Welcome to FocalEquity!  In case you don’t know me, my name is Craig Simons from Boston. I used to post daily videos on StockTock. I’m another wounded bear that’s been calling tops for the past couple months. If you can relate, I think we both know why we were wrong… there were just too many of us. But lately the bear cave has felt kind of lonely. Commenters are blasting myself and other bears for their persistent pessimism, their foolhardy allegiance to Elliot Wave, and their utter disregard for the trend. I’m just fine with all that. While calling tops is a fool’s errand, and my time would have been better spent riding the wave higher, do not expect me to stop searching for this elusive top with a fine tooth comb. I consider this market to be presenting one of the greatest trading opportunities in a lifetime. For day traders, you can ignore this message, but for investors and longer-term swing traders, the pending move lower should be epic. That being said, I don’t underestimate how long the “New Bull Market” charade can carry on. But I’ll be ready when it turns. I’m watching the weekly SPX chart for potential negative divergences just like the 2008 market top. Of course, if the market continues higher, these divergence could become moot. Low levels of fear are common before major market declines, and fear is certainly low, especially given the shaky footing of this economy. Here are weekly charts of the SPX and VIX.

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Looks like a Kiss of Death setup to me. Market seems to rallying the stock on hopes the gov’t will not institute the Volcker rule or some other form of financial regulation that restricts prop trading.  Recent focus on healthcare has many traders thinking the gov’t may do nothing. I think that’s doubtful. I’m going to side with Meredith Whitney who is adamant that major bank regulation is coming through the pipes. Also, Goldman is risky in the sense that we have no idea how they make money. I mean, we know they make money by being smarter than everyone else, but even the smartest guys in the room can be on the wrong side of a trade. Does anyone know their exposure to sovereign debt, particularly Greece? If the stock rallies above the neckline and holds, I will have to reevaluate, but this chart looks like a classic kiss of death.

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If your a bear holding front month options (like me), you’re probably ready to throw Elliot Wave Analysis out the window. You might have even covered your positions in frustration. In times like these, I try to hold to my convictions, provided they are backed up by rigorous rational thought. Wave Minuette (ii) of Minute [iii] is taking its sweet old time, subdividing into complex patterns of lower degree. Remember, corrective waves are much more difficult to count than impulsive waves, and Minuette (ii) is no exception. This count is borrowed from Kenny over at Kenny’s Technical Analysis Blog.  It shows Minuette (ii) tracing a double zigzag, which consists of a 5-3-5 zigzag for W, a 3-3-3-3-3 triangle for X, and a 5-3-5 zigzag for Y, with the last 5 in the form of an ending diagonal. The final 5th wave of the ending diagonal could complete Tuesday or perhaps ends truncated, allowing for a gap down Tuesday morning when the markets reopen. If you’re new to counting waves, don’t get thrown off by the WXY notation. Just think of them as an ABC. When counting zigzags, we use WXY for double zigzags and WXYXZ for triple zigzags. Could Minuette (ii) trace a triple zigzag? It’s possible, but I think unlikely given how long Minuette (ii) has already lasted (nearly twice as long as wave 1).

Holding front month options into expiration poses a great deal of risk. Historically, expiration does not end well for option buyers because stocks are manipulated by larger institutional players (ie. banks, hedge funds, prop trading desks, etc) so that stock prices close where option buyers make the least amount of money. There is a great site, optionpain.com, that calculates the “max pain” price for any stock ticker. When I type in SPY, it shows me that option sellers would pay out the least amount of money if the SPY closes at $110 on Friday. That is $2 higher from where it is now. Try it for yourself and you will see that option sellers prefer higher prices for most stocks and ETFs by Friday. If the wave count above is correct, I don’t see this expiration working out for these larger players. And when they become aware of it, you will see some real dumping as they try to hedge or reverse their positions. I guess this all makes sense if we are on the cusp of wave (iii) of [iii].

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8 AM Update
SPX Hourly, Broke trendline and backtested. Kiss of death?

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SPX 30-Minute
Minuette wave 3 may be underway. Today’s low may have marked the end of wave b, but I suspect Minuette wave 2 is already over.

XLF Daily
Financials are leading this market, and

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ON DECK: Wave 3 of 3
In my opinion, wave 3 of 3 is on deck (Minuette 3 of Minute 3 of Minor 1 of Intermediate 1 of Primary 3 of Cycle C… see Elliot Wave Notation). Today’s close will create some bullishness from the talking heads over the weekend. Maybe it lasts through Monday-Tuesday. The renewed optimism is expected right before a wave 3 of 3. Do not be fooled. I’m holding February puts in SPY, QQQQ, XLF, and some individual stocks.

The recent moves in the dollar, gold, and oil are not signs of a healthy market. Most people are still dismissing debt concerns as overblown (just heard Doug Kass say this!). I think structural problems in the global economy are just beginning to be exposed. I remain bearish on just about any hard asset, including gold. Deflation will be a common dinner table discussion in the near future. The US Dollar will continue to run. I expect this Bear will slice through “support” levels as if they were not even there. Valuations are based on faith, not growth. We are about to witness what happens to a faith-based economy when faith erodes.

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Here’s my primary count. Minute wave 2 traced a flat and now Minute wave 3 is here. You can see how much larger the structure is than Minute wave 1. This move lower should be very powerful, and we saw an example of its power today.

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4:10 PM
Primary count still a double zig-zag for Minute wave 2. Alternate flat count still a possibility to be aware of (see bottom of post).

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Here is another S&P count I am watching that has Minute wave 2 tracing a 3-3-5 Flat. This count is interesting because it takes out the wave 4 triangle with the short e-wave that never quite sat well with me. Thoughts?

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My primary count has Minute wave 1 ending on Friday. Minute wave 1 took 8 days to complete, so it’s reasonable to expect Minute wave 2 to last 5 days (8:5 Fibonacci relationship). Today, we saw an A wave higher followed by an ascending triangle B wave.   Of course, we must adjust as the market plays out, but this is what I’m thinking. I’d like to add to my short positions during the final C wave later in the week. (Link: Elliot Wave Notation)

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