Qs Heading To 30.72

The Qs are breaking out to the upside this morning from a small b wave triangle that completed yesterday afternoon. The most likely scenario is that this is wave E of the larger wave(4) triangle. E waves tend to suck everyone end based on some perceived good news event. So far, while the earnings news has been bad with lowered outlooks, etc, the perception has been that they could have been worse. Also, the 4th Qtr GDP report comes out tomorrow. As long as it is not worse than expected this is likely to be viewed in a positive light. However, caution is advised as this is typical market behavior in wave E.

The possibility of this outcome is why I only went 50% short with my index allocation last week. Once, and if, the markets roll back over and reconfirm the downtrend will I increase my index short position.

The Qs could run all the way back up to the January 6 high, but as long as they remain below it by even one tick, then we should conclude that it is still wave E. The other evidence supporting this view is that the Dow, SP500 and the Transports all declined much further relative to the Qs and will likely not approach the January 6 high on this rally. So, I think the key here is the Qs. If they exceed the January 6 high, then something else is going on and the bias will shift to the long side.

Traders should also not become extremely bullish if there is a lack of downside follow-through. As I will discuss in future posts, such an outcome would actually be more bearish for the 2009 outlook than if we get a nearterm retest of the 2008 lows.