’d be up over 40% on the year. I figure that I could ride out this anti-thesis play for a while. Then once I start losing with it I’ll know that my analsys is actually getting good and I’ll switch.

So one day after my prediction that the Qs are set for a rebound, they fall a little less than 50 cents. Whoops! If I had made a play with an option of 0.7 delta I would have LOST about 25 or 30 cents! Playing it the other way would have been very profitable! Forecasting with a week’s timeline, I would probably have used a 0.25 to 0.50 delta. Still not a pretty loss…

When I made the prediction I was looking solely at the Qs volatility. This is a pretty narrow view, and has show to be a bit off so far. I thought there would be resistance at the 19.40-19.50 level, but the Qs Volatility moved up to just under 20. I saw a potential move up to this resistance, but I didn’t write about it. To be fair, I have to take that as an error.

We’ll see if the volatilty hits any resistance at the 19.50-20.00 level, possibly validating what my earlier analysis.

In the future, I would like to include an analysis of how far I think the price of whatever I’m analyzing could move against me, and how far I think it would reasonably move with my prediction. I hear that a 1 to 3 risk reward ratio is prudent, and I should make an effort to add that further rigor to my analyses.

This morning I took a couple minutes to try and supplement my Qs analysis. I pulled up the 60 day chart of the Dow 30 and the Gold / Silver indices. I’ve learned through John Murphy’s “Intermarket Analysis” that the common trend is to see Gold (as well as silver and other commodities) rising as stocks are falling. Now maybe I didn’t quite have something right, but I could swear that this morning around 6:15 am I was looking at uptrends in both charts! How could the gold / silver index be rising as stocks are rising? Perhaps this is foreshadowing a future fall in stock prices. Maybe this has something to do with the strength of the dollar. Right now I’m not sure, but am confused.

I did a quick fibonacci tracing of the gold silver index and I think its currently bouncing between two fibonacci levels, and is either basing before heading up or forming a double or triple top before heading down more sharply. I saw the index moving between these levels through its action over the last several days.

Man I really need a bigger view of the picture, and a bit more analysis expertise because I’d like to be able to say that I think its moving one direction or the other!