Terry's Most Excellent Questions

Good morning!

It is a sunny Saturday morning. I feel rested and refreshed from a crazy work week. Now on to the market....

Terry raised very good questions recently in a comment. The questions are so good that they deserve a separate blog posting.

1. "If we are in a high and tight Bull flag pattern, should we consider entering a buy position in the TSP? I am typing this just after close on thurs. The DOW closed down ~60 and the S&P down 3.6."

Answer--When I saw the dramatic rise in the market on Thursday after 7:50 a.m. (PST), my first thought wasn't bullishness. My first thought was that (1) the drop caught the market off guard which meant (2) a bounce was due which we saw in the last hour of the trading day. Now normally, the last hour of the trading day means professionals are at work. But I remembered the same action in the afternoon of May 6, 2010 and the Flash Crash. Remember how the market drop caught everyone by surprise and then there was this tremendous short covering rally as the shorts feared losing their unanticipated good fortune? I also remembered this wonderful video on You Tube titled "100 Pips in 25 minutes." In this video, a Forex trader shows how shorts late to the party are always hurt by the inevitable retracement. So, I immediately took out my calculator and calculated a 0.618 retrace of the 1298 to 1262 drop. That got me to 1284. So, I anticipated the market should halt around 1284. It actually stopped around 1282.

After the 0.618 retrace, I anticipated a further drop in the market. That further drop happened on Friday.

But to answer your question, it remains a High and Tight Bull Flag pattern until the 1258 low is breached. So, a buy position in the TSP should be considered Monday morning. I am cautious because the upside is limited to the downward sloping 50-day moving average or roughly 1318. I am not comfortable right now with a buy recommendation, but definately, a buy consideration would be in order for Monday. If my thoughts should change, I will send out an alert to the Club members ASAP.


2. "I feel today would have been a good day to move into C fund. It would have been a scary move considering the market opened down 200. I ended the day +ing up my meager positions in stocks and ended the day up 2%."

Answer: Assuming we are witnessing a High and Tight Bull Flag Pattern, then Thursday would not have been a bad day to enter the C Fund. However, drops retrace (sometimes 0.618%) and then they make a lower low. The You Tube video "100 Pips in 25 minutes" makes this point. I recommend a viewing by all Club members. So, the best time to enter the C Fund might not have been Thursday because there was more of a drop in price to come. Why enter the C Fund at 1282 if you can enter the C Fund at 1262? Just a point to chew on.

Now, Terry, allow me to place on my Elliott Wave hat for a moment....

We can all agree that we have seen a big wave 1 down in May, a big correction wave 2 up in the last week of May, a big wave 3 down in June, a big correction (long and complex) wave up since the 1258 low on June 16. June 16 is very, very important to this big corrective wave 4. The low was 1258. Then, the market went up to 1298. Remember how I wrote that the daily trend changed on me? I believe this change means the big corrective wave will not be denied and that we will see the downward sloping 50 day-moving average or 1318.

Corrections are against the dominant down trend. They proceed up (A), then down (B), and then up to a higher high (C). 1258 to 1298 was corrective Wave A. Corrective Wave B began at 1298 and dropped to 1262. Then the market rose on Thursday from 1262 to 1282 (0.618 retrace). We need a retest of 1262 to scare people, then the market can continue its date with destiny at the downward sloping 50-day moving average.

So, I am looking for a test of 1262 on Monday, probably Monday morning. The buy zone is between 1258 and 1262.

3. "Your decision to sell out of the position above was a smart move how would your percentages calculated if you had held firm 1 more day?

Answer: The July 125 puts closed @ 1.70 on Friday. But I don't look back. There are plenty of opportunities between now and November to meet and surpass our goal. For example, Monday morning might present an opportunity around 1262. We will see....

Your contented strategist,

Wink

Quote of the Day: "What are the elements of good trading? The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance." Ed Seykota, quoted in Market Wizards, page 163.

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