Saturday, October 3, 2015

Search and Destroy

In our last post, we stated we would 'have to be flexible to what the market dictates'. Friday was such a day with a large reversal after a significant down opening. Many people are still playing the guessing game of, "is it Primary 5, yet, or is it still Primary 4?" and many other similar questions to maintain a bullish outlook. Our last weekend video downgraded the chances of P4 to about 5%. This means, "it still could happen, but based on recent price formations it does not look very likely".

How is it (if it does happen) that a 5% probability could come to pass if it does? It could happen in the same way that in a game of flipping a coin, the outcome of four-heads-in-a-row is not impossible. If you do the math, you will see roughly the same probability (.5 x .5 x.5 x .5 = .06 = 6%).  So, even if an outcome has a low probability, we can not dismiss the chances of seeing it come to pass in reality. From an objective viewpoint we, however, can not invalidate downward counts until the high of what is labeled minor wave 4, in the chart below, is exceeded higher. Why is that? Because downward diagonals can form with legs that retrace 66 - 89% of their downward legs, if there are three-wave sequences.

So how then does one understand the current environment? From my perspective, the environment of a sideways triangle or downward diagonal both involve significant volatility. This is such a time near an all-time market high - which makes the probability of outright volatility very high. The last several trading sessions have been no exception, and we patiently wait for clarity on the wave count.

In the meanwhile, Search and Destroy or Seek and Destroy was a military strategy that became popularized in the Vietnam war. In this context, however, it refers to the activity of the "big money", the players with accounts large enough to make a difference in market movement. See chart below.

Note Where the Gaps Are

Anyone who actively charts the market might note where price gaps are. Certainly, the downward gap created on Friday by the payroll report was filled quickly. We could have shown it here with a green circle (to indicate a 'filled gap'), but for clarity we did not. Of note, a gap down from Friday 25 Sep was also filled on this day. It is shown with a green circle.

But note there are two higher gaps - one at the 61.8% retrace level, and one smaller one, at the 78.6% retrace level. Isn't it interesting where those gaps are located? These gaps are shown with red circles. Could it be that in all the uncertainty, and smaller positions because of it, that the big players might have the trading algorithms cranked up to seek out those gaps? We honestly do not know if one or both of those higher gaps will 'fill' or act as resistance to an up move. We are beyond the 50% retrace, so it seems likely the upward price movement will continue at some point.

We 'do' know, from a technical perspective, that on Friday both the cash S&P and the futures got back to their daily middle Bollinger Band and it is possible that the upper Bollinger Band might become an interim price target, either with backing-and-filling or without.

If price 'should' hit the upper band, it 'could' act as resistance without exceeding the minor 4 high - in which case a downward diagonal is still a good possibility. A key downward warning sign would be if price gets 'near' the upper Bollinger Band, without actually contacting it. That will be an interesting 'tell' regardless of contact or not.

Beyond that, from an Elliott Wave perspective, it is the market that will have to tell us, and not the other way around. We can actually see two paths lower (diagonal minor 5 or continued triangle minor 4 - more especially on the Dow and S&P futures than cash S&P), and while we can see an upward path, it is more problematic at this point in time, and new higher highs would have to be made first.

Cheers and enjoy the chart!