Wave 5 or wave 2?

by Gary Dean http://www.marketspath.com/ an AdviceTrade.com publication

From last night's update: If we see early weakness, we need to watch the 873 area as a support area. We should see wave 2 up start in the coming hours/days. But the bias should remain on the downside in the coming weeks. 899-905 area is where I believe the next leg down will start.

Review of previous night's notes and today's tape: The indexes started the week off on a strong note and are now pushing the tape to question the wave A completion wave count. The rally from late March 27th to May 11th took on an ABC pattern to just about the exact distance from a-b and b-c. 779-875 wave (a) 826-930 wave (c) and ended with negative divergence on the daily charts.

The move from the May 11th highs took completed 5 waves down and I was expecting wave 2 up to start some time this week. It did just that today, but it was much more powerful than I anticipated which opens the door that we just completed a larger wave 4 down Friday and wave 5 is in progress.

If this is what is taking place, then we should see a burst through the 930 level and most likely stopping at or near the 200 dma (spx 943) Now the original roadmap is still in play, but we would have to see the tape turn quickly and if the spx takes out the 919 level, the odds of wave 5 up in playing out become very high.

I am also seeing a symmetrical triangle forming and if it is playing out, we should see the spx turn sometime Tuesday and the top of the triangle lands right in that 919 area, depending on when we push up there, as the trend line is declining. This would set up some choppy tape and a move back down to the 887/894 area would follow.

The difficult part about this pattern and where it is taking place is we don’t know if we are wave 2 up with wave 3 down to follow, or this is all part of wave 5 up. When we approach the lower trend line and if we see buy signals on the short term charts, we will have to take the conservative approach on our trades.

Today’s rally was sparked by the Bank of America upgrade by GS. Now GS downgraded BoA at $5, as they were on “know” as to what was about to take place by the Fed. They had their boyz buying the shares of BAC from $5 to $3. Now they decide to upgrade when BoA is 300% higher from where they downgraded them. Are they luring in the last of the buyers so they can finish unwinding their position? The downgrade came at the expense of shareholders as they sold and GS bought and I wouldn’t be surprised if this upgrade isn’t the same, as buyers step in as they are selling.

Profiling the "Herd”: In this section, I let you know what is going through the general public's mind, what they have been trained to do from the "smart money" and how the grim reaper will play the most havoc to their accounts. Given that the general public or the "Herd" is on the wrong side of the markets 99% of the time, it's important to know what they are thinking and feeling about the trend at all times so we can position our trades one step ahead of the trend change. The herd is still bulled up as seen by the low put/call ratio and declining vix. They will be disappointed in the end.

"Smart Money" Trend: In this section, I let you know what the Institutions were doing for the day and their buying/selling trend that has been in place for the last week. This is important information, as the markets will react to either the buying or selling volume they are producing. When we see the "smart money" fading the current trend in place, it gives us a heads up to either lock in profits or get in front of a trend change and build a position, against the current trend. The smart money was on the sell side all day today There is a plenty of selling volume that has yet to be worked off.

For Tomorrow: If we see early weakness, we need to watch the 896 area as support. I still expect them to push the tape to the 919 pivot in the coming hours/days. But the trend line is declining, so that number will change if we see early weakness. Early strength, the 915-919 pivot is some heavy resistance and should push the tape lower.

Open Trades:

Long:

PS UTLRSHRT QQQ (NYSE: QID)

UltraShort S&P500 ProShares (NYSE: SDS)

UltraShort Dow30 ProShares (NYSE: DXD)

Direxion Financial Bear 3X Shares (NYSE: FAZ)‎

The nightly report has been updated

Good Night!!

Gary

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