August 4, 2014

Don’t Believe the “All Clear” Signal – Thoughts on NDX Elliott Wave Count

Monday’s trade started without much fanfare.  The markets opened higher and appeared to indicate a strong lack of participation.  About an hour and fifteen minutes into the session a large sell basket hit both the NYSE and NDX pushing momentum traders into action and pushing the markets to session lows.   The lack of follow through selling turned momentum trade back to the upside, but it wasn’t until just before the last hour of the session that traders decided to make a more bullish stand as if the “All Clear” signal had been given.

emergency alert systemThe definition of all clear is usually associated with a siren, indicating that some danger, such as an air raid or tornado has passed.  It is an indication that obstacles are no longer present – a signal that a danger is over.

The manner in which that the buyers moved back in during the last hour of trade was indicative of some weak shorts scrambling to cover ahead of this week’s earnings.  If I were to believe the trading action in PCLN I would think someone had the inside scoop on what the company will report on next Monday with the stock once again clearing $1300 intraday reaching $1307 up over $54 or 4.34%.  The move itself did not make sense other than the ‘shorts’ were caught yet again and forced to capitulate.  I mean really – who trades PCLN these days?  One hundred shares of stock at $1300 a share would set you back $130,000.  One thousand shares would be $1,300,000.  The current all time high for PCLN is $1379 and at the current rate the stock could zip to a new all time high well before earnings are released next week.

Algorithmic trading is here to stay – at least for the mid-term.  It continues to rule the roost so to speak when I see days when for no apparent reason AMZN is up $6.60, BIDU is up $6.50, CMG is up another $7.85 after ringing in another all time high at $686.05.  GOOG is up $7.10, PCLN $54 and TSLA climbing $5.25 ahead of Wednesday’s earnings announcement.  At the same time volatility was getting crushed – with the VIX down $1.91 or 11.22%, UVXY loosing $3.20 or 9.20%, and the VIX future shedding $1.60 or 12%.  These are huge moves within these indexes.  The “all clear” was being sounded whether it was correct or not the algorithmic traders took it to heart and proceeded to move forward without any fear what so ever.

steerclearsignalsThere is an inherent danger and major difficulty attempting to position oneself against the army of algorithmic traders.  Whether I believe the correction is complete or not the trading action returning to a previous style brings with it a slew of smaller players who will believe the “all clear” has been sounded and that it is safe to return to buying on dips and selling puts as an asset class.  I continue to be amazed at the number of so called respectable research firms that are attempting to let everyone in on the great money making scheme that has made thousands of people a fortune, with no product, no website and no advertising.  I’ve actually read where it was being called the “ultimate Home Biz.”  To make matters worse they imply that less than 1% of the U.S. population even understands how this “secret” works.  Really?  If it is such a secret and so fool proof then I seriously hope that investors, traders, and the general public will see it for what it is – a huge liability waiting to slam dunk those believing it is a never ending money printing machine.

If ever there was a reason to sound the alarm this is it.  Understand if you choose to sell puts naked you may collect some cash up front, but the risk is not worth the pay out.  The markets will correct, and when that happens with any intensity the stampede to cover short puts will bankrupt many an unsuspecting trader as they continue to believe they will make enough to pay for the rent on a beach house.  Yeah, and Santa Claus really does exist!

Update for the NQ Elliott Wave Count


Last week I included an alternate Elliott Wave count for the NDX.  After Monday’s trade the alternate count has proven to be the more likely count.  2014-08-04-TOS_CHARTS.png_NQ_ELLIOTT_HOURLYCheck out the updated count on today’s chart for the NQ.  Updating the picture, the NQ reach a high of 3991.25 on July 24th.   From that point the market began to correct.  The degree and the depth were left open until the move itself began to take shape.  From the high it is likely that a larger “5-wave” decline is still in progress and will ultimately form wave A of a larger A-B-C correction, where waves A and C are declines and wave B an intervening rally.  What would negate this count is a break with follow through back above 3929.  The updated count shows that waves 1-4 are likely complete with the NQ dropping lower to begin wave 5 down.  The break back below 3494.50 on Monday afternoon leaves a more defined 3-wave rally in place to Monday’s high at 3915.75.  Monday’s strong rally did little to reverse the downward momentum as evidenced via the stochastic oscillator.  Support for wave 5 begins at 3853.50 with next support at 3815 being the more likely candidate to complete the initial larger wave A down.



Three-keysSteer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.