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Friday, July 9, 2010

A Few Ruminations

Okay, I am going to put down a few thoughts that I have been noodling around with for awhile.

But first things first: My Primary Count. This is and continues to be my primary count. I put the odds on this count. And even if we are not in a Minor 3 down yet, the risk (and all the surprises) will be to the downside. So this is the count I think is most likely and the one that I play until proven otherwise

Is this count a slam dunk or a sure thing? ... No. No count is, not ever. I always have alternate counts. I only ever show my preferred count, because despite having alternate counts (and I have between 2 and 6 going at any one time) you can only trade one. Yeah, yeah, you can hedge against various options (especially with options), but my strategy is to trade a count that I think is most likely but to be cognizant of other alternatives.

Its like underwear. You (hopefully) own several pairs, but you only wear one at a time (again hopefully).

So what is my leading alternate count?

A Leading Diagonal. ... I expect I am hearing groans about this one. My old preferred count was a leading diagonal. See this post: A Third Look at "Always Another Option". I left it as a preferred count, but I never left the idea. alphahorn and I have had a number of good conversations about this (he was the first one to come up with the idea as a count and to observe the pattern weeks ago). alpha has made the comment that this could be a larger LD at play, once the previous one was broken. That has stuck with me the last couple of weeks. alpha is still observing a diagonal take shape on the TNX.

So I am revisiting this one as a thought experiment.

Potential evidence #1: Volume and daily indicators

The volume (and the breadth as you can see on the first chart above) has not been accelerating down as time goes on. The opposite is true. This is not really what you expect if a 3 of 3 is starting to build (unless, of course, it is faking people out). But it would make sense if we are in the middle of a diagonal. Also the daily indicators are starting to slow down and converge, which is the behavior we typically observe in diagonals. Again, it could be the calm before the storm (these divergences aren't confirmed yet, they are still just potential divergences at this point).

Potential evidence #2: VIX

The VIX is slowing down. It is not consolidating at the top of the range (which is the behavior we would expect for an upside breakout). It looks ... lazy, just sort of moving sideways. The VIX is a weird animal to begin with, and doesn't always move how you would expect, but this is not really jiving with a 3 of 3 windup.

So here is what the count might look like. Read the notes on the chart, they are very useful.

Okay, so here is the big question. What am I doing about this count?


Like I said at the beginning, I show my preferred counts to you guys, because that is what I am trading. However, that said, I would take the same action with this count that I am taking with my preferred count.

We still will make a lower low in either case (down to 1000 at least). Which means for either count, I would stay short anyways.

But here is why I am showing this count:

If the next wave down does not accelerate, if we don't get a large volume and breadth spike down, especially as we near 1000 on the SPX, then I would start to seriously ponder the leading diagonal.

If my preferred count is correct, then the consolidation the last several weeks is burning off oversold to make room for a large spike down to 900 in a very short period of time. So this is why I keep harping on *potential* divergences. They are not divergences yet (on the daily chart).

However, if it starts stalling at 1000, then I suspect these divergences will be confirmed.

So I am staying short in either case, and just keeping an eye on how the next wave down behaves. Just sharing some thoughts.
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