3 Wave Rally Nears Completion

Markets closed decisively above last week's highs but the volume lagged on the QQQQ and the IWM while volume expanded on the major indexes. QQQQ relative strength is still lagging, which is a bad sign. Overall the current rally appears to be a double zigzag upward correction from the November 21 low. It may have ended today, but most likely we will see one more down-up sequence to complete it. The Dow finished just shy of the 50dema and the Qs finished just shy of the .618 retracement from the Nov 4 high. Both of those facts point to one more attempt at a rally high. If I had to guess, I would say it happens Wednesday after a down day tomorrow.

Today's open handed the bears one of those gotcha moments. Your exit level has been exceeded, but the market has gapped up well beyond the exit level. So what do you do? I think consistency is the most important trait to develop here. Always do it the same way and your results will be more consistent. In these situations, I choose to give the market an hour to see what happens. Sometimes it is clear that the market is running away and I go ahead and exit, but today was not clear at all. Yes, the Qs closed up 3.94%, but they only closed up .53 from the open and on lower volume. I saw that the volume was running light so I decided to hold my QID position. In an earlier post I recommended using wide stops. In this case my stop was 2 ATRs below the recent swing low (QID), so my stop has not yet been hit. My choice to exit on a breakout would have reduced my original loss expectation. However, I am still in and within my original trade parameters.

So far we have had few market long signals to suggest that this rally is for real. The Cabot Tides indicators are still short. The markets are still below the high of the low month and volume has been below average. Another interesting fact that John Carter of tradethemarkets.com has pointed out several times is that the Yen/Dollar is a great leading indicator for market action. The chart above shows that the rally in the Yen/Dollar is clearly 3 waves and it may already be breaking down in 5 waves.

My long positions helped cushion the blow from today's rally and I continue to look for a reversal in the next two days. If the markets continue higher I will exit short and look to go long on a pullback to the breakout level.