I am an amateur stock index futures trader. I use Elliott Wave, sentiment indicators and a host of technical indicators.
When I first starting trading, it astounded me how easy it was to lose money by executing trades in the direction I FELT the market was headed. It soon occured to me that the reason for this was that my emotional reaction to the tape was similar to the emotional reaction of the majority of others also reading the tape. Thus, in time, I learned to trade in the direction that felt MOST uncomfortable.
Given the action in the US indices since the beginning of August, I feel very uncomfortable about taking a long position next week with the S&P nearing the 1200 mark as it FEELS to me as though it is soon to go off the edge of a cliff. Alas, I am not alone. If you look at the CBOE half hour intraday P/C ratios for August 26, 2005, you will note that ratio spent the entire day over 1, except for the first hour of trade, and closed at 1.18. Further, check out the articles listed on this site over the past week and try to find more than one with something bullish to say about the US markets. The majority is once again convinced that the countertrend rally that started in October 2002 has FINALLY come to an end. It feels very confortable for me to agree with this notion just as it did during all previous sell-offs during the last 9 months. Everybody also knows that September is historically the worst month for stocks. Therefore, on Monday, I must endure discomfort and fade the downtrend with an uncle point of a tick below the London attack low. So much for sentiment.
As regards Elliott wave analysis, the action since the most recent highs is clearly corrective in nature. The waves are overlapping and the sell-off very slow. The breadth and volume is characteristic of a B wave correction to correct an A wave upswing from the London attack low to the most recent high of 1245.86. This B wave has already retraced over .618 of the A wave in the S&P but the NDX is holding up nicely above its .618 level. It is actually the DOW that is leading to the downside and I have learned the hard way that whenever the DOW leads, the entire market is ultimately going to reverse in the opposite direction. So far, I count 3 waves down and the third wave or C of the B wave may or may not be complete. If it did not complete today, then it should do so in the coming week and bottom somewhere very close to 1200. Thereafter, a C wave rally should ensue that takes the S&P as well as the Nasdaq to new multiyear highs (I am less certain about the DOW but maybe it will fool us all again). If wave C is 1.618 times wave A, a target of about 1300 is in order. A=C would bring the index to approximatley 1260. It will be a fast rally with good breadth as C waves are third waves. It will be fueled by boatloads of shorts running for cover and "news" events should occur that the media considers conducive to a bullish market.
Getting ready to rock to the upside? My heart says this thing is going straight to hell but my mind tells me otherwise.