Perfect Elliott Waves

While I believe that all markets trade in Elliott waves, sometimes the waves aren’t perfect. Sometimes wave 4 overlaps wave 1 by a few pips, and sometimes what looks like five down in an ever expanding market (like stocks which are measured in a depreciating currency) is actually a false break. Regardless of being a Perfect Elliott Waves

Trading the imperfect double top – PART I.

The double top is not a reversal pattern

When it comes to the chart pattern of double tops, traders often look for perfection. I would like to advise against perfection; and, instead, introduce how to search for the taste of a “good enough pattern.” Imagine that prices progress in an uptrend and then suddenly find resistance. Prices pull backs then turns north again, Trading the imperfect double top – PART I.

SPX Pinball: Room To Grow… To the Right

Inside view of a flipper machine - the playfield has its boundaries

The August SPX decline had strong momentum, and the October rally was also relentless. What is the trend then? When prices are capable of gaining momentum in both directions, it causes confusion in traders’ heads. Confusion calls for woes and fear. When the emotion becomes strong, price volatility increases and persists; trends seem to emerge suddenly SPX Pinball: Room To Grow… To the Right

Trend Division Line

The web of lines in trading - an SPX case study

Traders can profit from a set of lines that enables them to tell apart a trend from a correction. This discernment is essential when it comes to adjusting our trading strategy to the current market condition. What is more, these easy to draw lines represent a thinking process aimed at the proper assessment of the Trend Division Line

What Could Go Wrong? Expect the Unexpected

Today’s stock investors take a couple of things for granted: Stocks always go up to new highs after falling in a bear market. That today’s current dividends being paid by companies will always continue. But, at major market lows both of today’s “easy to make” assumptions will not only be challenged but will be ridiculed What Could Go Wrong? Expect the Unexpected

Into Laszlo’s Trading Room: S&P 500 life after the stalling pattern

This weekly chart reviews the end of the stalling pattern, an almost totally ranging action where “bulls were not interested” in buying new highs anymore. It covered 314 S&P points to the north which is not bad considering the strength of gravity at this height. Studying the internal details of the structure might be a Into Laszlo’s Trading Room: S&P 500 life after the stalling pattern

Nailed It! Elliott Wave Forecasts Prove Correct

As we’ve written many times here, “Policy Divergence” is a US dollar bull fantasy. This week, as risk markets became unglued, the probability of a rate hike in September is around 30% based on the Fed Funds futures market. In fact, there’s now only a 50/50 chance of any rate hike this year. Add to Nailed It! Elliott Wave Forecasts Prove Correct

Do Valuations Matter?

Today’s lofty stock market levels are predicated on the idea that zero percent interest rates (ZIRP) and low Treasury bond yields have made cash and bonds so unattractive that stocks are the only alternative. This is represented by the acronym TINA, or There Is No Alternative (to stocks). While it is true that lower interest Do Valuations Matter?

Into Laszlo’s Trading Room: S&P500 Bulls Not Interested

This week’s bar looks bad, so far, and looking at the short term charts there is a good chance it will remain that way. If it does, this week’s candle with the previous two bear bars would confirm the kick-start of the larger degree reversal, following the a completion of the diagonal pattern. The new Into Laszlo’s Trading Room: S&P500 Bulls Not Interested

Into Laszlo’s Trading Room: S&P500 Range and the Long Term Outlook

Although the halt to the bearish SPX decline at 2.072 is not a full disappointment to the bulls, it is worth taking a look at the larger picture to get a handle on the function of this muddled wave structure that overall moves sideways along a few weak breakouts to new highs.

Into Laszlo’s Trading Room: S&P500 Tipping Point

The SPX is like a balancing rock - rolling nowhere

Maybe traders have heard my trading advice along the lines, don’t take a momentum entry following an elongated range market. I say that because prices did “drag to new highs lacking any enthusiastic follow through.” This market is not for the faint of heart of trend traders for a good reason. The tight way the weekly Into Laszlo’s Trading Room: S&P500 Tipping Point

What’s the Big Idea? – Part 1

What was the big trading idea in the past

Sometimes, when searching for trades, it pays to take a step back. If one formulates a valid long term investment theme, it can be used as a bias to trade for months (given confirming price action and momentum). An example would be the post we wrote about the Turkish lira back in October. That article What’s the Big Idea? – Part 1

Into Laszlo’s Trading Room: S&P500 Almost on the Go

Looking at the S&P500 chart we can consider the structure as an ending diagonal in Intermediate wave (5) of Primary [5] position. The diagonal has been under construction since October 2014 when price carved out the Intermediate wave (4) low. The S&P500 has started to respect every possible resistance from early December and has played Into Laszlo’s Trading Room: S&P500 Almost on the Go

Einhorn Blasts “Frackers” (Beneficiaries of the Junk Bond Bubble)

Today David Einhorn gave his presentation at the Ira Sohn Investment Conference. For those who aren’t familiar with the conference, it’s turned into an annual who’s who lineup of top investment minds; and, it’s for a great cause – pediatric cancer research. The title of his presentation was “Meet the Frackers (YouTube link).” In it, he Einhorn Blasts “Frackers” (Beneficiaries of the Junk Bond Bubble)

Into Laszlo’s Trading Room: SPX Failure Falls Short

The first chart today is from our April 13 S&P500 “sandwich” post, and it shows the actual path prices traveled in the last two weeks or so. This close match demonstrates how powerful Elliott’s wave principle is when it comes to understanding the price action context. Nevertheless we are showing this chart for two other Into Laszlo’s Trading Room: SPX Failure Falls Short

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Use the Force, Luke

Always adjust or the golf club shape trend day will grind you

I see this mistake all the time – from runners, and traders. You probably have observed the same in other type of activities as well. The proverbial salmon swimming upstream. Let me explain. I ran the Vancouver Sun Run 10K this past weekend, and there was a vivid reminder of being aware of your environment. Use the Force, Luke

Into Laszlo’s Trading Room: The S&P500 Sandwich

Illustration: the S&P500 is stuck between support and resistance

Monday, 0:23 a.m. The S&P500 has not been to a new high since February 25; that is to say, for 31 trading days now. Despite the all-time-high drought, we have not observed too much bearish activity; the deepest spot formed less than a 4% decline than the 2,120 SPX peak. When the market is so firmly Into Laszlo’s Trading Room: The S&P500 Sandwich

Blindsided by the Housing Bust? Don’t Miss the Junk Bond Bubble’s

There’s a reason The Wolf continues to harp on the Junk Bond Bubble, and the Dosimeter, which lists over 100 defaults now. That’s right, I’ve capitalized it, turned it into a proper noun, hashtaged it to death and won’t stop talking about it. That’s because it’s the SINGLE MOST IMPORTANT ISSUE for this next down cycle, whenever it Blindsided by the Housing Bust? Don’t Miss the Junk Bond Bubble’s

Dow Theory Non-Confirmation

Dow Theory was developed by Charles Dow, Robert Rhea and others as a way to determine the health of a particular trend. It’s track record of calling tops and bottoms is quite good using only the Dow Jones Industrial Average and the Dow Jones Transportation Average. Basically, the theory is that if both averages are Dow Theory Non-Confirmation

Impulsive break – S&P 500 chart update

A broken security key on the table.

Previously we had discussed the key support of 2,085 on the S&P500, and 208.78 on the SPY ETF, which was broken on Friday. Then prices tested resistance and confirmed the bear breakdown during Monday’s session. Prices have broken the level that divided the bull and bear scenarios, and so it’s now resistance. Tuesday’s drop through the new Impulsive break – S&P 500 chart update

SPX – Still Has the Momentum

A photo of a sailing ship with the Statue of Liberty in the background

The SPY (SPDR S&P 500 ETF) was able to poke into the green “sustainable bull momentum area” not just once but three times. I bet many traders see the gradual increase of the last two days as a wedge or ending diagonal, just like the RSI does; but, at this high of an RSI reading, it does not mean more than a 1-2 days long correction, in all probability.

SPX Hiatus – Waiting for a Short Term Top

A little more than a dozen points, that is how much the cash S&P500 index fluctuated so far this week. It is stuck right in the zone that we marked as “potential resistance” last week. The lengthy lull is a pause, when the entire market waits for a breakout to show direction at the top SPX Hiatus – Waiting for a Short Term Top

Radio Shack, the Partridge Family and God – All in Bankruptcy Court

Yes, it’s true…sort of:  Radio Shack’s 95-year run has come to an end, David Cassidy of Partridge Family fame has filed BK (not the whole family) and while God isn’t in bankruptcy, one of God’s booksellers, Family Christian LLC, is.

We’ve been writing about the Junk Bond Bubble for some time now. In case you haven’t read our previous work, or seen The Wolf’s thousands of tweets about junk bonds, here’s the synopsis.

Central banks have left rates at 0% for so long, that the traditional discounting mechanisms used in finance have been turned on their heads. All of this monetary expansion is in an effort to combat over capacity (there’s too many burger shops, nail salons and auto dealers for the underlying economy to support) and over-indebtedness (people, corporations and governments).

Junk bond yields look attractive to investors at 6.5% today, when that was what 10-year Treasuries offered in 2007. So, companies have borrowed to the hilt in an attempt to make a buck for themselves. Unfortunately, when the economy slows even a little, coupon payments get missed and defaults start to happen. Follow along on our Junk Bond Bubble Dosimeter.

SPY (SPX) lines in play

photo illustration tyre marks in the send

We often hear objections like, “It’s too complex,” or “It takes too much effort” with regard to Elliott’s wave theory. But, anything worthwhile usually takes effort, and is complex, and those that endure the learning process to undertake such endeavors are generally rewarded. We use Elliott because it is effective at classifying market moves, but SPY (SPX) lines in play

Will the S&P top? How and When?

Many longer term investors, and traders, believe the stock market is unstoppable to the upside. And, over the past two years or so, they’ve been right. But, we have not seen resistance hold back bulls this firm for quite a long time. We can almost sense the lack of confidence in every bullish breakout attempt Will the S&P top? How and When?

The S&P Momentum and the Ugly Bear Bars

The bearish streak of five bars in the S&P500 - check out the post to understand what caused them

What is this bearish streak of five bars in the S&P500 and other US indexes? Is this just a correction or a new global financial meltdown? Some multi-timeframe momentum analysis might come handy in the understanding the nature and scale of the wave, which is how we arrive at our conclusion. “When a time frame produces The S&P Momentum and the Ugly Bear Bars

Four Ideas for 2015

fouréleaf clover illustration

Here are some long term charts that we feel will be a source of trading opportunities in 2015. It’s not a license to trade them blindly with no risk controls, but we do like these ideas. This piece is meant to highlight some technical, and fundamental, concepts we’ll focus on when looking for actual trades this year. We will apply Four Ideas for 2015

Beware of the junk bond bubble! Whether it’s the Dutch sports car maker, late-night TV advertising law firm or small mortgage brokerages over indebted firms are declaring bankruptcy daily.

While none of these firms were large enough to hit our Junk Bond Bubble Dosimeter, they are nonetheless endemic of the reason we created it.

The Fed’s irresponsible monetary policy (six years of 0%) and a $4 trillion balance sheet, have sent false signals to business people, who created and expanded businesses, which means there’s now too much capacity in place. Much of that capacity has come to be on the back of loans which won’t be fully repaid should the economy slow. We’ll continue to update the Dosimeter, so check back often.

On Christmas Eve, we here at Trader Skillset wish you and yours a Happy Holiday Season, and we have some big things in store for 2015.

Junk Bond Bubble Dosimeter

A yellow warning sign; exposure to junk bond default hazards

Six years of the Federal Reserve’s zero percent interest rate policy (ZIRP) has created a bubble in junk bonds. Investors can’t beat inflation in safe assets any longer, so some of that money has poured into junk bonds and floating rate notes. Those inflows pushed more, and more, money into businesses of marginal quality. Should Junk Bond Bubble Dosimeter

Bloomberg article about the impact of declining oil prices

Update: High yield bonds at new lows! We are on record suggesting that the Federal Reserve’s reckless 0% interest rate for the last six years has created a bubble in junk bonds:

The Bond Bubble is in Junk Bonds, Not Treasuries

Junk Debt & Auto Loans Reminiscent of Subprime in ’07

Now, we’re about to see the defaults start coming from the energy sector, due to the collapse in oil prices as written about in a recent article from Bloomberg. According to Dealogic and Lawrence McDonald, author of A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, oil and gas exploration companies issued $70 billion in junk bonds in 2014 alone.

So, is it any surprise that the junk bond ETF JNK hit a 52-week low today?

Just like subprime imploded in late ’06/early ’07, and the S&P continued to party on, were seeing stocks do the same today. But, even a few defaults could cause a cascade of liquidations which will have follow on effects. It’s time to exit junk and up your quality, if you haven’t already.

Junk Debt & Auto Loans Reminiscent of Subprime in ’07

“…the problems in the subprime market seems likely to be contained.” Ben Bernanke March 28, 2007 “Bear Stearns is fine.” Jim Cramer Tuesday March 11, 2008 (Four days before its insolvency) “…the likelihood of a severe financial panic has diminished…” Janet Yellen April 29, 2008 (Global Financial Crisis was well underway.) In late November 2006 Junk Debt & Auto Loans Reminiscent of Subprime in ’07

A Nasty Grind – S&P500 Update

A narrow price channel means one-way-traffic

Most articles that are about S&P 500 forecasts will start with that upfront. But, we’re different here at Trader Skillset, because we want to share the thought process, in addition to the forecast. It’s the equivalent of “teaching one to fish” rather than “providing a free meal.” So, we’re going to bury the lede, and A Nasty Grind – S&P500 Update

Trading the Google Earnings Report – Part II

Photo of a Google logo

In Part I of “Trading the Google earnings report” we covered Step 1, the short term overall market picture by analyzing the Nasdaq 100 index chart. We still have 3 more steps to discuss, but before that, a catch up on Wednesday’s trading session. The strong reversal of the last two hours of trading is Trading the Google Earnings Report – Part II

How Running Corrections are Born?

Where does the market run when we see a running correction form

We often see sideways corrections being somewhat skewed in the direction of the preceding trend leg. For example, in a bull trend the market suddenly turns down for a couple of bars (wave A) then forms a marginal higher high above the peak (wave B) and when many expect price to return at least to the How Running Corrections are Born?

The Bond Bubble is in Junk Bonds, Not Treasuries

Black and white photo of bubble. Bubbles have a tendency to burst

“The bond bubble is going to pop. But the bond bubble I’m talking about is in junk bonds, not Treasury bonds.”  -The Wolf Today brought an absolute shocker to the mainstream news media. GT Advanced Technologies, a component supplier to Apple (and junk bond issuer), filed for bankruptcy protection. On Friday, the stock closed with The Bond Bubble is in Junk Bonds, Not Treasuries

One Wave at a Time on the S&P 500

Elliott waves are powerful, but they don’t make one omnipotent. For instance the S&P500 quarterly bar chart’s trend is bullish and the monthly is bullish; but, the weekly bull trend is ripe for a pullback based on RSI trend analysis. The daily on the other hand got stuck at 62 on the RSI which suggest One Wave at a Time on the S&P 500

S&P 500 at 2000 – How high can it go?

crosshair on the weekly S&P 500 chart

A popular topic lately is the discussion of the bull market in US stocks now that the S&P 500 is at 2000. How much further might it go? We have already covered the process we would like to see before we change from bullish to bearish in a previous post about how to identify a trend change. Personally, as a trader I S&P 500 at 2000 – How high can it go?

Homebuilders ETF Forms a Head & Shoulders

XHB ETF monthly chart how the rally from the 2011 low loses momentum

The homebuilders (XHB) are always an interesting group to examine, because it tends to be an “early cycle” group. It’s a stock group that leads the market most likely because it touches so many different areas of the economy (commodities, interest rates, employment, etc.). As evidence of its leading nature, take a look at a stock Homebuilders ETF Forms a Head & Shoulders

Stock Market Risk – The New Reality Part 1

Effective Federal Funds Rate chart 1954 - 2014

Investors are expecting far too much return from their investments, and far too little downside potential, as of today. These expectations rest on two faulty ideas: Expecting the next five years to mirror the past five. Belief in the power of the Federal Reserve, and central banks everywhere, to ensure economic growth. But, the Fed’s Stock Market Risk – The New Reality Part 1

From Dow to Broccoli

The broccoli is a nice example of a fractal image in nature, repeating itself in self-similarity at varying scales

At the end of the 1800s Charles Dow’s market theory had already included some hints about the three phases of market trends. Deliberately I use the word “hint,” because his principles are formulated much too vaguely to build an active trading strategy with. According to Dow, the first phase is a slow up leg governed From Dow to Broccoli

Ideal Reversal and Continuation Signals

Traffic light tree in the dark - Tons of signals which one to choose

It takes more than a single candlestick, or pattern, to enter a trade, even if it meets an optimum set of criteria. Candlestick patterns are just one signal that we utilize to alert us when the short term price action lines up with the long term context. As Jeffrey Kennedy from Elliott Wave International puts Ideal Reversal and Continuation Signals

Three Times the Speed

Many traders have a basic understanding of momentum. But, we think most traders would benefit from three tweaks to the traditional thoughts on the topic. In fact, in our proprietary trading system, momentum helps to identify and confirm the context; and, as such, it is the link between historical prices and the short term signals. Traditional Momentum Three Times the Speed