Wednesday, October 15, 2014

These days, it would seem that no promising impulse leg goes unpunished. Few rallies have been reaching their D targets, especially when the stock market is bounding higher. Yesterday simply continued this pattern of behavior. That said, however, and going strictly by-the-book, the bullish look of the daily chart should continue  to encourage -- at least until such time as the point C low of the pattern, 1217.60, is trashed.  Still more encouraging would be a bullish reversal that takes out the 1243.00 midpoint pivot shown. A decisive move through this level would make a further move to its D sibling at 1268.30 an odds-on bet.

Bulls -- assuming there are any left -- got stomped yet again yesterday when the November contract fell nearly $4.  The breach of the midpoint Hidden Pivot support at 82.69 was decisive, implying that traders should try to short an upward retracement to it. If you use a 'mechanical' entry based simply on keeping risk:reward fixed at 1:3, a short from 82.69 would require a stop $1.19 above, at 83.88. This is because the potential gain if November Crude falls to the 79.11 target would be 3x $1.19, or $3.57.  I'd suggest holding size to a single contract unless you use the 'camouflage' technique to get short near p=82.69.

The selloff from mid-September's top was powerful enough to breach the August low (#1) with ease. My gut feeling now is that the downtrend will maintain its steep pitch until the April low, too, has been smashed.  That would create a bearish impulse leg on the weekly chart, something which has not occurred since January. The effect would likely be more significant this time, however, since the lows that will have been surpassed are far more imposing (and therefore ostensibly supportive) than the earlier ones.  In practical terms, the implication is that the C-D follow-through -- unlike in January, when there was none -- would reach its D target. As always, we should allow for the possibility that things do not always play out as expected.  If, for instance, the current down-leg were to take a breather, correcting upward for a couple of weeks (shown with a dotted red line), that would diminish the putative power of the downtrend. It would also effectively shorten the odds that the move from September's high is merely corrective rather than the beginning og a full-blown bear market.

Yesterday's rally impaled a 142^28 rally target that was achieved much more quickly than I had anticipated.  The A-B impulsive phase of the rally took a little more than two months to complete, but the far steeper C-D leg took only half that. Moreover, the target was exceeded by a significant ten ticks, implying that bulls (and of course short-covering bears) may have more buying to do. Ordinarily I would look to get short here, given the  persuasive and precise look of the pattern that produced the target. In this case, though, we'll play it cautiously and sit out the creation of a possible top near these levels.  Once the subsequent correction has run its course, we should expect the next rally cycle to carry to at least 145^23, the Hidden Pivot target shown as D2 (see inset, a continuous weekly chart . Regarding how quickly it might be reached, we'll make no assumptions of a slowdown in this world-beater's ascent. This will have implications for the way we position ourselves in TLT, where the expected widening of bullish calendar spreads we bought has been subdued because both sides of the spread have gone well in-the-money. _______ UPDATE (10:20 a.m. EDT): Bullish as I've been on T-Bonds, I could neither have imagined nor predicted the frightening power of today's rally.  Although the futures have sold off hard after spiking spectacularly in the early going, the rally has affirmed the flight-to-safety concept in spades. U.S. Bonds are where the world's investors will turn when it's time to circle the wagons.  Incredibly, that day may be at hand. It is almost surreal that there's at least a small possibility Ebola will turn out to be the Black Swan we've all dreaded for so long.