Trade # 12: EUR/USD Short (Update)

Update @ 8:57am CDT on 6/24/08: I was stopped out for -32 pips. If we head down below 1.5470, we will have a nice Head and Shoulders pattern, so I will look to go short there.


Buying the Fear in Bank Stocks

I last posted about the SPX here and here. Since then the market has dropped quite strongly in 5-waves, but I think we are near a short term bottom. I will try to play off this bottom and the highly bearish attitude against financial stocks by buying some Citigroup (C).

The chart above is the 60-day, 2h chart for the SPX. You can see a pretty clear 5-wave pattern that is near completion (as MACD divergence is confirming). Wave5=Wave1 around 1300, and and drop below 1314 would complete Wave-v of Wave5. I think 1300-1310 should prove to be good short term support.

The chart above is the 20 year chart for C. After having completed a 5-wave bullish cycle which ended in 2000, it has since been correcting in a Flat 3-wave pattern. This pattern is what attracted me to C instead of other financial stocks (well, it also pays 6%+ dividend, which is nice, and being one of the biggest banks, it's unlikely to perish).

Why would I want to buy a financial stock? Well, the immense bearishness and media attention means that these stocks are being incredibly scrutinized. They are probably being priced for worst case scenarios, which should lead to a strong pop if the market turns up for several days/weeks.

The 5-year daily chart above shows WaveC from the monthly chart. In a 3-wave flat correction, WaveC forms in 5-waves, as has C's price action over the past year. The stock is now becoming extremely oversold, as indicated by MACD divergence.

My plan is to buy C when the SPX enters the 1300-1310 range. I will have a stop at $13 (which is below Wave4 and the 78.6% fib level on the Monthly chart). If, and when, C bottoms in the next few days, I will move up the stop to below that low point. Then, if C has a 5-wave rally, I will hold longer term. Otherwise, if there is a shallow 3-wave correction, I will sell and look to buy later on (perhaps a few weeks/months later).

Trade # 12: EUR/USD Short

I am taking a short trade on the EUR/USD @ 1.5538, stop @ 1.5570. My target is below 1.5300.

The 1h chart above shows that the move from A to B was in 3 waves, not 5. Therefore, it is just a correction of the larger downtrend. The decline that followed was clearly in 5-waves, and so I am looking to go short on a 3-wave correction. I am aiming for around 1.5540 because there are several confluent resistance levels in that region:
  • 1.5537: Wave-iv high
  • 1.5537: 38.2% fib of the decline from 1.5651-->1.5467
  • 1.5540: Weekly pivot point
  • 1.5552: Monthly pivot point

My stop is above the 50% fibo level.

Interestingly, retail traders increased long positions by 34% in over a 25 pip range. In other words, small price action convinced them to go long, which is bearish. Also, that horizontal line on the chart appears to be very good support. Since it is so obvious, price will probably break through to stop everyone out. Hopefully it works this time around!


Trade # 11: EUR/USD Short (Update)

Update @ 9:59am CDT on 6/20/08: I was stopped out for -52 pips. Will watch and see what happens at this point.


Trade # 11: EUR/USD Short

I am going short the EUR/USD @ 1.5538, stop @ 1.5590. My target is below 1.5300.

As I was anticipating, the pair rallied after I was stopped out in trade # 10. It has reached the 50% fib level and bounced off strongly. The rally from 1.5302 was in 3 waves, which is corrective. I am now looking for a drop below 1.5300 to complete WaveC from the 1.6018 peak.

The 30m chart shows the 3-waves up in greater detail. You can clearly see 5-waves down from the 1.5585 top, which means at a minimum, there will be another 5-wave decline. My strategy is to take a short position at the 61.8% fib (1.5540) level of this decline. The Monthly pivot point @ 1.5552 should continue to provide resistance. My stop is a few ticks above the 1.5585 high.

I remain bearish because retail traders are staying net long. There are sure to be lots of stops below 1.5460-70, as price has tested this level many times and looks to be strong support. At a minimum, price should drop below this level.


Trade #10: EUR/USD Short (Update)

Update at 6:41pm CDT on 6/15/08: I was stopped out for a -50 pip loss. It looks like we could see higher prices near term, so I will look to go short around 1.5550-75 if all goes well.

The 1h chart above shows that the first wave down may have formed as a leading diagonal. If this is the case, we should see a sharp upward retracement for Wave-ii. The 50% fibo and the monthly pivot point lie in the 1.5550-75 zone, so I will look to short around there, given there is no 5-wave upmove.


Trade #10: EUR/USD Short

I am creating an entry order to short the EUR/USD @ 1.5350, stop @ 1.5400. My target is 1.5100-50. I last posted about the EUR/USD here.

The daily chart above shows that the rally for Waveb was shallower than I expected. It is, however, in a clear 3-wave pattern which indicates it was a countertrend rally. I am now anticipating that Wavec will extend below the Wavea low.

Retail traders are net long and adding to long positions. This supports a break below 1.5283 (Wavea low). However, longer term, COT data shows commercial traders taking multi-month record long positions, which is bullish. If price breaks below 1.5283 and then bounces back, I will then look to go long.

The 4-hr chart shows an enlarged view of the Waveb upward correction. It appears to have taken the shape of a 3-3-5 flat. My strategy is to take a short trade on a break of the supporting trendline and the 38.2% fibo around 1.5365. My stop will be above this level.

My target is 1.5100-50 as there is some strong support in this range. Wavec would equal Wavea @ 1.5108. The channel trendline, which is nearing that range, lies at 1.5153 today. Also, the 50% fibo is at 1.5163. I the trade goes my way, I will look to tighten my stop or close my position in this price region.


Crude Oil's Climax!!

I last posted about crude oil here. I was certainly early in thinking that oil had topped. Now, the evidence for a medium-term top is pretty compelling. I think we could see the start of a very good correction in the next few days.

The daily chart shows my Elliot Wave count for USO (the ETF that follows Crude Oil). You can see that Wave5 has extended itself quite nicely. We are now in the final rally in Wave5. MACD divergence is forming, which normally occurs in 5th waves. Also, notice the parabolic uptrend denoted by the trendlines. These patterns are often corrected swiftly once the trendline breaks.

Most interesting to me is the fact that oil is rallying so vigorously after such a strong uptrend. William O'Neil writes about this phenomenon in his book "The Successful Investor":

"... say a stock that's been moving up for several months, but never more than 8 points in any one day, shoots up 12 points. When that happens ... you could be several days away from the ultimate top..."

Crude oil has just had it's best two days ever (in absolute dollar terms). In percentage terms, it rallied about 5% yesterday, and so far has rallied 7.5% higher than yesterday's close. This is on the heels of more than doubling in the past year! This sure looks like the final buying frenzy/blowoff for Crude!

The 5-min chart shows in detail the final Wave. Wave5 is underway, so we should see a top soon. Because blowoffs can continue for a long time, my plan will be to wait for a 5-wave decline on the intraday time frame, and then go short on an upward correction. That way I won't be caught off guard trying to catch the exact top.


SPX bullish alternative

Here's a bullish alternative to the bearish SPX wave count shown here. I this this scenario is less likely than the bearish count, but it's important to keep an eye of both possibilities.

The chart above shows that a leading diagonal may have formed from the March lows. Notice there are 5 distinct, but overlapping, waves that stay within the bounds of the triangle trendlines. If the market had truly bottomed in March, this uptrend could be considered Wave1. Now, we would be in Wave2 down. It would likely drop below 1373 to the 1330-1350 range before starting Wave3.

However, I find this scenario improbable for a couple reasons. First, the decline from the October 2007 high was in 5-waves. 5-wave declines are usually corrected, and then followed by another 5-wave decline that undercuts the previous low (forming a 5-3-5 zig-zag correction). Second, in a leading diagonal, the correct subdivision pattern is 5-3-5-3-5, whereas in this case, each upleg divides into 3 waves.

What would cause me to become bullish? If the recent decline stops where Wave-c = Wave-a and then rebounds above the Wave-a low. This would tell me that the decline was indeed just a 3-wave correction of the new bullish trend. I would look to buy on a rally through the Wave-b top.