Monday, December 15, 2008

The Transports Lead To The Downside

(click to enlarge chart)

The Dow Transports and the S&P Financials have closed solidly below the uptrend line from the 11/21 low. It seems likely that the Dow Industrials, S&P 500 and Nasdaq Composite and 100 will follow suit. The VIX continues to hang in there amazingly. So what can we expect from here. If the indexes close above the 12/8 and 12/9 highs, then the rally will extend to the 50demas, but at the moment it appears that the Dow is headed to 8000 or below and the Qs are headed to 27 or below to complete wave D of the intermediate 4th wave triangle.

Elliot Wave International says that the upper trendline of the triangle will be too steep to be a valid triangle and therefore another pattern is developing, possibly an ending diagonal triangle if the market goes down tomorrow. I don't agree with this assessment. I think that this is most likely a triangle, and the reason is that I am seeing a lot of triangles developing in large cap stocks. The triangle makes the most sense as I think the mutual funds and institutional investors and the government are going to do everything possible to hold this market up until the end of the year, and the triangle allows that to happen. Then, the final wave of selling can begin on January 2.

The alternate view is that wave 3 of (5) is setting up, which is even more bearish, but I don't think this could be right as the decline from the 12/8 and 12/9 highs looks very corrective, which fits with a wave D interpretation.

I am still looking for a macd sell or a break of last weeks low to get more bearish. I will expect this to occur on increasing volume and wait for a retest to add to short positions. A failure of the retest would be the ideal entry point. Anything else could be a fakeout breakdown.

If the market was going to break out, I think it would have already done so as there has been ample opportunity over the last week for the generals to push it up and they haven't. Everyone knows what the Fed is going to do tomorrow. The only surprise will be if they only lower interest rates 1/4 pt instead of a 1/2 pt. Such a surprise would indeed be negative for stocks given the expectations.

So, don't lose your patience. It is not surprising to see a slow grind sideways to work off the oversold condition generated in October. The rally from the March 17 low took 44trading days. We are currently at 34 trading days from the October 27 low and 10 trading days will take us to December 30.

1 comment:

dave said...

some misc notes
1) VIX 20S X 50S
2) EEM & FXI charts look great; have slight misgivings about FXI because it's not as true as Shanghai Comp
3) NY Comp is surprisingly stronger than any of major indices incl RUT or QQQQ
4) still allowing for one more pullback which will not take out late Nov low; next spring or fall is another story