The State of the Market

We always start with the forest then dive into the trees at KasSky Enterprises. As such we will first show the SP-500 in its weekly context with our target high objective coming in the months of April-June 2013. The US Equity Market thus far is climbing within a corrective overall price action which leads us to believe that future equity prices will fall with an overall slowing global economy. We have important cycles topping as well as Elliot Wave counts coming to conclusions within this timeframe and price objective. The following chart was posted over three months ago showing a conclusion to the current uptrend coming in April 2013 June 2013:

The above picture shows a price objective of 1518 which has obviously been surpassed, but the objective of posting future price targets is not to buy or sell them, but to see how the markets react at those prices. Timeframes however are not as objective. Although prices have risen above our forecast for 1518, the timeframe remains the same. We are looking for an interim top in the months from April to June 2013 forecast from before November, 2012.

With the long term forecast still in order we dive into the smaller timeframes. The SP-500 gave a hedge or sell signal at 1530 cash. This signal resulted in a 50 pt decline into 1480 before resuming the uptrend. This signal generally does not show the high of the uptrend before a precipitous decline, but rather warns that one is in the works once the index tacks on another 20-40 pts. This signal put the odds on a sell from 1550-60 sell signal for an intermediate trend change. We did have a tiny reaction at that level, but the market proceeded higher, expanding further than any drawdown in the history of the indicator. The hedge/sell signal is shown in the chart below:

Although the hedge/sell signal has obviously run against us, it is still in our best interest to show you where we have made mistakes. It is a necessary portion of trading to be wrong unless youre a market maker, which we are NOT. At the time we believed the point marked a third wave within Elliott Wave Theory and the next move to higher levels would mark the top, which came at 1563 and was within our 20-40 pt. range above the previous high. This seemed the opportune time to initiate short positions. It produced a pullback of 25 pts and the market was off again, which WE DID NOT EXPECT NOR FORECAST. We highlight this material to prove our track record of forecasting while staying with, and not fighting, the trend.

The chart above shows our current Elliott Wave count as well as the highlighted buy/sell areas from previous signals. We have never seen a hedge/sell signal run as high on a daily scale as this one has which has two connotations: 1) It is very overextended and will result in an extremely large pullback (30%+) or 2) We are in the context of an extremely bullish market where these signals will only result in small pullbacks before the ultimate bullish price action will resume. Right now the bearish reversal lies at 1536 on the SP-500, that is the ultimate line in the sand. We would like to now expand back out to a yearly time scale of the Dow Jones Industrial Average.

We are still working off the assumption that we are in a long term correction within an even longer term bull market. In January of 2013 we posted the charts above showing an expectation of the backtest of this trendline. Obviously, every day that passes increases the value of the trendline, but we still dont expect it to be surpassed. We believe we are still trading within the context of the1965-1975 timeframe where we see a few years of stagflation and choppy up and down price action. We DO NOT believe we will test the lows of 667 in the SP-500 and contend the lowest level would be near 920, though a low of 1150 is the expected outcome. Long term charts are always theoretical, so lets get down to the nitty-gritty where we make our trades. The next section will highlight the shorter term trade opportunities within this market. Please note we are reserving charts that may be referenced for our paid subscribers, but referenced charts do reflect our current market views. KasSky always works with a top down view of the markets; starting at longer term charts and working our way into the intermediate trading level charts. Having done our due diligence on the longer term th timeframes we reproduce our daily charts based on those market calls. As of today, May 10 , 2013 all US Equity Markets are still bullish. In the overall structure of the US Equity Markets we are expecting another move lower into 2014 unless the cycles are inverted where well see a high in 2015 followed by a washout move lower into 2019. Most dont trade off these long term horizons so the next section, followed by the next series of these market forecasts, will rely solely on daily charts. All indicators as of today May 10, 2013 are on buy and bullish. The bearish reversal on these positions reside at 1536, which is a stretch from current levels and would result in too large a drawdown for KasSky and its clients. We have adjusted our stops to 1582 based on hourly charts. The daily MACD broke above its downtrend line after achieving a 90% retracement level of the third wave th high. This puts the odds of the last move being a 4 wave correction at 82% and states the next move th higher should be a 5 wave of some degree, highlighting an upcoming pullback in the markets. We developed this 90% retracement rule after backtesting nearly two thousand series of fourth wave corrections.

As you can see on the above chart, the MACD is approaching a level that either marks a top or extends a bullish market. Having odds of 82% that we already completed a fourth wave correction we are betting that this line will mark the fifth wave top of the current uptrend. A break of the upsloping demand line will increase the odds of a larger correction taking hold. The daily ADX is agreeing with a bullish trending market, after not giving a buy signal which usually follows the sell signal. The sell signal in the ADX was referenced earlier in this article and occurred at 1530 giving a top projection of 1550-70. Once again it is trending up toward the 35-40 level where a rollover will issue a new sell signal. We are inclined to believe that this new sell signal will produce a small pullback then relinquish a higher top that will be highly fadeable and highly profitable. The move should be accompanied by a negative divergence in the +DI Indicator.

Daily RSI gave a CIT (change in trend) at 1597 and remains bullish. A break of the upsloping trendline will result in a new CIT and change the market to bearish.

Stochastic RSI is suggesting that the current uptrend will come to completion before May 23, 2013. The slope of the uptrending demand line suggests that the market will react sooner than that date however. Steep slopes as shown in the RSI chart above and Stoch RSI chart below generally produce a pullback sooner than later. Neither are showing signs of divergence which leads us to believe the pullback off these levels will just be that, a pullback, and higher price levels should be expected.

Our expanded market view references inter-market analysis of bond, currency and yields and includes proprietary models with an averaged R of over 95. Upcoming posts will contain charts with the cross referenced material as well as the prop charts and models.