(Click To Enlarge Chart)The above chart of the XLF has been intriguing me for a couple of weeks now, and I think the pattern has become exceptionally clear. The XLF moved up in 3 waves off of the November 21 low, which has been followed by a long B wave. The reason it is so clear that it is a B wave is that we can see that waves a and c of B are separated by a triangle. This pattern is even more clear in JPM. If this analysis is correct then the current decline is nearly over and a two week rally should follow. Wave c of B should complete in the next 1 to 3 days. Wave A lasted 10 days and by symmetry, wave C should last approximately 10 days. I find it hard to imagine a scenario in which the major indexes continue to fall while the financials are rallying, so I am going to go out on a limb and say that I expect new rally highs by the end of January in all major indexes. I suspect this rally will surprise many traders who are now looking for new bear market lows. For those of you who have positioned yourselves short, I recommend keeping a tight leash on those positions and be prepared to get long for a swing trade above today's high.
I have repeatedly cautioned against being heavily positioned one way or the other since early December, and so far I think that recommendation has been a good one. I know that many have made profits trading the beaten down stocks for quick gains, and that has been a good trade to be sure. However, don't get attached to either direction.
Note that there were only 12 NYSE new lows today. Hardly indicative of an impulsive decline.
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