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Friday, May 12, 2017

Market update 5/12/2017 Pullbacks v Sell-offs - advanced trading techniques

Pullbacks v Sell-offs

This is the perfect time to continue talking more about technical theory, and although you might find it boring, it's going to help you understand basic Elliott Wave theory, and that's going to help you read any one of my charts, and that's going to help you anticipate the next trade.

Yesterday's bear attack looks like a 1 day event, and a nice little shakeout ahead of OPEX. We didn't see much movement on the $VIX, as it continues to hang in the bottom of the range. Low $VIX = small market moves. At $VIX 10 you don't see big sell-offs, and even if the $VIX were to test resistance @ the top of the range (12.25), we're only going to see the DOW test the 20,725 level.

I don't see us revisiting yesterday's lows, anytime soon, and that's because the $SPX held the May low. This is important, because as long as we don't make new lows, a bear market is not confirmed.
This is because a pullback looks like a "higher high", which is exactly what we saw, and that points to a pullback. You could say, "but the Dow took out the May low"..., but The April low on the DOW is around 20,400, and we saw a huge bullish hammer off the 50 day, and that's an impulse wave, and you hardly ever see one impulse. Yesterday's rally off the lows, looks like an impulse, and the fact that it broke out above key resistance, tells me the market isn't selling off.

Now you're probably asking, "what is an impulse wave? If you study Elliott Wave Theory, you'll find "impulse waves" mentioned, in passing, and that "one impulse is always followed by another", but they fail to explain what an impulse wave is. The easiest way to explain what an impulse wave is, is that it's a powerful move, like the rally we saw off the lows yesterday. and only the first leg up in a bull market, or the first leg down in a bear market. An impulse wave is wave A (in a counter-trend), or wave 1 in a trend, but can also be a powerful wave C in a counter trend, but the important thing to remember, is that the first impulse is followed by a pullback - just like the one we're seeing this morning.  

I think the easiest way to explain what an impulse wave is, is to draw it on the 1 min $SPX chart. The EW count below is an example of the most bullish scenario, which would be a breakout to new highs, into OPEX, and into the summer. To be clear, I'm not making that prediction, but it seems the most probable outcome.

In a bear market this is what the EW count might look like. Impulse wave A, followed by a pullback into wave B, and the corrective A-B-C pattern completing with a second impulse (in wave C).

 I see yet, another scenario where the rally fades @2401 level again, but let's put that up on the shelf, for now. Either way, I see yesterday's shakeout as a 1 day event. A blip on the radar, and a failed bear attack. Read more about how to hammer markets down, in a bear attack, in "Jim Cramer's Guide to Market Manipulation" 

Final note: We've seen Oil on a tear, and that points to an impulse wave. No doubt the powers that be are planning to get paid on their bearish options (in the energy sector) this month, so expect a pullback there.

Take care, and have a great weekend, AA

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