Gee, Think.

The Kondratieff cycle is a long cycle, typically lasting 55 to 60
years. It was discovered in the 1800s by Nikolai Kondratieff. I’ve
been reading about it in John Murphy’s “Intermarket Analysis” lately.
Today I reread part of his discription on it.
Part of me thinks that these cycles can’t really be correct. It seems
unlikely for there to be such recognizable and repeatable pattterns.
However, this particular pattern has proved correct over the last 250
years. If the data supports it, I should have a hard time refuting it.
I have heard that there are issues with whether these long term models
use an inflation adjusted stock index. When I was reading Frost and
Prechter’s “Elliot Wave Principle” they mentioned that some of the
elliot patterns were more recognizable under the inflation adjusted
Dow.
Doubts aside, the Kondratieff cycle calls for a “winter” declining
period starting in 2000 and lasting upwards of 10 years. One of the key
markers of winter is deflation, which I’ve read was experienced in
2000. The next marker is falling commodities prices. I’m not sure if
we have those yet, but I’m going to keep this theory in the back of my
mind.

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.

Today’s action in the Qs is an astounding +0.53 or +1.46%!

I am feeling great because in the first part of this analysis I projected the Qs to move down to 35.00 to complete the fifth wave. After completing the fifth wave, the following A wave would be a sharp rise upward, such as we are now experiencing! Now, we didn’t quite get to 35.00. It looks like we got down to 35.50 yesterday. So is this upswing a new A wave in the correction? I’m not sure yet. It could just be the 4th wave correction of the 5 wave extension. I need a bit more time to really analyze, but I may not have the time.

Looks like my guess for a dip in the Qs was dead wrong today!  I was thinking earlier… is 0.27% gain enough to satisfy my elliot based prediction for an upswing?  Apparently my answer to that question should have been NO!  But that’s information for another prediction or guess.  I’ll be interested to see how this formation plays into my elliot wave analysis from the weekend.

I’m going to guess that the Qs will head down again today. Now this is
a guess because I haven’t had much time to look at the charts again. I
would call it a prediction if I could be a little more specific. I’m
calling it a guess so that if I’m wrong I can shrug it off.
Now, if my calculations on my wave analysis of the Qs over the last 45
days are right, and further if wave 1 is related by equality to wave 3,
then wave 5 has not yet reached it’s target of approximately 37.00.
This target would relate wave five to waves one and three by 1.618
approximately.
Yesterday was a small interruption to what I think is the downward trend
of a bear market 5th wave extension. The action on tuesday was not of
enough amplitude to make me think that the fifth wave was over yet. If
we were entering the A, B, C, correction phase yesterday’s upswing would
have to continue much higher today. Yesterday’s uptick was probably a
correction from a smaller degree wave in wave 5.
I’l have to check the 5 and 8 day moving averages to be sure that I
think the downtrend will continue today.

3 Month Daily QQQQ with 4-Day Simple Moving Average, originally uploaded by Gare and Kitty.

I’m going to head out on a limb and call for today to be an up day. I know that there is a lot going on in the middle east with Israel and Lebannon. I know that this is pushing the price of Oil higher, which tends to hurt stocks.

However, the candle from yesterday looks like a great Doji, which typically signals that the trend is set for a reversal in the short term. In this chart we can see that the the Doji signal has been misleading several times, but at a glance I think it’s held for at least the very next day.

I’d like to add that after completing the fifth wave, there should be a retracement up to approximately the start of wave 4 as a minimum target. This could occur in a relatively straight line, but will likely have at least three distinct waves, A, B, and C. The end of wave C should be somewhere in the price territory of wave 4.

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.

Volatility in the Qs is approaching a significant fibonacci level, 19.34 to 19.45. On my chart from May 11^th 2006 to July 7^th 2006 I see three fibonacci retracements converging at this level.

The first retracement range is starts at 15.07 on 05/12/2006 and ends at 26.40 on 06/08/2006.
The second retracement range starts at 21.48 on 05/22/2006 and ends at 18.07 on 05/23/2006.
The third retracement range starts at 22.14 on 05/34/3006 and ends at 16.53 on 05/26/2006.

The first range has a 38.2% line at 19.41.
The second range has a 38.2% line at 19.40.
The third range has a 50.0% line at 19.33.

These ranges seem to be significant in that they create a line that is overlapped three times. Now the QQV is currently at 18.73. This leaves it more than 55 cents away from the area of resistance. The chart seems to show that there is a strong likelihood of the Qs volatility index (QQV) bouncing off this level. The QQV appears to be in a downtrend since the high at 26.51 June 8^th. Since volatility is inversely related to the underlying stock price,based on volatility alone I think this indicates that the Qs are in for a rise over the next week.

Click for the chart: