Week In Review for 11/15 - 11/19

Announcements:

Due to the Thanksgiving holiday, there will not be a week in review published for 11/22- 11/26.

The Week In Review:

The month of November has been strong for all dollar denominated asset classes as investors rationalized  buying everything in hope that the FED will create inflation and drive markets up. In November, the Daily Sentiment Index for the S&P reached 94% bulls and the AAII Investor's poll reached 57.6% bulls. Both readings are the highest since January 2007. Considering the optimism for stocks that transpired near the market's high of 10/12/2007 and the weak economy, it's not hard to reason from a contrarian viewpoint that most investors who counted on the FED's easing before and are now even more bullish than 2007 will also suffer a similar fate when they least likely expect it.

With Thanksgiving only days away here in the U.S., I think most readers expect a week of low volatility as traders are more focused on the "bird" than QE2, USD, equities and commodities. It's often during these holiday times that I take some time to review my trade plan, goals for next year and a good old fashion dose of "Chartfest"... basically, I'm looking at allot of markets. In the next couple of weeks I'll be posting the charts of crude oil, copper, USD, some sectors and individual stocks.

However, I try not to take anything for granted. Note that the following chart shows converging moving averages as annotated by the blue circles. Analysts call this condition "market compression". I find that when this occurs there is a high probability for a big market move. Also not that I've circled several places on the chart when all three moving averages converged. Draw your own conclusions but the subsequent moves seem rather definitive to me. Unfortunately, most traders don't know what direction the market will trade by just looking at the chart.  That is unless you have Elliott Wave in your trading toolbox. So let's try to explain why the market is compressing and the expected direction of the market using the wave principle.

ES_F Forecast:

At the daily chart level, I'm still working a w.4 retracement whereas the wave pattern should unfold in either a flat correction or a triangle, followed by a new recovery high. This interpretation bodes well for a market that undergoing compressing. Between the flat and triangle, the triangle interpretation (see 60 min. chart levels) would best explain the market compression that we find developing at daily chart level. Under each of these interpretations, a decline below w.1, roughly the .50 retracement of w.2 - w.3, would eliminate another high in the rally that began in July from w. (B) and call for a larger decline. While, I remain open to this possibility, I don't think the probability of such an event is high.

Turning my attention to the 60 min. chart levels, I've shown the charts for flat and triangle interpretation. Until I see how the pattern is unfolding, I can't make a near term forecast beyond what I have noted.

Here's the market's position as of the close on 11/19/2010.

Momentum: Weekly is OB and has turned down. Daily is bullish but not OB. 60 min. is OB.
Pattern: W.c of wave.2. Either a triangle or flat correction for w.4

Time: No analysis made.

Trade Strategy: Remain flat until w.4 wave pattern becomes clearer.

Conclusion: Once w.4 ends, the market should push higher in an impulsive manner. Expect a new recovery high that is telegraphed by the three moving average convergences at the daily chart level.


Best of Trading