Market Update Email 2-6-2009

Started to save charts at this point instead of using links. I also added a disclaimer at the end of this email as my audience was getting larger.

To: Friends and Family
Subject: My take on where the wave count is and other technical market observations

Warning: I get pretty technical below, but you should be able to tell by the linked charts where the key areas are and what I expect. If not, just shoot me an email or give me a ring. By the way, the charts should update on a 20 min delayed basis so you can refer back to them as time goes by to see how we progress. I suggest bookmarking as a favorite and I will try to keep updated.

I usually follow the QQQQs, but they are more difficult right now so Id rather show you the cleaner market at this point, the S&P 500. Click the link below, then read away. You will most likely want to flip back and forth between the chart and this email to make it easier to follow.

Link to my chart and you can see we are in a pretty good risk reward area with a possible intermediate term top at $875 last week with an expected big move down imminent...read on.

High Probability scenario (labeled on chart): the highest percentage count is we have a completed wave pattern (labeled gray IV?) as a triangle with the E and final wave completion last week at $875. What this means if count is correct is the fifth and final wave of this move down has started. We will get confirmation with a move into the green area and a break out of the triangle south. A break out of the triangle south will turn me 75% Bearish. A move below $800 will turn me 95% Bearish. I leave 5% open because there is another possibility of breaking down the triangle but only for a shortwhile before a suckers rally move back into it later this month. This will be short lived though at which point I will turn 100% Bearish. Based on my own personal trading account, I am about 60% bearish and 40% cash currently. This count is also supported by many other factors including the VIX (Implied Options Volatility) making higher lows even though the market was doing the same (line chart below wave count). The VIX usually moves opposite to the market and is showing that fear is growing even though the market is rising. Also, the current put/call ratio is at the lowest levels it has been throughout this whole bear market. That link to a second chart is attached below. The put/call also moves inversely to the markets, so a low on it corresponds with a high in the market. Pretty amazing the bullishness considering we are still at prices below our October lows! This put/call chart is very important and I have relied on it all Bear market. You can see the buy and sell signals it has given in the past. Right on. Similar to the vix, it gets lower as fear decreases and higher as fear increases. Right now there is a ton of bullishness and complacency which is a recipe for a brutal move down as this fifth leg should be.

The fifth wave down should be a big move that takes us to new lows below $750. The triangle pattern on the chart measures to a move that is 250 pts or 25% so a breakdown of the triangle will result in a similar sized huge move of $250 pts and/or 25%. That measures to an S&P500 between $618 and $575. Triangles usually go about 66% of their apex, which is the zone we are in now. Breakouts usually occur in that 66% area, so I expect something to happen pretty soon. Hold on to your hats, because what I am seeing, trading, and expecting is the next final (at least for a few months) big move down where we will get our capitulation everyone keeps talking about and everyone will be scared to death. The red boxed area will tell us if something else is going on which Ive outlined in my lesser probability scenarios below.

Medium Probability scenario: the final triangle move up isn't yet completed at $875 and we push higher to the top of the triangle around $900. I can't fully turn bullish until the triangle is broken out to the upside, though, and then makes a higher high above $945.

Low Probability scenario: any movement above $875 would require a reevaluation of the wave count and any move above $945 would require probable bullishness. That is unlikely at this point, though. Translation: Stop Losses at those levels depending on how aggressive you are trading and your time frame.

Bottom line, we should stay in the triangle until we dont! At that point price will tell us where the market is going. Good Luck.

Remember, although this is pretty much my lame life, it is still just my opinion and not trading advice. Only you know your own goals, timelines, risk tolerance, etc.

Chad