By Susan C. Walker, Elliott Wave International
November 29, 2007

The world is awash in bad news about the subprime mortgage meltdown, just the same way that New Orleans was awash in floodwaters from Hurricane Katrina two summers ago. A few examples:

The median price for new home drops 13% since last year, the most in 37 years, according to a Census Bureau report on November 29.

This due in large part to buyers not being able to get financing now that lenders have tightened their lending standards in response to the subprime debacle.

Major Wall Street banks write off billions of dollars in subprime-backed securities.

Dire forecasts estimate that the credit crunch caused by the mortgage problems will cause between $250 billion to $500 billion of losses at banks and brokerages before it’s done.

If you want to see how this kind of news looks on a price chart, consider the chart that we published in the latest Elliott Wave Financial Forecast. It shows how confidence in the mortgage market has simply fallen off a cliff. “The ABX Mortgage Indexes are akin to the eerie music that starts to play right before the goriest scenes in a horror movie,” write our analysts Steve Hochberg and Pete Kendall. Even prime-rated mortgages (the top line on the chart) seem to have been tainted by the cliff-diving exploits of the subprime and Alt-A mortgage indexes.

Editor’s note: Elliott Wave International invites you to read more about this Mortgage Mutiny chart in a special three-page excerpt from the November 2007 Elliott Wave Financial Forecast, called “Transition to a Fear of Risk.”

The continuing repercussions of the subprime meltdown since two Bear Stearns’ hedge funds imploded in August remind me how closely this situation imitates the delayed punch of Hurricane Katrina in the summer of 2005. In fact, I wrote a column for Fox News on that very topic a few months ago, some of which is worth repeating.

* * * * *
[Excerpted from “Subprime Storm Mimics Katrina,” originally published July 30, 2007]

Wall Street may have reason to worry about a financial hurricane poised to do the same kind of damage Hurricane Katrina did — in terms of money and assets lost — in New Orleans in 2005. Given the latest storm warnings about subprime mortgages and the Dow’s dive last week, it looks like “Subprime Katrina” might become the financial storm of the decade.

Wall Street investment bankers who remember the devastation in New Orleans might want to start battening down the hatches. In fact, some of them seem to understand their pending doom as they try to cajole the rest of the world into thinking that the subprime (otherwise known as low-quality) mortgage contagion is contained. ‘Sure, sure, Bear Stearns got hit when its subprime hedge funds lost their value, but everyone else is O.K.,’ they say. ‘Let’s all heave one collective sigh of relief that we dodged that bullet.’

Does that attitude sound familiar? It’s exactly how the people of New Orleans felt for the 8-10 hours after Hurricane Katrina whipped up the Gulf Coast and dumped its rain. It was over; they had dodged the bullet. Their beautiful city that is built below sea level and surrounded by sea walls and levees was safe. That’s where Wall Street is right now – hoping the levees will hold as investment bankers try to sandbag the rest of us with lots of placating talk. Well, it turns out that New Orleans was about as safe as the subprime bonds that are now below their own “C” level.

Although Wall Street bankers have been doing one heckuva job, I think it’s too soon to breathe easy, just as it was too soon for those in the Big Easy to breathe easy. Here’s why: Wall Street was warned about the coming hurricane-force fall-out from subprime mortgages, and it ignored the warnings, buying up all the securities backed by subprime mortgages that it could. Now, Wall Street is having trouble selling more debt. It sounds like it may be too late for many Wall Street denizens to get out of town – and their positions – before the floodwaters start rising.

Remember, too, the finger-pointing and blaming that started as soon as the rest of the nation realized that the U.S. government was not doing enough to help New Orleans? The editors of The Elliott Wave Financial Forecast recognize a similar change in attitudes toward Wall Street:

“The unwinding process will be sped along by a flood of revelations about illicit hedge fund and investment banking activities. Just as Enron, Tyco and a host of other primary beneficiaries of the late 1990s bull market run became the focus of scandals, hedge funds and the banks that enabled them are starting to become a focal point for scrutiny.” (The Elliott Wave Financial Forecast, July 2007)

Then will come the final installment. Just as the U.S. government was slow to come to grips with the disaster in New Orleans so that people were left to fend for themselves, so too will investment bankers and investors have to fend for themselves. They may find themselves clutching their worthless paper and wishing someone would bail them out from the rooftops of their now-worthless homes.
* * * * *
Now, here we are at the end of November, and the situation for investors and investment banks has played out almost exactly as I outlined. Hardly anyone is coming out smelling like a rose. If anything it’s the opposite, as the stench from quarterly financial filings rises as banks reveal how many billions in dollars they must write off for their mortgage investments gone bad. Sadly, the conclusion to my Subprime Katrina column still holds true: “Heckuva Job Brownie – now known as Helicopter Ben Bernanke and his Federal Reserve team – won’t have any more luck picking up the pieces on Wall Street than FEMA did in New Orleans.”

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

When day trading futures, you enter and exit all positions in the same day - never carrying a position overnight. Since the overnight moves of the market are difficult to predict, many traders avoid risk by day trading. Ironically, the public believes that day trading is the riskiest way to trade.

THIS IS A MYTH !

Some traders day trading futures, make 1 to 3 trades per day, trying to catch the major intraday moves. Others trade in-and-out very frequently, trying to “scalp” a small profit on each trade. (My style uses a unique blend of these two strategies.)

For those day trading futures, the Emini Stock Index Futures have become the most popular day trading vehicle because of their liquidity, leverage, and the ease of trading them online. You can go short or long with equal ease – unlike stocks where it’s easier to go long than short due to the “up tick” rule.

The time relationship of the eminis (and the “big contracts”) to the cash indices is important to understand. Let’s start from square one.

The S&P 500 stock index (the cash index, symbol SPX) is central to day trading futures. It has an Exchange Traded Fund (the “Spyders,” symbol SPY) that trades like a stock, but without the “up tick” rule. The price of the S&P 500 cash index moves up and down with the 500 stocks that make up the index. The SPYders follow the S&P 500 cash index very closely. You can trade Exchange Traded Funds such as the SPY (and QQQQ for the Nasdaq 100) online from home. But for day traders, they are not as favorable as day trading futures.

The concept of “futures” is a little confusing, but it boils down to this: the financial industry has turned the S&P 500 cash index into a “contract” that trades like a stock. The contract (or futures contract) has a price that goes up and down from one moment to the next. It has a chart that looks just like stock chart, and you can make money with it by buying low and selling high, or vice versa. That’s a complicated as it needs to be for now.

The “big contracts” or SP Maxis were invented first and they’re still around. With the big contracts, a lot of money changes hands. When the price of the SP Maxis moves one point, $250 per contract moves with it. The SP Maxi contracts trade in a literal “pit” where the traders, called “locals,” shout at each other, buying and selling for everyone who wants a piece of the action.

The locals are not public servants, of course, they make money for their own accounts. They have the advantage of being able to read each other’s body language and the tone of the other trader’s voices. They see what the strongest traders in the pit are doing. They have several other advantages too, their costs per trade are tiny compared to the public’s commissions.

The “locals” aren’t born as professional traders though, they learn to trade like everyone else, except they have a huge advantage in learning as well because they learn to scalp first! Their instant access and low commissions make this possible compared to others, but those day trading futures online can take advantage of scalping trades as well.

Scalping is basically limiting your losses to only one or two ticks while taking any profit you get as you get it. It’s easier than going for several points per trade, I’ve been using this strategy day trading futures with much success.

Locals also use the spread (the difference between the bid and ask price), to grab quick profits from orders that come in on either side of the market. This makes scalping easier for them.

In the past, all these advantages made it impossible for a “retail” day trader to be a successful scalper. It was insane to try. And to this day many traders have the idea that scalping is too difficult for the public because you have to compete against traders with an unfair advantage.

But all that has changed now. If you follow some simple, yet important guidelines then you too can be successful scalping and day trading futures online.

They took the concept of the Maxi futures contracts and came up with smaller contracts (the eminis) that move $50.00 per SP point instead of $250.00. This allows all traders, big and small, to trade the stock index futures.

But even more radically, they set it up so that the smaller contracts (the eminis) are traded only through computers. This was revolutionary, they bypassed the pit, taking away the advantage of the “locals,” and leveling the playing field in a way that has never been done before. And to level the field even more, retail commission costs fell like a rock. Today, any trader day trading futures with a small account can pay $4.80 per round turn (entering and exiting a trade).

This means that scalping is open to the day trading public for the first time in history. But most people who are day trading futures don’t even realize where the new advantage really is.

Scalping is one of the keys to making a living day trading futures as I do, because I follow a simple rule: “Every trade starts out as a scalp until proven otherwise” .

The SP emini futures became more and more popular and more liquid, breaking a lot of records along the way.

The SP Maxis futures and the SP emini futures are both derived from the S&P 500 index (symbol SPX), which, as I said, has an ETF that trades like a stock (symbol SPY).

So the question is - which of these is the leader and which are followers?

Today the emini futures track the Maxi contracts almost tick for tick, with the emini’s beginning to lead the Maxi’s at times, and also “overshooting” the Maxis at emotional extremes, such as the at the top of an intraday rally.

Both the SP eminis and the SP Maxis (the futures) lead the S&P 500 cash index by a variable amount of time, often in the range of a fraction of a second. Some people call this “the tail wagging the dog,” because the futures are derivatives of the stock indices, but call it what you want, the futures are leading the way.

The fact that the futures lead the markets makes their chart patterns more “pure” and reliable for support and resistance trading. This makes a huge difference to me.

I use the stock index futures (the eminis and Maxis) for calculating daily support and resistance areas, which are the basis of my own trading style – a style of trading that has paid my bills and built my financial security for about 20 years now.

For the past 10 years Mike Reed has been writing a market newsletter each day, “The RBI Trader’s Updates“, giving his “game plan” for the next trading day.

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals

Evidence-Based Technical Analysis examines how you can apply the scientific method, and recently developed statistical tests, to determine the true effectiveness of technical trading signals. Throughout the book, expert David Aronson provides you with comprehensive coverage of this new methodology, which is specifically designed for evaluating the performance of rules/signals that are discovered by data mining.

If you are a systems trader you will appreciate the reviews on this book. The reviewers have split into polar opposites who either hate the book and consider it worthless or have happily applied the analytical techniques to make their trading systems more robust and reliable.

The scramble over the last few days to cover short positions in financial equities signaled an unwinding of the oil/equity spread.

The Dow chart does not show everyting happened behind the scenes but when you match up the Dow chart with a US Dollar index chart and a Crude chart over the same period you will gain a greater intuitive understanding of this important dynamic.

Traders covered short equities and in turn liquidate long positions in crude exiting what has been a dream trade for many months.

Adam Hewison also talks about the recent disappearance of the Up-Tick Rule for short trading and how that has affected market volatility. He has a must see video on the topic.

Click the link to go to the MarketClub Trading BLOG. Depending on when you see this you may have to scroll down a few posts.

By Vadim Pokhlebkin
Elliott Wave International

You don’t have to squint to see them. Watch currency market charts long enough and you’ll see them everywhere: those moments on a chart when the market first swings wide up and down, then less so, then the swings narrow even more… Then for a while it seems the market is stuck, going only sideways, until – boom! – it launches into a wild spike that takes it far, far, and away.

Triangles. That’s what Elliotticians call those contracting swings in the charts. In fact, one of the triangle patterns in Elliott wave analysis is called just that: a “contracting triangle.” It’s usually a sideways move comprised of 5 waves, A-B-C-D-E. They most commonly form in 4th waves. And when one ends, the resolution is usually sharp and swift. “Triangles appear to reflect a balance of forces,” says Prechter and Frost’s Elliott Wave Principle – Key to Market Behavior. “When a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle.” Here is an idealized diagram:

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