Tuesday, January 27, 2009

DoctorMad Drawing Battle Lines...

I’m going to have to start calling the good doctor by a different name… perhaps GeneralMad is more fitting? He’s into the battle and tells us where the battle lines are drawn…

Here comes another sticksave on the banks in the form of dilution and the taxpayers eating some of their losses. Awesome.

Stocks. The bears tried to push the bulls out of their channel the entire day, but if you look closely those are nothing but pins below that blue line with no closes. The bulls held the line. I think we finished 4 of C today and started working on 5. Wave 5s can terminate at anytime. This could run a very long way as despite the breakout of 848 we still have NOT even made a 38.2 fib retrace for the move off the Jan 6 highs. That said the bulls are quickly running out of ammo and that is a very steep channel to hold on unless some major sustained volume shows up tomorrow. I still think the best trade this week is going to be to short the eventual break of the channel whenever it happens. Anything else is front running. Watch the volume early. We could have a light volume float up all the way up until FOMC, but I also see a gap and crap as a possibility. The 55 hour has now turned up and should also offer support and give you confirmation of the channel break. In all likelihood the 55 will end up coinciding and riding up the bottom of the channel. I still don't think this is the start of a major C wave. The volume has been far too weak throughout the move. Judging by the put/call throughout this retrace it looks like the bulls already spent most of their ammo. Tomorrow is one of those days that's going to be more important than others to really pay attention to.

Bonds. What's there to say. I was a sleeping baby and woke up to a nightmare around 1 EST today when a big green blitzkrieg took out my bear lines of defense. I still think this could all be a 4 but I took down my short into the ramp. I was worried Big Ben might start lobbing nuclear artillery shells on my troops with some formal announcement that they REALLY do plan to buy the long end. That and I had that feeling that a bunch of peoples blackberries were going off with "BUY BONDS BIG BEN IS COMING" messages. I had big profits to protect and if this is THE END of the 25 year bond bull than the bears are going to have plenty of more victories ahead and I hope to participate in them. For now, I'm back to watching. The good news for bears still holding short is that if this was just a 4 then wave 5 should quickly and violently reverse back into that channel.

Take a look at my TF chart. Notice how on the RUT the bulls held the retrace channel and the momentum even as the ES dipped beneath their line. I sort of consider this looking at different fronts of the same overall battle. When the RUT finally cracks then you'll know the bears are ready to do a little ass kicking. RUT still leads both ways. I also took the pic in Heikin Ashi style candles. I often flip back both ways between Heikins and straight candles. You can set a shortcut from your settings. Just flip through some charts with Heikins on and I think you'll find quickly that counts are more obvious by the way they color the candles. Heikins also help you stay in trades longer although they trigger late exits. Just follow the trend until the color changes or you think it is about to.

- DoctorMad

For those not familiar with Heikin Ashi candles, they stay red in a downtrend and green in an uptrend. Thus it’s easier to spot trends without getting whiplash!

I agree with Mark that the RUT has been leading both ways. When it begins to lead in the downward direction again, you’ll know it’s time to get back on the short side.