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OI Technical Staff : 10/17/2008 9:59:59 PM

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Keene Little : 10/17/2008 4:13:56 PM

I received more than the usual emails of frustration today so for those who struggled with this market this week know that you're not alone. This is why I started my warnings about how much more difficult the market will be to trade over the next several weeks if not a couple of months. We're entering the stair-stepping lower portion of the EW pattern and that means a bunch of 4th and 5th waves to complete the few degrees of the EW pattern (each time a 4th and 5th wave finishes it completes one larger degree 3rd wave until we finally reach the completion of the decline from last October).

I have found 4th wave corrections to be the worst time to be in the market and 5th waves can be just as frustrating (choppy move lower, truncations, extensions, you name it). I firmly believe we're in a 4th wave correction now and it will be followed by a new low and then we'll enter a larger 4th wave and then another 5th wave lower. So you need to understand that the frustration you're feeling this week is warranted. It also tells you to scale back on your trading and then trade lightly and quickly--get in and out and take small profits at a time (and keep losses even smaller).

I exited most of my longer-term put positions last week and this week because I felt the bulk of the move down had completed. I'll now start jumping in and out and looking to take the rest of my longer-term short position off the table a little lower. I just don't like the idea of time premium withering away which is what 4th wave corrections do to your options.

So relax, take a breath, stop trading (get flat) for a few days to let the mind clear and then when you feel like you're a little more in synch with the market you can try trading again. But this environment will require crisper setups that afford tighter stops and a desire to get in and out quickly. Waiting for another home run is not recommended now.

Have a great weekend and I'll post some updates on Sunday for what I think next week might look like.

Keene Little : 10/17/2008 3:54:56 PM

The rally from yesterday for NDX looks like an impulsive 5-wave count. I could easily label it corrective but for now I think it would be better to err on the side of caution (in not wanting to get too bearish too early) and expect another leg up once a pullback finishes. After breaking its uptrend line this afternoon it bounced back up for a nice retest and then fell away. Good day-trade short play right there at the kiss goodbye (~1343). Now watch for two equal legs down for its pullback (1295.31) to see if it finds support and starts back up. 10-min chart: Link

Keene Little : 10/17/2008 3:30:25 PM

SPX is breaking its uptrend line from yesterday's low so that tells us that leg up is finished. Now I'll be watching to see what kind of decline is formed (impulsive or corrective). So far the decline from today's high is a 3-wave move and will have equality at 937.60. If that level becomes support and we see a push back above the bounce high near 3:00 PM then we'll know it's a corrective pullback and I'll look for higher prices (either right away or after a larger pullback).

Jim Brown : 10/17/2008 2:51:21 PM

Thank everyone for responding. I had several users email me as well and no problems were reported. We are planning on moving the monitor to a new hosting company in a few weeks and just trying to get all the ducks lined up in advance. Thanks again!

Keene Little : 10/17/2008 2:50:45 PM

SPX ran into its old friends the 100 and 130 moving averages this afternoon on the 30-min chart at 966 and 983, resp.,(closely equating the 10-dma) and is now pulling back. That's another resistance level the bulls have to contend with. As I've been commenting recently, we're now into the part of the wave pattern for the decline from last October where it's going to be very challenging figuring out whether we're in a bigger 4th wave correction, still heading lower, getting a bigger a-b-c bounce, etc. This is where I'll be showing possible price paths and doing my best to identify key levels and we'll use other trading tools to help confirm what's playing out.

As mentioned yesterday, we could see a big sideways triangle 4th wave play out from last Friday's low, shown in pink on the 30-min chart: Link . The other possibilities include the bounce being over and we'll start back down to new lows (dark red) or we'll get just a pullback before heading higher in a larger a-b-c bounce (green). Confused? Welcome to the potetnial chop zone.

The levels of importance right now are a break of the uptrend line from yesterday, currently near 947, a break of the uptrend line from last Friday near 875 and a break above 1006. In between 875 and 1006 this market could go anywhere and turn on a dime when it does it. This requires very careful trading and good discipline about your stops.

Jane Fox : 10/17/2008 2:48:37 PM

Jim, I just installed the standalone version on my Vista machine and it is working fine.

Keene Little : 10/17/2008 2:28:00 PM

Jim, I usually use the browser version of the MM but have used the standalone version (especially when we were recently having problems with the web site version). I've been running on it on both XP and Vista with no problems.

Jim Brown : 10/17/2008 2:18:56 PM

Market Monitor on Vista - We are making some changes to the Market Monitor and need to know if aanyone is running the software download version on Vista. If you are using that platform (not the web browser version) on Vista please send me an email and tell me how it is working. Jim at OptionInvestor.com

Keene Little : 10/17/2008 2:07:00 PM

This is where I have to be careful and not let my bias get in the way of a fair assessment of the EW structure. This SPX 15-min chart shows a bullish wave count: Link . The downside level to break is really 955, not 964 as mentioned earlier. Below 955 would negate the bearish count on the chart and raise the possibility that we're starting back down. But as long as the pullbacks remain minor there is now a good possibility that we'll see SPX work its way higher towards the 1070 area on Monday/Tuesday. Then it would be time to start looking for a top again.

Keene Little : 10/17/2008 1:53:20 PM

There are a couple of Fibs of interest to me while watching this rally leg. It still smells like a correction to me although a push above SPX 1006 (78.6% retracement of this week's decline) would have me thinking otherwise. I mentioned 976 but if SPX continues to hold above 964 and pushes back up then there's some Fib correlation around 997-1001. So a break above 1006 would be clearly bullish while a break below 964 would be a heads up that the bounce may have finished. 10-min chart:

Keene Little : 10/17/2008 1:39:33 PM

SPX is blowing right through 976 and heading for the top of its parallel up-channel that I showed earlier, currently near 982.

Keene Little : 10/17/2008 1:29:09 PM

If you look at a 5-min chart you can see what's becoming a 5-wave move up from this morning's pullback near 11:30 AM. It looks like it could complete the 5th wave right around the SPX 976 area. That sets up a short play and then we'll have to see what kind of pullback develops from there (assuming of course it starts a pullback).

Keene Little : 10/17/2008 1:25:47 PM

The bounce off yesterday's low continues to fit as a possible correction of this week's decline which is why I'm interested in what SPX does around 976 if it gets there. This could lead to some more hard selling into next week (dark red on the 60-min chart). Otherwise a pullback from the 976 area that leads to another push higher could lead to a rally up to the 1070-1077 area next week as part of a larger a-b-c bounce off the October 10th low (shown in pink). It takes a break below 890 now to confirm the bearish scenario. Link

Jane Fox : 10/17/2008 1:14:27 PM

Vix and the S&P futures are in sync today and they are bullish. Link

Keene Little : 10/17/2008 1:05:21 PM

I'm back. I see the market is pushing higher and the rally pattern looks very strange (perhaps opex related). I still don't trust the upside but until it breaks down in an impulsive decline I can't say that I trust the downside either. If it's a double zigzag bounce off yesterday's low (a-b-c-x-a-b-c) then the 2nd a-b-c bounce will achieve equality at SPX 976.21 which is right on top of the 62% retracement of this week's decline from Tuesday.

Jeff Bailey : 10/17/2008 12:03:58 PM

VIX.X 70.73 +4.61%

Jeff Bailey : 10/17/2008 12:03:34 PM

UNE-AJ are $1.90 x $2.10

Jeff Bailey : 10/17/2008 12:02:55 PM

US Nat. Gas Fund (UNG) Alert! $30.90 +2.65% ... MONTHLY S1.

Keene Little : 10/17/2008 11:55:37 AM

Through all this, and studying the tea leaves this morning, we have to remember it's opex and there's a tendency for prices to get pinned around strike prices. There is a greater likelihood for choppy price action today than anything else.

I've got to run out to a meeting which will take about an hour so I should be back right after lunch. Be safe.

Keene Little : 10/17/2008 11:37:32 AM

SPX is slightly more bullish in that it created a parallel up-channel from yesterday's low but if it breaks below the low near 10:10 AM (931.85) it would be a signal that a corrective rally has finished and a new decline may be starting. Otherwise one more push higher could complete a 5-wave move up from yesterday, maybe reaching 960-965 before pulling back to correct the rally from yesterday. That pullback, as depicted in green on this 10-min chart, should lead to another leg higher early next week: Link

Keene Little : 10/17/2008 11:13:22 AM

This is where the rally can't fail otherwise it will look like a throw-over finish above a rising wedge. A drop back inside the pattern would be a sell signal. NDX 5-min chart: Link

Keene Little : 10/17/2008 10:55:08 AM

Pushing higher here without a little larger consolidation first is making the pattern of the rally look more like an ending pattern now. There's something I don't like about it (as far as thinking bullish about it). This could easily turn into a strong rally (instead of the ending pattern) but so far I have to say I don't trust it. If it is an ending pattern then we could see a quick retracement back to at least yesterday afternoon's lows. On the sidelines and watching for now.

Jane Fox : 10/17/2008 10:53:00 AM

AD line started the day at -1911 but had "improved" to -183 now.

Keene Little : 10/17/2008 10:35:07 AM

Price continues to consolidate and that supports the idea that it will lead to another push higher. If we get a 4th wave consolidation followed by a 5th wave higher it would then be followed by a pullback to correct the rally off yesterday's low. The result of all that would mean a doji kind of day filled with more chop and whipsaws. Unless this morning's low is taken out (which should result in some fast selling) we could be facing a typical opex Friday where price doesn't go very far.

Jane Fox : 10/17/2008 10:29:25 AM

Gee the DOW is only down 52 points. I have gotten quite used to the 400-500 point moves.

Jane Fox : 10/17/2008 10:28:12 AM

There is this thing called the SPAM indicator. When sales of SPAM go up means people are pulling back and vice versa. Guess which way this indicator is moving?

Jane Fox : 10/17/2008 10:25:17 AM

The stimulus checks sent out by the government was an attempt to smooth this out.

Jane Fox : 10/17/2008 10:23:32 AM

We need to adjust our consumption levels for sure but we need to do it in a way that will not throw us into a recession. That is the conundrum our government now faces.

Jane Fox : 10/17/2008 10:21:11 AM

If people continued to buy even though mortgages were failing and credit was hard to get we may have muddled through but yesterday we had evidence that spending was just not taking place.

Jane Fox : 10/17/2008 10:19:06 AM

We don't know if we are in a major recession or not but the retail sales will certainly affect the next GDP number. This is why the market dropped yesterday when the retail sales number was released.

Jane Fox : 10/17/2008 10:17:10 AM

One thing that marks a recession is that people spend less. Yesterday we heard that retail sales are down 1.2% from August. This is very strong evidence the consumer is hunkering down. Remember of course the consumer is a very large part of our GDP and consumption is 70% of GDP basically the output of goods and services in our economy. To put 1.2% into perspective and why this is so important let's look at the GDP growth or how much the economy grew or how much our standard of living is growing. If the GDP falls from 2% growth to a 1% shrinking we would be in a major recession so 70% of the GDP number falls by 1.2% that will affect GDP in a big way and can take a moderate recession to a major recession.

Keene Little : 10/17/2008 10:05:21 AM

Unlike SPX, NDX had not reached the level by yesterday's close where it would have two equal legs up from yesterday's low. That's at 1320.23 so watch how price behaves around there.

Linda Piazza : 10/17/2008 10:04:12 AM

Before I go, I wanted to note that the A/D line did indeed bounce from just above that Keltner support that it was testing and about which I'd warned equity bears. Now, already, in this whirling market environment we're in, the A/D line is quickly approaching strong potential resistance, beginning at about -800 and extending up to about -700. Bulls need to be aware and update their profit-protecting plans.

Jane Fox : 10/17/2008 9:57:27 AM

If we go into a recession what will that look like. First of all I think it is important to remember a recession is not black or white and it will hit each of differently, if at all. In a recession jobs will become harder and harder to find and marginal businesses will be hurt the most, the fancy knobby wine stores will probably close, the hipster restaurant will probably close but the neighborhood liquor store and the pizza joints will be ok.

Linda Piazza : 10/17/2008 9:56:13 AM

I also want to mention the TED spread this morning. Late yesterday afternoon, I noted that the TED spread had dropped to 4.07, which I thought was a test of the rising trendline from which it had been bouncing for the last month. I said then that it needed to drop below (actually, close below) 3.87, which was the last peak high before the current one, before I would fully believe that rising trendline had been violated. The delayed Bloomberg feed is now 3.89, so it's testing, but not quite confirming a breakdown of the rising trendline that has been in place. I don't have the ability to draw trendlines on Bloomberg's charts, but here's the chart for the last month, so that you can imagine for yourselves that rising trendline, keeping in mind that this chart does not show today's values: Link

What does all this mean? As I've been mentioning since my first Trader's Corner article on the TED spread back last spring that the correspondence of TED spread peak highs to SPX lows isn't particularly reliable as a market timing tool. Sometimes, the SPX is already recovering as the TED spread hits a peak and sometimes, the downturn is just beginning. So, we can't use this as a market timing tool, but that doesn't mean that we don't want the TED spread to start showing weakness. Technically, it would be good to see it drop below that rising trendline and then find resistance there any time it tried to rise again.

Keene Little : 10/17/2008 9:52:25 AM

If the market now consolidates between yesterday's high and this morning's low it will be bullish. But a break to a new daily low would negate a bullish possibility for a 5-wave move up from yesterday.

Jane Fox : 10/17/2008 9:52:11 AM

Geesh I never even noticed Linda - thanks.

Jane Fox : 10/17/2008 9:51:37 AM

The one thing Bernanke is worried about more than inflation is deflation. Deflation is when prices go down so wages go down and then the demand goes down and prices go down even more. This is worse than inflation.

Linda Piazza : 10/17/2008 9:48:44 AM

I see that Jane is working alone this morning. I'll join in as long as I can. I'm looking now at the A/D line on the intraday Keltner charts. They suggest to me the potential for the A/D line to steady at potential support near about -2000 to -2100 or, if that doesn't hold, closer to -2400 to -2500. I don't know which it will be because one chart gives me one target and another, the other and lower target. The idea, though, is that bears need to be aware that the A/D line is already closely approaching one level of potential support, If that fails to hold, it could drop toward -2400 at least, but these intraday charts are not showing much cohesion, robbing me of the typical ability to weigh one against the other and decide how strong support might be.

Jane Fox : 10/17/2008 9:46:57 AM

The US government is becoming the world's biggest mattress.

Jane Fox : 10/17/2008 9:45:01 AM

Banks are still not lending to one another but the commercial paper is starting to thaw a little. Many are still confused and many are still scared. The 2 week treasury bills are trading with negative yields (this has never happened since the great depression), people are willing to accept this negative return for the safety of them

Jane Fox : 10/17/2008 9:41:48 AM

Here are your overnight charts. Bearish but at least yesterday's lows have not been violated - yet. Link

Jane Fox : 10/17/2008 9:36:18 AM

LONDON (MarketWatch) -- Key short-term borrowing costs continued a gradual decline Friday in the wake of heavy lending by central banks and multibillion-dollar efforts by European and U.S. governments to shore up troubled institutions and guarantee interbank loans. The London interbank offered rate, or Libor, for three-month dollar loans slipped to 4.41875% from 4.5025% Thursday, news reports said. Three-month rates for euro and sterling loans posted small declines. Sharply elevated Libor rates have reflected refusal by banks to lend to each other due to credit concerns. Typically Libor tracks closely to expectations for official interest rates. The Fed funds rate stands at 1.5%.

Jane Fox : 10/17/2008 9:33:48 AM

WASHINGTON (MarketWatch) -- Construction of new homes dwindled to a 17-year low in September as home builders sought to reduce the number of unsold homes in an elusive quest to find the bottom of the historic housing collapse.

Housing starts fell 6.3% in September to a seasonally adjusted annual rate of 817,000, the lowest since January 1991, the Commerce Department estimated Friday. Starts of single-family homes tumbled 12% to an annual rate of 544,000, the lowest since February 1982.

Housing starts were also revised lower in July and August. Starts in August were revised down to 872,000 from 895,000.

The September estimates were much worse than the 3% decline to an annual rate of 870,000 that was expected by economists surveyed by MarketWatch

Keene Little : 10/17/2008 9:20:14 AM

Equity futures are down so we've got the start of a possible decline to new lows. Whether we'll get just a pullback before heading higher again is the question at the moment. If you shorted yesterday's bounce your stop should be at a new high. We'll have to see if there will be an attempt to close this morning's gap. As mentioned last night, any drop this morning followed by a rally above yesterday's high would be bullish so I'd buy that move (for a trade).

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