Regular readers know that I started getting ready for a stock market pullback about a month ago when the 2CS dropped under 70 and even more so when it dropped under 60 on January 14. I bought a small portion (fortunately!) of SDS the triple short SP500 ETF and gradually added to VXX (VIX ETF) on market up days to build a now decent position. Since I knew from 15 years of watching VIX daily that VIX doesn't move as much near the top as does the P/C ratio, I haven't really been too far underwater on VXX.
Most of the recent news has been splendid with record corporate earnings and sweetness and light at the White House and Capitol, all of which leads to even more public bullishness. However, stocks have not definitivelycrested and SPX even made a new high today. But there's a silver lining here as well, as I learned years ago from Welles Wilder and later from trading friend G9 who posted a reply here several months back. He retired from trading in about 2004 having made all the fortune he wanted. Both he and the great Welles Wilder taught me about expanding tops at a course I took with Wilder's associates in the 1980's. Wilder called them Reverse Point Waves (RPW) because once price had traced out 5 or 7 or more odd-numbered waves in an expansion pattern the likelihood of price reversal was very high. G9 also knew Wilder's work but reasoned that if odd numbered expansions were potential reversal setups, then even numbered expansions were continuation setups. His own work suggested the continuation probability for 4 or 6 or more even numbered expansions was 80%. And so it has always seemed to me since I learned about it.
At this point, however, it is 5 point reversals I am seeing in several different time periods, all converging today. Naturally this, like all methods of market signals, is NOT a sure thing, but it's reasonable, has data behind it, and is occurring as sentiment is sky high bullish as measured by the 2CS and other methods.
Here are some of the RPW's I am talking about. The first one is on the weekly chart of SPX . It shows the expanding nature of the formation and how it is numbered, starting at the January high of 2010:
Ignore the "fibo fork" for now as it is of secondary importance. I had thought the slight rise above the price level of point 3 in early November might be a reversal point, but sentiment wasn't yet ready so I passed on it.
The second chart shows 2 more RPW five point sequences on the recent 24 hour 160 minute bar chart of SP500 e-mini futures. The larger degree RPW started with light blue 1 last Friday, wave 2 on Sunday late, wave 3 early Tuesday, wave 4 late Tuesday, and wave 5 putatively late today. Also note in smaller red numbers a 1-5 count within light blue wave 5 starting overnight last night and ending with the larger degree wave 5 late today:
(The parallel grey lines are the ten day regression channel, and the thick bright green lines are a five day Bollinger 2 sigma band and merely show short term exuberance.)
When RPW's work they are seemingly "out of the blue" and make "no sense", but we we know better. :) Astute observers will notice an even larger degree RPW which started on this short term chart on Thursday January 13.
Keep in mind this is all just my opinion and NOT a recommendation. I am NOT an adviser, have nothing to sell or want to, and manage only family accounts.