The Big Picture: July 30, 2012

We’ve been blessed with a real trader’s market the past few months.  Had we simply held our April 2 shorts (at 1422), then covered and gone long on May 23 (at 1298, I was early), we’d be up a respectable 215 points (15%) as of Friday’s close.

There’s certainly nothing wrong with a 15% return in 4 months. It beats the heck out of a buy and hold strategy which would have left us down 33 points (-0.49%)

By paying attention to harmonics and chart patterns, however, we registered 685 points over the same period for a 49.25% return.

Looking back, our forecast was eerily accurate.  Here’s the chart I posted on June 11, a slightly revised version of a June 1 forecast [see: Mixed Signals.]

The forecast line is the solid purple line rising diagonally across the chart in the middle of the red channel.  I was expecting a quick decline from 1335 to 1308, then a rise by July 25 to 1389.  I punted on the likely wave shape, drawing a straight line down the channel midline from June 22 on.

We got the decline the next day (to 1307)… and followed that with a rise to 1389 by July 27 — only two days later than expected.  Here is the exact same forecast, superimposed on the actual market results.

I’m not aware of anyone who correctly anticipated the wave moves.  I’m glad I didn’t embarrass myself by taking a wild guess.  But, the channel worked very well — until the July 12 dip necessitated a slightly tamer slope.

Earlier today, a friend described his attempts to capitalize on the rise since early June using options.  He had the right direction, the right target and nearly the right timing.  Yet, profits had been anything but automatic.

I attribute the difficulty to the crazy wave structure we’ve seen since June 25.  It’s been a tough time to stay ahead of the daily swings.  In the past 38 sessions since 1266,  only 3 featured daily swings of less than 10 points.  Fourteen had daily swings of 19 points or greater.

So, what’s next?



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