Expectations and New Bearish Trade Set-Up

Click on Chart to Enlarge

Last week I had said that I would revert back to short-term trading mode if the S&P 500 did not manage to fall below 800. It did not, and that prompted me to suggest placing a stop loss on BGZ to protect some of the gains we had. The stop loss was hit Friday resulting in a 4% gain, so there are no open trades on the blog right now.

The chart above is the S&P 500 as of the end of this past week. I have put several notes and lines on the chart with the most likely scenario that I think will occur. That scenario is a sharp advance next week up to 875 or beyond, followed by a very severe decline beginning after that. The reason I put these projections and expectations on the blog is because it is fundamental to the way I trade and allows trading decisions to be reduced largely to logic.

I like to create "if" -"then" type scenarios. If so and so happens, then I will make a trade......

Also, I have expectations for what "should" happen after the trade is entered, in order to confirm the likely correctness of that particular outlook.

So the logic for the coming week is.......

If the S&P 500 moves above 875 by Thursday with overbought short-term signals, then I will suggest a new trade on an inverse ETF (BGZ in this case).

Now the rest of the analysis may only interest or seem coherent to someone interested in wave theory, but there is a logical component that should be easily grasped in any case.....First, the light blue boxes (with green lines inside) surround the upward phases of market movement since October. Second, the pink lines highlight the weekly highs and lows of the downward phases during that time. Notice that the upward phases have multiple overlapping price moves, like price is moving a lot, but not getting anywhere fast. Now the downward phases don't overlap, and price is able to move in one direction for a sustained period of time.

The basic market logic is that the current trend is in the direction of the fastest and largest price moves. That still is definitely DOWN at this point. So until, we see a large and fast upward move (larger and faster than any other upward moves), then it is wise to assume the main trend is still down.

I have referenced the price pattern above as a possible "triple three" correction, which is a term from Elliot Wave theory. Without getting into details, that is the most complex corrective formation possible. So after this upward phase ends, the larger correction should end, and the market should resume a strong downward trend. Again, if this does not happen, then I will have to consider a change in perspective.

Because the potential still exists for a huge move down, if I recommend BGZ this week, then I will plan on holding it for a longer period to try to catch the big move. I will be using intermediate term models for the exit rather than short-term models. If the market follows the scenario laid out above, then we should be able to get in at a lower price than the 62.26 entry on the last BGZ trade, which will be the best of both worlds -- we already made a 4% profit on the last trade, and we get back in the new trade at a better price than the original.

Pete