The Big Boys, page-328

@CaptainGrumpy, as per your post in the XSO thread, can I respectfully suggest that you’ve placed your stops at the wrong place!! I had a look at the S&P 500 Chart (SPX), really interesting.

There are two scenario’s as always of course, the bear case and the bullish case. I’m with the bears.

If you’d asked me a few weeks ago where the “bounce” would peak I would say at the Red Dot marked on my SPX weekly chart below. That is, at the 78.6% retracement (2077) and at Week 9 from the August low. It’s come up beautifully to that point now. All I want next week is a reversal bar, where it opens and peaks a little higher and closes low.

Of course it could just keep going up. But to me the idea of a stop loss is to close the trade once the short is proven wrong. You’ve placed it right where the bear move should peak and turn. In fact, part of final move should be the last of the shorts buying back and then we’re done. At 2085 you’re only 8 points above my target high in an index that moves 20- 40 points a day. There’s not enough wiggle room.

The green zone is where I will accept the bear case is wrong. That being Week 12 from the low, or at 127.7 above the high. Between the Red Dot and these zones is a transition area where the case is slipping away from me. You don’t necessarily need a stop this high, but for me I’d want to give it more room (I don’t use stops by the way). That said, the deeper and more liquid the market, the more precise my Technical approach is, and SPX is as big and liquid as any. So really next week should tell the story.

Other evidence that this is a Wave B, or second leg up of a zig-zag bearish move, is:

• Wave B typically has three clear subwaves,
• The steepness of these subwaves, it looks more like a volatile bouncing retracement than a stable steady uptrend,
• There was a 6 months distribution zone prior to the initial fall, i.e .it sort of rolled over.
• The initial fall was exactly 25%, typical of zig-zag moves down.

I’m actually really glad I did this analysis in response to your post. It helped me clarify my perspective. I was getting a little concerned last week with my shorts but looking at this chart everything is right on track. I entered some new short positions in Caltex (CTX) on Friday, and already had shorts in Macquarie Bank and a couple of others. I can’t get enough money into short positions atm. If I see a reversal bar occur next week, it’ll be all in.

@strauss, re your XSO comments about Aug 07, that fall was exactly 25% of the previous leg up, then climbed for 11 weeks up to a final peak, both of which I’m calculating in my chart below, before a massive collapse. So some similarities with my green zone as marked.