Market Journal: Bumps in the Road

By: Joseph Russo | Fri, Jun 24, 2011
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Bumps in the Road

Whether they are organic or artificially induced, every bull market is an uphill battle. At various stages of maturity, each formidable bull market regardless of its origin and nature is certain to encounter numerous bumps in the road along its finite journey.

Temporary short-term bumps that reward buying-the-dips are of the gentle and sweet variety, while others are more challengingly bitter in terms of time and amplitude.

At some point amidst an aging primary or cyclical bull market run, the greatest danger is that one of these typically expected bumps will turn out to be the end of the road.


Dead End

What follows after such an event, or how bad the ensuing bear market will be depends upon a host of factors and unknown variables. An example of a worst case scenario would be that of the end of the last bull market run, which ended abruptly in October of 2007.

Standing pat and riding across that last bull market crest was much like Thelma and Louise driving off a cliff into the abyss. The speed and velocity of the ferocious decline that ensued in the 17-months following was simply unmanageable for the vast majority of market participants to effectively deal with.


The trillion-dollar age-old question persists;

Since there is no way to know with certainty exactly when a bull market has arrived at its final destination, nor any absolute foreknowledge as to the precise nature and composition of the pending bear market that will inevitably follow, what can be done to mitigate such risks and to consistently maximize absolute on-balance-returns?


Awareness

The first thing that needs to be done is to acquire a means by which to heighten ones awareness to such risks and opportunities. The absolute best and most direct way to accomplish this is to study the behavior of price through the effective use of technical chart analysis.

If you have yet to master the art and science of effectively interpreting price behavior across multiple timeframes, then it may be wise to align yourself with someone who has a proven track record in doing so.


Charting and Forecasting

The effective use of charting and technical analysis provides an essential contextual perspective from which observers become more keenly aware of the present state of risk and opportunity inherent in a given market.

Moreover, if effectively disseminated by the practitioner, observations derived from the analysis will address varying degrees of risk/opportunity relative to the overall framework and structure of a price series that has been thoroughly analyzed in multiple timeframes.

Objective, disciplined, and measured analysis of such type provides the best set of forecasting tools from which discretionary traders and investors can most effectively assess risk and opportunity in relation to their individual levels of engagement and investment styles.

Beyond attaining a disciplined and objective perspective as to the future prospects for a given market, what else can be pursued in order to improve the net results of one's specific levels of engagement in the market?


Strategic Preparedness

Though it's critically essential to gain awareness, awareness alone often falls short of getting good and consistent results that are appropriately aligned with one's individual time horizons and tolerance for risk.

If one's discretionary inclinations to pull the trigger at key points of recognition cannot be trusted, a more clearly defined strategic approach in defining entry and exit criteria is required to assist in prudently acting upon such awareness in accordance with one's defined timeframe and objectives.

As with the awareness derived from forecasting tools and technical analysis, strategic engagement protocols must be defined by timeframe and objectives.

Failure to align both technical analysis and strategic engagement within a specific contextual framework of intent, risk tolerance, and timeframe objectives will often end up rendering the entire exercise useless.


Enter the Systems Trader

From the disciplines inherent within charting, forecasting, and technical analysis, strategy trading is born.

Investing and trading by way of strategic engagement is a simple and effective means by which to bridge the gap between awareness and execution.

When properly constructed for each timeframe and objective, strategic trading systems should reflect and act upon the underlying technicals and repetitive geometric fractals playing out in the behavior of price. As such, there is no need to wander aimlessly about the historic price chart archives in the hopes of finding a matching analog to trade from that may or may not last.

It's no big secret that markets go up, down, and sideways. That's about all they are capable of doing. So if one's method was effective at trading an analog in the past, it most certainly should be fit enough to navigate its way through the markets geometric repetitions in the present. If not, all you're doing is rolling the dice on a handpicked analog with a limited shelf-life.


Bottom Line

In addition to gaining critical awareness by way of objective chart analysis, observing/acting upon the signals and execution criteria of a timeframe-correlated adjunct trading/investment strategy provides the best possible means by which to consistently beat the market, and rack up reliable on-balance absolute returns.


Market Journal

Elliott Wave Technology's quarterly market journals and bundled services embody the powerful synergies resident in our disciplined objective approach to technical analysis in concert with respectively correlated strategic methods of engagement.


Buy & Hold Update:

SP500 Chart 1

June 23 - Elliott Wave Technology (GRA): Thus far, despite recent bumps in the road, the bulls are holding the line. The trendline, that is. No matter how unsustainable it appears, the bailout induced V-Shaped Wall Street Recovery continues as Main Street continues to flounder. Regardless of outcome, the Guardian Revere Advisory shall continue to pursue its inherent directives and remain objectively aligned with the Primary/Cycle degrees of trend for as long as those trends may last. Our long standing credo at the GRA remains the same, don't be fooled again.

 


Wave Watch:

Dow Chart 2

June 23 - Elliott Wave Technology (IMF): For ardent wave watchers, the biggest question beyond the degree of trend resident in the market is whether or not the Primary Bull market from the 2009 low has terminated a few months ahead of schedule. Given the set of intractable circumstances and headwinds facing global economies, we would not be at all surprised if it has. In the same breath, we must also respect the level of bullish cushion acquired as a result of the current bailout rally. Shortly after the rally began in 2009, we were the first to suggest that equity markets harbored the potential to return to their respective pre-crash highs. The NASDAQ has already achieved such a feat.

 


Intermediate-Term Chart of the Week:

US Dollar Chart 3

June-23 - Elliott Wave Technology (Position Traders Perspective): Tragically fearful of a strong currency, equity markets and governments remain totally dependent upon the effects of inflation and legislative alchemy in order to mask egregious flaws and irreparable mistakes. To gain a clear view of exactly what exists deep inside the dark hole in which so many have permanently buried their heads, we provide contextual links to something old, something new, and something borrowed. We appear to be at another inflection point of great uncertainty surrounding the dollar. It is at such junctures that we often witness diabolical and rapid whipsaw fluctuations in values across the financial sphere. Thus far, the skewed status quo prevails, and the powers that be remain in perceptible control of unfolding events. Stay tuned as something likely to become known as the Fiatnam Wars may soon be coming to a theatre near you. For now, so long as the US dollar is concerned, sideways with a downside bias is a statist's gift from heaven itself.


Intermediate-Term System Traders Chart of the Month:

Dow Chart 4

June 24 - Elliott Wave Technology (PTP-Systems Trader): The PTP systems trading operation has two components. Level-1 is for the long haul, and is geared to trade the larger primary degrees of trend. Level-2 acts has a hedge & enhancement operation for those long-haul core positions, and is geared to act faster in its directive to capture price movements occurring at the smaller intermediate degrees of trend. After getting whipsawed on a sell signal in the summer of 2010, here we show Level-2's hedge and enhance record of engagement for the Dow still riding the second leg up of the V-shape equity rally off the August 2010 low. Layering money management, limit orders, and profit targets atop the system generated buy/sell signals, we mitigate the general effects of peak equity drawing down prior to a reversal, which means that we have better odds of taking high level profits nearer to open equity peaks. The trade-off in using such criteria is that it raises the odds we may miss all or part of move on a signal that either fails to elect a limit order, or continues to progress after we've taken profits at a predetermined target. Lower levels of engagement have lower trading frequencies with longer-term views, while higher levels of engagement exhibit greater trading frequencies with shorter-term views.


Near Term Chart of the Week:

US Dollar Chart 5

June 24 - Elliott Wave Technology (Near Term Outlook): In addition to our standard charting and forecasting protocols, we regularly provide discretionary short-term trade set-ups within our Near Term Outlook. This one triggered on Wednesday June 22 in the dollar index and telegraphed an upside breakout for the dollar citing 75.51 as a short-term upside price target.

Much earlier in the week we boxed the 74.47 level as key bullish support. Shortly after the 6-22 print low of 74.50, the dollar broke out above the upper boundary of our bullish falling wedge pattern, and continued directly on path to achieving its short term price objective without whipsaw, drawdown, or incident. Though one may not take each and every trade set-up identified, or any at all, the point values and price targets listed provide valuable information relative to other discretionary strategies one may be employing.


Near-Term System Traders Market of the Week:

Dow Chart 6

June 24 - Elliott Wave Technology (NTO Systems Trader): Higher than Level's one and two, this Level-III trading strategy is more sensitive to shorter timeframes, and in its directive to capture Elliott waves at minor degrees of trend, it will engage the markets and trade with higher levels of frequency. Each level of engagement or timeframe objective may be deployed as a standalone strategy or as part of a larger strategy that may center on larger core positions. Here, we show Dow traders at Level-III taking high level profits in early May and moving to a flat position while the Dow was still on its last buy signal. On June 8, we got a Level-III sell signal in the Dow. Those fearful of missing a move would have to bypass the current limit order instruction and short the Dow at the market. If the market crashes right here and now, we miss the move. If it rally's and hits our sell limit while still in sell-mode, we'll move short. If the market rally's and moves back to a buy signal, we'll move back to the long side if parameters meet our money management constraints. Despite predictions, analogs, and other distractions, we stay with the discipline embedded in the code, and we'll take or accept missing whatever profit the market delivers whenever the current trend shows a reasonably sustainable sign of reversing. Despite the fact we're flat the Dow, it's a "Sell and hold" until it's a "Buy". It's that simple.


E-mini Systems Trader Update:

S&P Chart 7

June 25 - Elliott Wave Technology (DTP): At 10-15 trades per month, compared to HFT (high frequency trading), our E-mini Systems trader is like trading for the long-haul. At Level-V, this is our highest frequency trading strategy. Like all others and possibly more so, it is subject to bumps in the road otherwise referred to as periods of drawdown. Following a successful April, which racked up in excess of 3k per single contract traded, May gave back more than half of April's profits. As you can see in our lower panel's month-to-date equity, June has been mostly in the red as well. Recent short positions have caught the latest move down, and are in large part responsible for the current attempt at salvaging June to end the period back in the green as it were.


Yes, We Are

In our view, "Yes, We Can" and its derivative, "Yes, We Will" is for sissy's and politicians'. In our book, you either are or you are not getting the task at hand accomplished.

Are we continuing to fulfill our prime directive of charting and forecasting the markets effectively? Yes, We Are.

Are we proud that our subscribers have stayed one step ahead of the markets in all timeframes since inception of our services? Yes, We Are.

Are we beating all of the benchmarks and delivering absolute returns in both the historic bull and bear market cycles of the new millennium? Yes, We Are.

Are you accomplishing all of the above? If not, you can if you join us because Yes, We Are.


That's a Wrap:

To say that we live in interesting times is flattering; to recognize that we continue to live in inconceivably unbelievable times would be far more fitting.

When investing or trading remember that you are fighting a constant war, and there is no room for sensitivity. In one way or another, we have all been incented to dance with thieves, and we'll be damned if any of them strip us of a single penny when it's all said and done.

Quite the contrary, Elliott Wave Technology is on a quest to provide winning solutions across-the-board in every timeframe. We correct course quickly when wrong, because we only have only one gear, which is winning, and one adversary, which is price.

Trade Better/Invest Smarter

 


 

Joseph Russo

Author: Joseph Russo

Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo

Since the dot.com bubble, 911, and the 2002 market crash, Elliott Wave Technology's mission remains the delivery of valuable solutions-based services that empower clients to execute successful trading and investment decisions in all market environments.

Joe Russo is an entrepreneurial publisher and market analyst providing digital online media solutions designed to assist traders and investors in prudently and profitably navigating their exposure to the financial markets.

Since the official launch of his Elliott Wave Technology website in 2005, he has established an outstanding record of accomplishment, including but not limited to, ...

  • In 2005, he elicited a major long-term wealth producing nugget of guidance in suggesting strongly that members give serious consideration to apportioning 10%-20% of their net worth toward the physical acquisition of Gold (@ $400.) and Silver (@ $6.00).

  • In 2006, the (MTA) Market Technicians Association featured his article "Scaling Perceptions amid the Global Equity Boom" in their industry newsletter, "Technically Speaking."

  • On May 6 of 2007, five months prior to the market top in 2007, though still bullish at that time, he publicly warned long-term investors not to be fooled again, in "Bullish Like There's No Tomorrow."

  • On March 10 of 2008, with another 48% of downside remaining to the bottom of the great bear market of 2008-2009, in "V-for Vendetta," using the Wilshire 5000 as proxy, he publicly laid out the case for the depth and amplitude of the unfolding bear market, which marked terminal to a rather nice long-run in equity values.

  • Working extensively with EasyLanguage® programmer George Pruitt in 2010 and 2011, the author of "Building Winning Trading Systems with TradeStation," he assisted in the development of several proprietary trading systems.

  • On February 11, 2011, he publicly made available his call for a key bottom in the long bond at 117 '3/32. Within a year and half from his call, the long bond rallied in excess of 30% to new all time highs in July of 2012.

  • For the benefit of members and his general readership, he responded to widespread levels of economic and financial uncertainty in the development of Prudent Measures in 2012.

  • He publicly warned of a major top in Apple on October 26, 2012 in the very early stages of a 40% decline from its all time high.

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