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October 14, 2008

IF Statements

Equities markets kept things simple today, first sporting a minor exhaustion gap off the gains seen since Friday, followed by a day-long consolidation. I label this a "minor" exhaustion gap because the run higher should not be finished, even if new bear market lows are in the immediate future. We are currently looking at a wave 4-of-3 correction unfolding. This wave should take on an A-B-C form, but we've only seen A and B:

index chart

Once wave 4-of-3 completes, I expect a scary reversal to test last Friday's lows. This scare will constitute wave 5-of-3 and set the foundation for a prolonged rally. Now, I know a lot of smart people who do not think we will see a test of the lows, so make your own judgment. However, these same smart people expect a 4-6 month rally to unfold... as do I... and I just don't see how such a rally will can materialize without a retest.

My trading strategy from here is based on this outlook. If wave 4-of-3 completes as expected, I will unload my index longs along the way up. Once I believe the move has completed, I will position short, in smaller size, to catch wave 5-of-3. However, I have no intention of trading around some of the recent equity positions added to my book (GDX, EAC, UYG, BP, EWT). In fact, I will probably add to them if we see a test of the low.

There are a lot of "IFs" in my prognostications. Greater than normal caution is warranted here due to the large percentage swings the markets are doling out. My final "if" is that if the market does anything to change my view, I'll write a mid-day post or drop some lines in the comments below. Cheers.


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