Friday, October 2, 2015

Market Update 10/01/2015 The Window Dressing Washout and a Key Reversal

A lot has happened since last month - a key window dressing month - Sept. turned out to be one of the worst Septembers on record. I was anticipating fund managers would buy the dip, and instead we saw them lighten up on their positions. Just goes to show it's hard to predict what's going to happen one day to the next, let alone the next month, and that's why I spend many hours charting each and every day, and why market timing requires both patience, and constant vigilance.

If you possess these 2 human qualities (patience and vigilance) congratulations!  More and more we live in a world that has become increasingly impatient, and one where many folks expect instant gratification. This is exactly the kind of thinking that led to The Fed lowering interest rates to 0, and bank bailouts, in the face of a prolonged economic contraction. I'm talking about the one which started in 2000, not last month, and both are far from over. Of course we would all like crises to be over quickly, but there's a natural order to things. Quick fixes seldom last for very long, and they can even make matters worse, as Peter Schiff often warns.

There's a reason why I'm going on an on about patience, well actually a few reasons.

1. It's important to wait for the pullback, whether it be in beaten down Stocks like Twitter, or GoPro, or countless others - many of which you've seen me tweet, and re-tweet again. It's no fun catching falling knifes, so leave the guessing to other folks, while you wait for your target, or better yet, wait for  a retest of support, once the reversal is confirmed. More and more we see a washout below support - in a shakeout - before we see any kind of reversal, and that can take some time. Watching from the sidelines won't cost you anything, and it's always a good exercise in patience.

Here we see a shakeout in shares of Twitter $TWTR followed by a rebound, which is then followed by just the kind of bullish back-test I describe. The Pattern is a parallel channel (seen in blue), and we now see it retesting $25 support. Another thing to note is that you would never find this bottom using a short term chart, and that's a topic for another time.

2. Seemly endless sideways consolidation patterns - AKA sideways corrections - require a huge amount of patience to trade successfully, and there's a good chance we're in just such an extended sideways (contracting triangle pattern in wave 4 right now). This isn't something I just came up with overnight, this was discovered and Tweeted on Sept 30th, but I had already been working on this chart for a couple weeks.

When the market is lethargic and erratic as it is, it's time to start thinking outside the box, and this pattern matches the action we're seeing, and you can learn more about wave (4) triangles in my free Elliott Wave Tutorial.

The August flash-crash spooked investors and traders alike, and this left many looking for the next leg down, but so far we've only seen another washout in a couple areas, namely the Russell 2000, and the Biotech space. This can be attributed to a reallocation of funds going into the end of the quarter - as I mentioned above - but the major indices have in fact not made new lows, and unless we were in a prolonged crash - say in wave 3 - I would never expect that.

You just don't see the market crash in the first leg down (in wave 1). Once you see a crash like this, you would expect an equal and opposite reaction (which we saw), followed by an extended period of consolidation. Also, as I pointed out in an earlier blog, and again on my Sept interview at; if August support get's taken out there is no support  below that (1870ish) level. The August low is key support on some very long term charts. If these levels were to break; the next key support level I would be looking at would be the breakout point to new highs back in 2012 (1550 on the $SPX), which was never back-tested by the way. That previous resistance would become new support. I do see some possible support levels on the way down, but as I stated in that interview "things would become sketchy", if that August support is taken out.

I can't say for sure that we're completely out of the woods as far as a bear market is concerned, but I think we've seen the worst of it for now.

As far as the Russell 2000 this pullback looks a lot like the one we saw in Oct 2011

Continue to follow my Twitter @3XTraders for the latest up to-the-date developments.
Anthony Allyn

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