Tricky Treats

As I stated in prior postings, no amount of downward movement will be a surprise. We got only a typical smaller portion, Halloween-sized, morsel of that on Friday, and then a rebound. The most ghastly of facts surrounding this decline is that my proprietary bullish sentiment model shows the percent bullishness as still being on the longest average sustained romp over the 60% level that has ever been recorded by this measure, as shown in the weekly chart below, as of this weekend. 

Bullish Sentiment - Weekly - Longest Ever Sustained Push Over 60%

Now for a real fright: compare that level to that shown on the CNN Money Fear & Greed Index, shown below.

This, market-basket approach, is showing outright fear and labels it as such. The indicator-basket is made up of a mishmash of moving averages on a number of factors, and it's trying to tell you people are thinking differently than the survey data, above. Quite honestly, I've looked over their indicators and to me they are confusing with the overall index ill-constructed. So this may amount to an unintentional but never-the-less nasty Trick being played on you - much like when the high-school kids on Halloween night think they're only going to flood your window-well with the garden hose, but instead the whole basement gets drenched.

We know that daily price now has a lower high (or a series of them) and now a lower low. So, does the market offer any costumes that might be more informative, and not just hip & cool? Well, for that we turn to the work of Master Trader, Bill Williams. Bill wrote the book Trading Chaos and offered some indicators that are still in wide use today. A few of them are used in the chart below. They are 1) the Alligator, 2) the Elliott Wave Oscillator, or AO, and 3) fractals.

The first thing one can note is that the truncation high, if it remains so, did occur on a confirmed divergence with the Elliott Wave Oscillator as shown in the bottom panel. That divergence is given the term confirmed precisely because there was a daily higher price high on a lower EWO value, and then the EWO dropped below zero again.

The next thing to note is in the upper right - the presence of a trap fractal. That is defined as a price that exceeded a prior fractal, in this case, green or up, and then promptly reversed to exceed a fractal in the opposite direction, in this case a red or down fractal.

So, think about the characteristics of either 2nd waves or of B waves. Their job is to try to convince you that the trend prior to the last wave is really reversing. In other words, you didn't see a 1 wave or an A wave, down, in this case, before the 2 wave or B wave up. No, that down wave was a sham, a ghost, as it literally didn't happen. That is what the trap fractal tries to do. It tries to get you to buy into the reversal back into the prior up trend at precisely the incorrect time.

So, in the Bill Williams system, there is now a fractal break well below the alligator. Several down (red) fractals have been broken lower. And the daily gator appears to be turning lower. And, while this is a sell signal in the Bill Williams system, keep in mind, as I have written about before, to follow this system on a daily basis requires a very high level of capitalization relative to risk. So, what that means is one either has to be extremely wealthy already not to care about the inevitable retracements relative to one's potential market gains, or one has to remain out of the market until one of those retraces occurs, or one has to keep their position sizes extremely small (in either futures or options, say) until the gator fully "opens up" to the downside. In short, extremely conscientious risk-management must be practiced or the consequences might be suffered.

Lastly, should the market continue lower the chart is showing the first two price counts along the way, noting that the 2.618 Fibonacci level is also a measured move should the neckline of this bobblehead be significantly broken lower.

Have a terrifying, hair-raising, and blood-curdling rest of the weekend - just kidding, of course.

TraderJoe