Up by the stairs. Sun Jun 6

A quick Sunday post. Disappointing US job numbers have knocked the US indices down over 3% and I'm regretting that I was keener on scenario B than scenario A. To recap, I was working with two main possibilities both of which hypothesised that we were having a retracement rally. Scenario B had the rally grinding up close to 4650 while the target for scenario A was pretty much spot on with a forecast of 4450-4500.

The 60 minute chart above shows how it unfolded in quite a textbook manner as an a-b-c correction with the c wave subdividing into 5. It sounds arcane but it's a pretty standard elliott wave interpretation of a common enough event. What I'm kicking myself about is that I was holding a few longs still in the event that this might unfold into a bigger rally. It certainly could have but the risk/reward had shrunk to the point where I was taking the wrong side of the bet.

I had seen something similar in Fmg, for example, but not taken the signal and also seen a slighly different retracement pattern in stocks like Ipl and Sgp which I did take but only in a modest way because I hadn't really accepted the implication of the patterns cropping up. I know why too - I'd been pretty much maximum long for the last couple of weeks and had got into the habit of being bullish so that I was looking at the market with rose coloured glasses.

It's quite easy to lose mental flexibility and I usually try to have a couple of positions on board at any one time which are opposite to the general thrust of my book. Not so much because I expect to make a lot out of them but because they help to keep me balanced.

The next question is whether the market will go straight to new lows or make a higher low. I think it's most likely to make a higher low and then trace out a retracement quite like the very recent one, but perhaps with a smaller range. The reason I think this is because the highs of this rally clearly overlapped the swing low on May 7 so that the close on June 3 was higher than that May 7 close. This ability to trade through previous lows, even if only temporarily, implies that the fast, exploratory part of the fall is over for the time being.

So, we get a higher low and another, more tepid rally. If that happens, then we can get another downtrend to new lows. The chart, below, is a daily of the Xjo back in late 2008, early 2009 and there was something similar to what I'm imagining. A rally through late November to early January which slightly overlaps the October 08 swing low. This rally retraces through to late January then has a second, very weak attempt which has failed by mid February, clearing the way for a drive down to new lows. It's not a perfect match, it unfolds much slower than the recent move, but the salient points could turn out to be similar.

I'm getting a road map which might turn out to be useful but it doesn't answer my most pressing problem which is when to cut my longs and whether the market will have gapped too much for me to put on any short positions. Usually in these situations, the open is the worst time to sell or put on shorts but it's definitely a stock by stock proposition. Smaller stocks can be forgotten or defy gravity for an hour or two and provide opportunities to get out or get short.
I'll have to wait and see. More tomorrow.