One of my favorite spots is the beach at Coronado. I could sit on the sand and watch the waves roll in for hours and hours. No two waves are the same. Some are large and relatively violent. Others are calm and and understated. But the pattern repeats over and over again, regardless of the size of the wave. First, there is the calm. Then, there is a sense that pressure is building below the water's surface. The underlying pressure lifts the water higher and higher until the wave is majestic in appearance. The wave gathers strength, a strength that defies gravity as the wave hangs in the air until the shore is reached and the wave comes crushing back to reality. And then the calm returns again.
Think of the market as an ocean of fear and greed.
A wave begins when investors are fearful. The future looks bleak. The market might drop down to the center of the earth. Who in their right mind would be buying stocks? Well, some are buying because they see opportunity. They are buying low. The market begins to rise and everyone is taken by surprise. This unexpected wave out of the depths of despair is Wave I. Only a few investors and traders catch it.
But waves eventually reach the shore and drop back to earth. Most will believe that the lower prices are coming again. However, the market drop stops before the low of Wave I is taken out. This wave down following the first wave up is Wave II. When this Wave II bottoms, you want to buy. This is a buying opportunity in the extreme, even though most investors will be bearish and expect lower prices.
(The Las Vegas Investment Club followed this strategy. Wave I started on July 1, 2010 when the S&P 500 Index reached a low of 1010. The market rose and made a high of 1129 on August 9, 2010. This point was the end of Wave I. Now, it was just a matter of waiting for the Wave II drop to play itself out. We waited and waited until August 25, 2010 when Wave II had reached the zone where Wave I began. Then, we moved 100% into the C Fund fully expecting a tremendous rise in the market.)
Wave III up follows Wave II down. Wave III up is the most powerful wave in terms of market psychology. Investors and traders recognize that the market is going up when the high of Wave I (1129) is breached. Most monthly records for performance are set when the the high of Wave I is taken out.
Of course, the market high is followed by another market low. This new market low is Wave IV. Finally, the market makes a final excited high. This is Wave V. When this wave reaches its top, it is time to sell. You will see alot of divergences between the price and underlying technical indicators (Relative Strength Index, MACD line, MACD histogram, full stochastics). Its time to go. In fact, this point is one of the best times to sell! The market reached the top of Wave V on April 26, 2010 in the middle of many divergences. 1219 was a great time to sell in hindsight.
What happens after the top of Wave V?
The market will drop (Wave A). The end of Wave A is a great time to buy but it is hard to seize the opportunity in real time. The bottom of Wave A was 1010 on July 1, 2010. Highs follow lows, so the market should move up. This wave up is called Wave B. I believe Wave B up was from 1010 on July 1, 2010 to 1196 on October 25, 2010. Highs are followed by lows, so the market should move down after October 25, 2010. Wave B up ended, I think, @ 1196 on Mutual Fund Monday, October 25, 2010, @ 6:45 a.m. (PST).
These waves in investor psychology make me very bearish right now. The high of 1196 should be followed by a significant low.
The next wave C should be down. According to market commentator Corey Rosenbloom, a great time to sell is @ the top of Wave B/Beginning of Wave C. I agree.
This week should see the next wave down play itself out. Its all about waves this Sunday morning.
Highs are followed by lows.
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1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
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