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We experienced the biggest opening week drop of a New Year in stock market history for the Dow Jones and S&P500.

This past week was good, but Ah, I’m kicking myself for not holding onto the puts from yesterday. Instead of yesterday’s close as the 5th wave –it was actually a b-wave low of the 4th wave–which I should’ve guessed since it was only marginally lower than the 3rd wave — which is not typical of a 5th wave.

What we experienced was a 4th wave A-B-C flat — just like what we experienced earlier with a 2nd wave A-B-C flat — though slightly different look.

5th waves are tricky to guess how they go. It did not look like what I expected today. I have to be open to the possibility of a 5th wave extension that goes beyond traditional expectations.

From a microperspective, it looks like Sunday night could go just a little bit more down towards 1905 from 1913 here. We should be targeting the A-wave lows from last August 2015 — but I don’t think we will get there in the next few days. I’m expecting some kind of bounce that retests the 1950-1980 region. The drop that follows after that, perhaps end of January – may  be the one that gets to 1850 — not this one, at least my best guess based on the pattern formation. Or it’s possible we go straight to 1850 from here. Will have to look at clues in the coming days to get a better sense.

 

The Russell looks like it will target the October 2014 lows of 1100. So a slight bounce in coming days, followed by a drop towards 1100 is what I would expect.

 

If Nasdaq retests the 4480 again, I will likely be reshorting the Russell at that point.

 

The S&P500 started 2015 pretty much exactly where we are today — around the 2030-2050 region. We went as high as just over 2110 to as low as just below 1850.

But the numbers don’t tell the full story. Here’s a look at the chart — as well as our Elliott wave count on the structure of what occurred this past year.

S&P500 Daily Chart for All of 2015:

The above chart is the S&P500 from December to December in 2015.

So What Happened in 2015?

Basically, we spent most of the first half of the year finishing that last 5th wave that began from the drop in October 2014. The second half of December 2014 was a massive rally Santa Rally (even bigger than the one from this month in December 2015.

2015 began with a drop in wave pink II — which set the stage for the ending diagonal for the next several months. We had a I-II-1-2-3-4-i-ii-iii-iv-v play out — an ending diagonal within an ending diagonal. Then we came out of that ending diagonal with an a-b-c pink IV four — and then finally finished it with a last thrust up in a wave V over 2100.

Whether that last thrust wave V was technically higher than the wave II  from mid-May is inconsequential. In terms of pattern structure, the high in mid-July is considered the completion of this ending diagonal.

From that top, we experienced a yellow a-wave pull back followed by a b-wave rally — and then a leading expanding diagonal orange wave 1 — that can be broken down into 1-2-3-4-5. Then we got an a-b-c wave 2 retrace to near the top of that diagonal.

That’s what preceded a major wave 3 drop — in what appears to be an orange wave A in August of 2015.

For the second half of 2015, e experienced what appears to be a corrective B-wave that pretty much went all the way back to the highs over 2100

S&P500 Weekly Chart from 2011 to 2015:

 

S&P500 Weekly Chart from 2011 to 2015

My S&P500 Outlook for 2016

Well, as you can see from the above weekly chart — I believe the yellow A drop and B-wave rally has finished — and we are forming the foundations for what may become yellow wave 1 down.

As I write this now, we may potentially have a corrective A-B-C wave 2 , –which usually results in a wave 3 down — as long as 2060ES does not get breached in this last week of December.

Judging from the pattern in the Russell2000 — I see a clear 5 waves down and 3 waves retrace — which gives me further confidence that downside is to follow.

I am a little hesitant about making this downside call in the near-term, because another prominent Elliott Wave site is predicting the exact opposite — a 1-2-i-ii highly bullish move to the upside.

But because we spent the entire first half of 2015 in an ending diagonal within an ending diagonal — I don’t think we will break into new highs. The August 2015 drop also does not seem resolved yet until we get a C-wave down.

I also think the pattern in the last two weeks is more representative of the corrective A-B-C wave 2 flat — rather than the 1-2-i-ii setup.

A= 3-wave move

B= 3-wave move

C = 5-wave move with extension

This 3-3-5 structure matches the corrective wave 2 pattern more.

Why do we trade the S&P500 instead of individual stocks?

Transcript

On this podcast, in addition to trade recaps, we’re also going to talk about some stock market concepts —

 

So you’ll learn everything from what is Elliott Wave Theory — what are options — why do we use options?

 How do you bet  where the market won’t go?

But for today, we’re gonna talk about  why do we trade the S&P index — as opposed to individual stocks.

 

People always talk about – oh, what’s the next hot stock — the next Apple — and then there are people who talk about penny stocks — and all the corrupt newsletter promotions and the pump and dump there. 

 

But we here avoid stocks. Why is that?

 

If you look at some of the most successful traders in our recent history — take a look at Jack Schwager’s Market wizards book — you’ll know what I mean.

 

Many of the traders featured in that book — trade the index or commodities — they’re not individual stock pickers for the most part. When it comes to individual stocks — that game is more about information — do you know that some biotech is gonna pass or fail some FDA approval. A lot of top funds bribe PhDs who are in the know to tip over some information — usually indirectly — so they get the hint about what’s going on. That’s a game of information.

 

We don’t have access to the private, often illegal, information — and so we don’t get an edge with individual stocks.

 

So that’s the first reason — we don’t have that information advantage with individual companies and stocks.

Stock Specific Risk

The second reason is that stocks exhibit a lot of different kinds of risk — in addition to overall market risk, they have stock specific risks. Every quarter, –every 3 months — a company that is listed on the stock exchange has to release quarterly earnings reports to the public. When these numbers come out — the stock and sometimes dramatically and instantly move in one way or the other — and oftentimes, the direction in which it moves can completely make no sense. A company can beat earnings, but if its guidance is down, then the stock can go down. There can be any number of possibilities — and oftentimes, having an information advantage doesn’t necessarily guarantee results.

 

So this kind of stock-specific risk is too unpredictable — that we don’t wan to play that game.

 

Remember, it’s almost like walking into a casino — there’s all kinds of games that are available to play. You can play kraps, blackjack, poker, –and then within each, there’s different tables — you get to pick which game to play. Picking stocks is not the game we want to play. One minute a company can get FDA approval, the next minute, there can be a reversal of that decision. Not for us.

 

Now what about the index? Well, you see the index is essentially an average of all the major stocks — a true representation of the overall market. And so while individual stocks could go up or down 30 or 40% in one day — it’s extremely rare for the entire index to be down 10% or even 5% in one day.

 

Now, you might be wondering —well, if the index barely fluctuates and moves in less than 1 percent typically on any given day — wouldn’t it be really hard to make any money because there isn’t much movement compared to stocks?

 

Well, to that I would tell you that with the S&P — you got things like options and futures — that  not only give you leverage so you that 1% move can be magnified many times.

Big drop in past 2 days nearly reversed the rally from Monday to Thursday morning.

And here’s my wave count for today’s action:

As you may know from our post yesterday, we bought SPY puts when ES was trading around 2065 — we bought those at $.79. Today, they close well over $3 — and we cashed out our last piece at $3.11 (we cashed out the first half at $1.81 yesterday).

Today we also realized our 207.5/209 call spread since we had gains of $1,000 and the max profit on that trade was $1,200 — so we were close to 80-90% of potential profit. Given the action after the close (big drop) – we could’ve held on, but not worth the risk with profits on the table.

 

We posted 2 videos:

* How and when exactly to execute a buy put order

* Live trading – closing out a call spread on my mobile phone

Transcript

Today is Friday December 18 — expiration Friday —

 

Last week we talked about how we realized $2500 by betting that the market would stay below 210 in the SPY – indeed it stayed well below 210 and thos optionso expired worthless, which means we collected our full premium of $2500 — the way we collected that weekly premium — was just like the way insurance companies make money.

 

Insurance companies bet that you won’t get into an accident, –and they have information about you.

 

Likewise, we bet that market would stay below 210 at expiration — and we had information about the markets — historical wave pattern information. And based on that information, we we made that bet and collected our weekly premium.

 

 

and we also said we bought puts and did another short call spread with short strike 206.5.

 

Now how did these two trades from last week do?

 

Well, initially earlier this week on monday and Tuesday, they were up big–the SPY went all the way below 201 — but then the market rallied into the Fed meeting on Wednesday — where they raised interest rates for the first time in some 6+ years.

 

Because of the Fed announcement and the rally into it– we had to exit the put at puny profits — and the short call spread, we lost a tiny bit — so it was basically break even — in order to reduce risk. Reallyl, we should’ve realized gets especially when 90% of our maximum profit potential was hit on Monday. But instead, we didn’t close out — and the market rallied our gains evaporated. But didn’t want continue holding into the Fed meeting — because crazy things happen on Fed day.

Sometimes, that’s what you gotta do if there’s some big news event like there was this week on Wednesday.

 

 

So what happened during the fed announcement? The ES (S&P futures) were around 2045 –they initially dipped down to 2030–then rallied into the close at 2065. Overnight, it hit over 2070. 

 

Lots of people were saying that this was a super bullish pattern and that we were going to hit new highs.

 

We really looked carefully at the wave patterns posted on our blog our prediction for what exactly the wave pattern was with this fed announcement. We were convinced, that this rally —would turn over. In fact, we specifically said that if it ever touches 2045 on the day after the Fed announcement, the entire market would turn down.

 

Show Notes

To check the price of SPY:

* On your browser, go to finance.yahoo.com – and search “SPY”

* Download the investing.com app (free, iOS) – type in “SPY” in the search at the top right – then select S&P500. Rotate your phone and make sure the candle stick chart is selected at the top.

Transcript

Today is Friday, December 11, 2015 –this is SilverSurfer — former hedge fund and prop desk trader turned lifestyle trader

–and wow – what a big day in the markets. The S&P closed down 1.94% today and we actually just realized $2,500 in profits from our high-probability bet last Friday just 7 days ago –turning $7,500 to $10,000 in  just 7 days. On a smaller scale, you can think of it as turning $750 to $1,000 in same period for time.  And actually, if the markets didn’t do anything today – just stayed where it was — or even gone up — we still would’ve realized the $2,500 — that’s the beauty of our strategy.  We also initiated a new trade yesterday buying puts that we sent out to our members and that one is already up more than $2,000 today.

 

 

 

Now you might be wondering how this podcast is different from other podcasts — well, here we take mobile-focused way of making real money in the markets. Yes, we these are our real trades with real money. — and each day we post an update on our blog over a lifestyletrading101.com/blog –so everything is documented.  we only do 1 trade a week. What do I mean by being mobile-focused?  Well,  we do everything right from our mobile phones and we show you how you can, too. We don’t do hundreds of trades per week like some traders do — that would require us to constantly go in and out. We don’t have time for that, and frankly, neither do you. The lifestyle trader approach is about living the lifestyle you want and doesn’t require you to sit in front of a computer screen watching every tick. So our mobile-focused approach teaches you how to do just 1 trade each week.

 

We give you high probability trades so you can go on with the rest of your life and check in here and there. We can’t promise every trade will be a winner, but we generally only share what we believe have at least an 80% chance of success. Each week we place just 1 high probability trade at LifeStyleTrading101.com — and we talk about it right here in this podcast–along with any forecasts we might have for where the market is going.

 

So that’s a bit about what makes this podcast unique—real money, real trades — right on your phone.

 

Now, onto this week’s update – we just realized profits of $2,500 and we sent text alerts out to our members for trades going into next week. First – the $2,500. How did I make $2,500 tapping a few buttons on my iPhone? 

 

You see, 7 days ago, we put on a bet that the SPY ((the exchange traded fund – ETF — that tracks the most popular S&P500 stock index ) would stay below $210 when it was priced around $208. Well, today it closed at 201.88. If you want to check for yourself where the SPY is trading at – you can go to finance.yahoo.com and type in SPY in the search bar — or better yet on your iPhone device, download the investing.com app once you have it downloaded — at th...