10/27 Daily Commentary

Today was the second day of an I1 double-bottom.  I sold most positions before 9am and covered DJ futures position around noon, which is the normal behavior if the stock market low occurs on the second day of a double-bottom.   For this I1 cycle the peak was 10/8 SPX 1165.15 and the bottom today SPX 1182.45.  17.30 points up over 13 days is .11% advance per day.    This is identical to the .11% daily advance during the last I1 down cycle.  Outside of I1 down the SPX has been advancing .24% daily, compliments of Uncle Ben.  I took a minor loss on SDS held and DJ futures short held through the cycle but earned a multiple of that on trades both in stock index and commodity ETFs as well as futures trades.   With the amount of Fed money printing over the past 2 months this is a winning strategy.

Earlier in the year, after QE1 started wearing off and I1 was not fighting the Fed, I was told in my comments that I would make more money if I just sold big at I1 tops and bought big at I1 bottoms.  For the last 2 I1 cycles,  while the Fed was ramping up it's asset purchases, I've been told that I1 is dead and that it doesn't work.  I made money in both periods because I stopped believing in a simplistic world in my 20's.   If exogenous market events occur I am not naive.  When the Fed knocked down rates by 3/4% at a pop in 2007 I did not believe that I1 being in a downtrend would overwhelm the short-term effects of such shocks.  If war were to break out I would not think that I1 would determine the trend.   The Fed is in the process of removing itself from market support.  Today Bill Gross weighed in with condemnation of Fed policy comparing the government’s trillion-dollar efforts to stir job growth to a Ponzi scheme run on bondholders and warning that the combination of zero interest rates and massive asset purchases by the Fed has created a black hole, a liquidity trap where the lack of consumer demand means neither borrowing nor lending is stimulated.

China also spoke out against the effects of unrestrained U.S. money creation on their economy. These effects are not just Chinese but throughout the world.


Commodity markets have already turned and stock indices are tracing out what is turning out to be the final 3-wave up for the bull move from August. 

There is a confluence of I1, dollar index, and stock indices that should play out over the next week.
First I1 is due for a weak uptick through 11/5.  I believe the stock market will not hold up after the 11/3 FOMC announcement.  I will be shorting earlier than the I1 mini-peak.
Second, the dollar index looks like Minute 1 upward is complete.  It also confirmed the buy signal with a daily close well above the 18-day M/A.
Third, DJI came down near it's critical support and is rallying off of this low.  There could be an ending diagonal finishing with another nominal new high in SPX.


Going forward, I am flat in all markets.   I still believe that the dollar will drive all markets and is due for a wave 2 retracement down to at least 77.91 ranging down to 77.70.  This retracement will not take until 11/3 to occur.  I look for the wave 2 bottom to occur at roughly the same time as the final high in the ending diagonal.  This is the point at which I'll go short gold, stocks, crude and long dollar index.
Until that time upward retracement and/or consolidation in commodities is expected.
If I am wrong and DJI takes out 11,000 then I'll look for an entry point to go short after a bounce.  If the decline occurs overnight SP futures 1162.25 will be the flash point.