IWM eWave Thesis Still on Course

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Written for and shared with Minyanville's "Buzz & Banter" subscribers today:

As time progresses we can see how the anticipated trend line tag above current price rises the reversal level ever so slightly. $105 to $107 is about where we should expect to see the parabola peak. A trend line tag isn't necessarily baked-in, but it usually tries its damnedest to get there. I'm using the melt-up to build my short position further - there's at least a small fear in me that waiting for the perfect entry point could be foolish as there are likely many waiting for the same - and it could come and go quickly without warning, leaving those of us with a short bias scrambling to initiate a position with the distinct possibility of entering below current levels.

I realize this is a bold call in its exactitude, not to mention severity. My own rationalization mechanism agrees with that sentiment! However, this is an attempt in not over-complicating (or over-thinking) the basic tenets of Elliot Wave Theory. Time will tell if my approach is lucid.

In behavioral finance terms it would seem logical (to me) that an unexpected, severe sell-off could manifest. Most market participants have now assimilated in the belief that the market cannot, will not, pull back more than 10% without being met with buyers. In many ways this market has been too "easy" for bulls. Much as bears have been unequivocally slaughtered for fighting the tape that has been so easy for bulls, their turn will soon come as well.

The smartest phrase to have ever escaped the lips of Jim Cramer, and possibly one of the most true statements ever uttered on the street was "Bulls make money, bears make money, pigs get slaughtered." I can't help but to identify an overwhelming bull bravado transforming our market into a pig sty. Yes, bears have been decimated. They are throwing in the towel and reevaluating career options. Through my lens, this is when turns occur; when fewest are positioned to take advantage of the larger profit opportunity and most are positioned for the greatest pain.

Raymond             James' Jeffrey Saut called for a reversal to begin this past Friday, "D-Day" he called it. I shared a few notes back and forth with Mr. Saut as well as Minyanville's Jeffrey Cooper last Thursday on when (and what catalyst) could mark the turning point. In summation, both were quick to caution that the market doesn't always do exactly what it's supposed to do at the exact moment it's expected to do so. (Remember, this was a day before "D-Day") The point being a shift had occurred regardless of the US market's inclination to reflect said shift. There were major cross-currents increasing the likelihood the US sell-would not occur on schedule; July OPEX & hell-bent Ben Bernanke come to mind primarily.

For me, there's one piece of evidence proving Jeff Saut was correct. A look at Friday's action in the Nikkei, a 600 point drop in the futures in minutes on an ambiguous catalyst. This morning in Japan (last night here in the US) Nikkei futures whipsawed wildly on what should've been Abe-inspired bliss. Keep a close eye on Japan. The land of the rising sun holds a great deal of importance at this point in time. The Nikkei's close +60 handles this morning was an unmitigated defeat.

Peter Tchir shared with us today his thoughts on the next "tell" not availing itself to market participants readily. Well Pete, if I had to throw a guess out there - mine's the Nikkei.

Best of luck out there!
Nice coverage on IWM from you - thanks for your hard work. I also cover (and prefer to trade over ES, NQ, etc.) R2k, usually by analyzing TF and have a running series on the index at http://www.seeitmarket.com. Here's the latest, from July 15 but still timely in case you're interested: http://www.seeitmarket.com/russell-2000-sailing-off-the-market-map-15033/
DuncanParker andrewunknown
Thanks Andrew! My, what a fantastic and multi-layered review of The Rut! I've found a lot of value in your analysis because it differs from my quiver, but ultimately arrives at a similar conclusion - highly complementary styles, imo. It seems as if a reversal is impossible at this point - the trader in me has given up fighting the updraft, but the analyst in me warns against complacency. For me, the real test isn't if IWM reverses or not; rather it's how extreme or docile the ensuing decline will be. I am short the RUT (puts via IWM September - December at the money dollar cost averaged to a 101 BE) which has been an exercise in futility thus far. Needless to say, xanax and Pepto have been at an arm's reach the last two+ weeks. (Kidding) The relative strength has been amazing to witness. History dictates a flood of money late in the game gets spanked and I'm going to give the nod to statistics rather than "this time will be different." It's been a tough market - longs are under invested and shorts have tire tracks on them. Pretty incredible really. All in all, I think this rally has another year to go, but not without a correction of some magnitude in short order. The weekly and monthly charts literally shoot vertically into the air - reminds me of gold not too long ago... Looking forward to more of your insight! Thanks for your kindness and camaraderie - TradingView has a great group of traders and I've enjoyed sharing my thoughts with all of you. Cheers!
StealthTrader disagrees with anything that suggests the market could go lower. I consider that somewhat of a validation of the above thesis.
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