Range-Bound Scalping Ahead ~ The Risk Averse Alert

Thursday, August 11, 2011

Range-Bound Scalping Ahead

There are a couple developments advising a slight change to the Elliott wave count labeling the market's decline since July 7th peak, when ended wave B — the middle wave in an a-b-c Elliott corrective wave down from October 2007 top, whose ultimate end targets index levels last seen in the 1987-1994 period. These justify assuming that, wave 3 of (1) of C ended earlier this week.

SPX 5-min

To now I had been supposing five waves down forming wave 3 of (1) still were developing. Although today's lift higher at the open was not unexpected, its afternoon continuation was, particularly over the final hour. Without going into too much detail, the stuff making for "the right look" according to the Elliott Wave Principle rather encourages the view detailed above.

Plainly, RSI at 5-minute intervals supports the likelihood that, a "c" wave — an Elliott third wave — formed today, having been pasted above 50 more or less all day, thus demonstrating the sort of dynamic, buy-side bias you would expect during formation of an Elliott third wave higher.

Yet the one thing really standing out is, in fact, the final hour's relative strength. All day long buying simply was not strong enough to bring RSI to exceed its best going into Tuesday's close, when the initial leg in a corrective wave forming since late-Tuesday unfolded. Then, during today's final hour, not only was Tuesday's RSI peak exceeded, but at 5-minute intervals you see the best reading registered since July 22nd, when began wave 3 of (1) down. So, that measure of improving technical strength you would expect as a 5-wave decline proceeds — namely fourth wave versus second wave — is being evidenced via 5-minute RSI. Yet this is but a first sign of underlying technical improvement. There's more "work" to be done in formation of wave 4 of (1) over coming days.

Now, you will recall the final lift higher into Tuesday's close was thought a vivid display of "follow the sucker" by the manner in which the S&P 500's 1-minute RSI was lifted to a rather pronounced, buy-side extreme. Given today's general lag in the S&P 500's 5-minute RSI up until the final hour, it appears yet another round of "follow the sucker" was played. Add to this today's close: a relative strength killer. Get ready, then, for another soft day, probably a lot like Wednesday.


The other development raising probability that, wave 3 of (1) ended on Tuesday was today's rather muted Volatility Index pullback, this notwithstanding today's market recovering all of yesterday's loss and then some. Now, what is it going to take to bring volatility in? Quite simply, stability. Thus raised is probability that, wave 4 of (1) currently is forming.

Now, let's not forget we're still dealing with leveraged, bankrupt, weak hands whose voracious capital need likewise explains an elevated VIX. What opportunity, then, to command top dollar writing options going into August expiration — this at a time of record CBOE options activity — while floating the market in a narrow range (relatively speaking anyway). So, the coming week appears set for a more or less sideways trade, this forming wave 4 of (1) of C.

Of course, that option premiums might be kept elevated, tomorrow sets up to be a weak day...

Fast Money
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