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Wednesday, August 3, 2011

August 3 (updated)

Update, 11:45

As I have been saying the last week, my cycle chart (the 60-min chart in my Trend System) has not issued any divergence yet and so I had been calling for lower lows over the course of the week. So far that has been playing out. But as this wave has been accelerating down (and especially with the daily reversal hammer today) I decided to do a specific backtest study.

I built my 60 min cycle chart off of a 10 year backtest, and out of 162 cycles and subcycles, only 11 bottomed without a divergence signal (~7%). This has been a fairly reliable indicator for me, which is why I continue to look for divergences in all cycles.

But with the backtest study, I wanted to look for
a) Sub-Cycles that bottomed with no divergence
b) with a similar setup to this wave (very wide MA spread, similar stochastic readings, etc.)

I found only 3 that matched that criteria: Sept 18, 2008 (crash), Oct 13, 2008 (crash), and May 8, 2010 (flash crash).

These are interesting results. While the move down the last two weeks has been sharp, I don't think it yet qualifies as a 'crash', at least not yet. So I am not entirely convinced that this hammer is a conclusive bottom. However... The 'flash crash' was about a 8% move down (the 20-min 'spike' was deeper) and that has been about the size of the move down to the bottom today.

Of these 3 cases, all triggered sub-cycle bottoms on no divergence, and a sharp move up that failed within a couple of days, and within a week or so was moving down again, triggering another sub-cycle top signal and making new lows with follow through.

So, if this cycle follows a similar pattern: then we have a bottom with no divergence that occurred this morning, and tomorrow will be a huge up day and trigger my uptrend indicators. We should see a continuation of the rally for a couple of days, fail, trigger a new downtrend, and then new lows around a week from now.

The options then, as I see them, are:

1) A lower low tomorrow or Friday with divergence that will be the end of this wave and cycle (bullish for the intermediate term)


2) A huge up day tomorrow which makes a bottom with no divergence and a sub-cycle bottom. The wave will move up for the next couple of days, fail, and be making fresh lows in about a week and a likely bearish continuation (much more bearish for the intermediate term)


Current count. My cycle chart has still not issued a bottom signal. Several indicators are finally starting to slow down. But my key indicator needs to issue a divergence signal for a bottom, and it hasn't yet (it still made a lower low at today's bottom). However, it is now set (depending on how the next low is made) to make divergence on the next wave down. So my charts are telling we have at least one more low for this wave.

Supporting sub-count is consistent with that call.

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