Buy Signals Abound

I have been discussing now for several weeks that it appeared we were in wave C up of a triangle. While there is a remote chance that we are still in wave C, the lack of year-end selling coupled with a breakout to new highs for the rally reduces that probability considerably. Elliott Wave International has now introduced an alternate count that puts us in the early stages of wave C of a double zigzag upward correction and I think that view together with the positive 10 month cycle is the most probable case. There are many possible targets at this point, but the most likely target is the 200dema, which for the Dow is now around 10,470 and the for the Qs is around 38.45 so we could see Dow 10,000 and QQQQ 37.50 by the time the 200dema is hit.

The TC2000 McClellan Oscillator hit a new all time high this Friday at 328.28. This is near term bearish and intermediate term bullish. Therefore, we may see a 1 to 4 day pullback next week followed by more rally. The continuation of the rally into the first day of the year reduces the likelihood that the 11 week cycle turn date will be a significant low. It will most likely be a high or a minor swing low, so we should expect the rally to continue into the 3rd or 4th week of January.

The only thing that will negate this view is a break of last week's low on higher volume.

Let's look at the positive signals that have occured as of Friday 1/2/09:

Head and Shoulders Bottom Breakout
20 Day Donchian Channel Breakout
Positive Divergence MACD Buy signal still in force
Daily Bollinger Band Squeeze setup on the daily charts
3 Week Buy signal still in force
Weekly MACD Buy signal close call (needs one more week)
10-15demas Crossing Up the 20-30demas
Cabot Tides are neutral
Cabot Two Second Indicator is bullish
IBD Confirmed Rally
McClellan Summation Index is soaring

On the negative side, we have:

McClellan Oscillator extremely overbought
Declining volume every week of the rally
Friday's breakout was on significantly lower volume than previous December high
% Stocks Above 40ma is at a two year high of 82.86%
Sentiment by many measures is now very bullish

Overall, the weight of the evidence supports the continuation of this rally. However, it may be prudent to wait for a pullback to enter new long positions. Many trend following systems are not on buy signals yet, so depending on the system or systems you are using it may also be prudent to reduce position size regardless of how confident you are in the rally.

This is not a time to double up short positions. This is a time to be exiting short positions that are not working and looking for viable long positions. This is not the time to chase after stocks that are extended, e.g. RMBS and RGLD, but look for stocks that are setting up such as AFAM, MYGN, and HOMB. Lastly, if you have not been already entering long positions, this is not the time to go all in either. Look to enter no more than two or three new positions in a week. If the rally fails, your losses will be reduced.

I have invested a lot of time in this blog looking at the bearish case, but regardless of elliott wave or sentimemt, price is saying higher and the profits will be in the direction of price.