Sunday, January 11, 2009
Rough road map for stock market
I am short the market right now via SRS and puts on SSO, NEM, BHP, AEM and KSS. These are short term trades, as I believe we are in the middle of a rally that will last until spring. The bear market is NOT over by a long shot, but no market moves in a straight line and there are big profit opportunities going both long and short in even the worst bear markets.
Elliott wave theory is complex and can get a little too complicated for my taste at times, but the rough application of wave counts can be quite helpful in determining where we are in a big picture sense. I believe we just completed the "A" wave up in a wave IV correction and once the current "B" wave down completes, a big "C" wave rally up will begin. Once this "C" wave up completes in the spring (some time between say mid-March and the first week of May), a BIG, NASTY downward leg in the stock market will begin and crush every one's hopes for a recovery.
In chart form, using the S&P as a proxy for general stocks:
Because the bigger trend is up rather than down, my current bearish trades will be closed in 1-4 weeks. I will be looking to get long gold stocks starting at the end of January and will be betting the farm on gold stocks outperforming most general stocks until the rally is over in the spring. I believe 50% gains from the bottom in the gold mining sector are reasonable to expect and 100% gains wouldn't surprise me.
You see, this coming "C" wave up in general stocks will correspond with a 5th wave up in the first bull leg for gold stocks, as gold stocks have entered a new bull market. When the next leg of the stock market bear begins in the spring, gold stocks will simply undergo a bull market correction and will NOT make new lows. However, gold stock sector declines can be rough and deep, so I'll be trying to sell near the top and won't be holding through the correction.