Good morning everyone!
I am writing on a wonderful Sunday morning from a hilltop in Southern California (an undisclosed location a la Dick Cheney/smile). The views of the green hills in the distance and the valleys below are pleasing to the eye. There's a nice rustling sound as ocean breezes slide by the way. Ah, Sunday mornings.
It also helps that market conditions are unfolding as they should.
You see, the trend is always your friend. I don't care how many smooth-talking money managers are talking "x" or indicators are saying "y." At the end of the day, it is best to be right with the dominant trend. Life can be easy.
Where are we this fine Sunday morning?
Well, the S&P 500 Index topped on May 1, 2011 at 1370. Since then, the market shifted into a down trend gear. The early warning sign were the five swings down throughout the month of May. Elliott Wave Theory 101 teaches that the dominant trend begins with five waves in a direction. The direction could be either up or down. But once we see a five-wave move in a new direction, we have rock solid confirmation that the trend has changed. Now, it may be psychologically hard to accept what your eyes are seeing. As the previous trend is ending, we have a human tendency to project the old trend into the future. I do it. You do it. Everyone does it.
But we must put away that rear-view mirror and look at the road ahead (do you hear me, Joel?/smile).
Anyway, these waves are fractal in nature. That just means that they unfold in layers within a larger wave. Think of it this way. The first five waves down completed on May 23. Now, we know. Those who study the markets every day have their confirmation of a trend change to the down side. The high-speed computers know this and, presumably, are being programmed to sell on the upcoming rally. Why? Because the complete wave down from May 1 to May 23 constituted a wave down of a larger degree. Corrections follow waves down, so the move up from May 23 to May 31 was the first rally up. And it was wise to sell this rally.
When the market peaked at 1346 on June 1, we had a tremendous trend day. It is considered a trend day because the market trend revealed itself with force. June 1 was a massive down day as the market opened at a high of 1346 and closed around 1315. It was time to go.
This Second Wave down that started on June 1 will have three baby or micro down waves contained within it. Thus, think of the first drop from 1346 to 1277 as baby wave 1. Baby wave 2 up followed and took us up to to 1294. But remember that the dominant trend remains down. Don't forget that! We can be safe in being bearish because the whole move down from May 1 to May 23 has provided insurance against the engine backfiring as Jesse Livermore might say.
On Friday, the market dropped below the previous baby wave 1 low of 1277 to close at 1270. We are now in baby wave number 3 of the large wave 3 down since May 1. We are in the sweet spot of the down trend. We are in the Third Wave of the Third Wave down. It is at this point, according to Wikipedia, that the crowd catches on.
What may lie ahead?
There are no guarantees in this business. However, it is likely that the baby wave 3 will continue down and be the strongest of the baby waves down since June 1. Baby wave 3 should be followed by a baby wave 4 up and a final baby wave 5 down. Then, we should have a sideways consolidation or Wave 4 before the whole process repeats itself again in a final Wave 5 down.
So, we're in the sweet spot right now.
Cheers!
Wink
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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.
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