Friday, February 27, 2009

Taking Profits

I was surprised somewhat by the lack of downside follow-through today given the news on Citi and GE, but that may be pointing to some exhaustion of the downtrend. As I had mentioned in my last post I would be considering taking profits on some short positions today with more downside. When I did not see an acceleration this afternoon, I took profits in (3) short stock positions and (2) index short positions. I still see some potential for more downside so I am not completely out yet, but risk for shorts is definitely increasing.

What concerns me the most here is that this may not be wave (5). So far, the major indexes have only completed 3 waves down from the January high. If we should start a strong rally from these levels or even slightly lower, we could be looking at a B wave. If that is the case, the current pattern would be an expanded flat in most indexes. This could point to the possibility of the most bearish of elliott wave counts, a P1,P2,P3-(1),(2)...(3). In other words, in this scenario, after completing wave C of (2) of P3 up toward the 200demas, the indexes would collapse in intermediate wave (3) of primary wave 3. This is why I really want to see more capitulation next week with one more up down sequence to complete the primary wave 1 count. I have been keeping this count in my back pocket and hoping that it could be excluded.

Regardless of the wave count, sentiment is extremely bearish by some measures and neutral by others. For example, the 10 day ma of the Daily Sentiment Index for the SP500 has reached an all-time low today, while the 10 day ma of the put/call ratio and the VIX remain neutral. New NYSE lows have been modest, while the McClellan Summation Index has moved down sharply. Divergences are typical in 5th waves, but mixed sentiment and breadth data are more typical of B waves.

The reason I am raising this red flag is that many, including myself, have been looking for the mother of all retracement rallies to begin soon. If the above scenario were to be correct, there will be many who buy this rally who will get creamed because it simply will not last as long as would be typical. A truncated 5th wave is one thing, but we must at least see 5 waves down.

An alternate view is that we are in wave (4) of P1. I do not think that this is the case since wave (4) would end up being twice as long in time as wave (2). This is certainly possible. I just don't think it is the most probable.

Understanding these possible outcomes can help us not be overcommitted to one preconceived view of the market action. Traders, however, should be trading the price action and not a hypothetical viewpoint.

Given the lack of intensity in the decline this week, I decided to exit shorts in A, ADSK and PLD as well as positions in DXD and TWM. Gains were around 20% on all but PLD. The gain on PLD was a nice 42%. I am still long the QID, SSG, SKF. I may end up with a scratch in those positions depending on market action next week.

Wednesday, February 25, 2009

Still In The Downtrend

There's little to add tonight as it appears that the markets have been moving sideways in preparation for the next move down. The wave count for the Qs is most probably wave 2 of (5) as it is lagging the other indexes in completing wave (5) down. While the Dow and S&P completed an upward abc correction today and could be in wave ii or iv of 3 of (5). While I have tried to analyze and address the wave count during this sideways movement in preparation for the completion of primary wave 1 down, I am not trading the elliot wave count per se. Rather I am using it as a guide to aid when to begin taking profits. My entries have been based almost entirely on price rules that have been discussed in prior posts. However, it is not prudent to wait for price rule exits when short near a potentially major bottom. I will be looking to begin taking profits as early as Friday on some positions depending on whether we get another move down this week.

I have seen some speculation that we are only completing wave (3) and one can certainly make a case for it if looking solely at Elliott wave. However, in considering the wave counts I take into consideration the point in the 10 month and 4 year cycle that we are in. Carl Swenlin at Decisionpoint called the November bottom the bottom of the 9 month cycle (what I call the 10 month, because that is what it averages out to) and I agree with him. This explains why the current 5th wave has been muted to some degree and the lower potential targets are not likely to be seen for now. We are in the strongest first half of the 10 month cycle. When the 22 week cycle bottoms in March, we should see a strong surge for the first half of the next 22 week cycle like we saw off of the November low. Which should put us at the front end of another 10 month cycle. In other words, we could see a substantial period of market advance prior to the next leg down in primary wave 3. This doesn't mesh, as I see it now, with this next move being wave (4). I could be wrong, but I envision primary wave 3 occuring when the second half of the next 10 month cycle is in alignment with the final descent of the 4 year cycle to bottom in 2010.

We shall see.

Tuesday, February 24, 2009

Where's The Capitulation

While capitulation is not always seen at market bottoms, it is usually seen at important ones. Yesterday's action just wasn't enough to call it capitulation. Today's rally was probably wave 2 of (5) in the Qs and wave ii of 3 of (5) in the Dow. This means we could see substantially more upside before the downtrend resumes. A move back up to 30 in the Qs is within the bounds of the dowtrend as well as 7860 in the Dow. If they move much above those levels then we would need to re-examine the situation.

It appeared yesterday that we were beginning the capitulation process, and even though there was no downside follow-through today, one day doesn't make a trend. As I said previously, we must be willing to withstand the sharp rallies while we ride out the downtrend. If there is evidence of a change in trend, then we can act accordingly, i.e. there is no reason to bail on short positions just yet based on trend following methodologies.

Today's action in gold was also still within the limits of the uptrend. That may change, but I will want to see more action to warrant exiting a profitable position in gold given a legitimate upside target higher that 1029.

Patience and discipline!

Monday, February 23, 2009

No Rally = Climax In The Making

The lack of a rally today and the subsequent break of the 2002 lows in the Dow probably means that a climax selloff to complete wave(5) down is underway. While I had originally considered that the markets would work their way down in a steady fashion to fit the expected time targets, today's action pushes the expected completion date forward. In addition to today's action, another reason that I am suggesting an earlier end date is that sentiment has swung quite rapidly from very bullish to very bearish. Some sentiment indicators such as the put/call ratio still have room for more bearishness, but we must be careful here.

As I said previously, the best place to exit is probably at the end wave 3 of (5) and we may be there by the end of the week. Action in individual stocks will become divergent with some continuing to go down while the market builds a bottom and others will begin to advance.

I continue to see the Qs retesting 25.05 and DOW 6400+- as a signal of the end. I will discuss my reasoning on a future post as I am pressed for time tonight.

Friday, February 20, 2009

Short Term Rally Possible

The Qs have completed 5 waves down from the 2/10 high and a rally back to the 50dema is possible if not likely. The other major indexes have completed wave i of 3 of (5) of P1, which also supports a wave ii rally. This rally, however sharp, should be brief and should not move above the 2/9 - 2/10 highs in any index. We will probably see some premature market bottom calls next week and should not be side-tracked by this.

The most extreme move of this decline should be the next one after any rally. I expect that the Dow will push close to the final target on this move. It would be prudent to be taking profits at that time rather than risk losing them as waves 4 up and 5 down may not produce much further downward progress. This applies even more significantly to short positions in individual stocks as many will be bottoming ahead of the broader markets.

This last decline lasted 8 days. If wave ii lasts 2 days and wave iii lasts 10 days, then that would align with the March 10 first target date. I am not saying this is how it will play out, but it is a possible sequence to look for. In particular, it gives us a time zone for profit taking between the end of next week and March 10.

I also expect that we will see extreme calls for the gold market both for upside targets and for a top. We may be close to a top in gold, but I suspect gold will continue to move inversely with the stock market, which means a pullback in gold over the next few days before a final push to a top.

As a reminder, this is the time to be scanning for leading stocks and stocks with clear bottoming patterns to buy when the market bottoms. The cream is rising to the top now.

I wish you all the best during the exciting days ahead.

Thursday, February 19, 2009

Sell Signals In QQQQ and SMH

Today we got the final confirmations of the downtrend with 3 week sell signals in the Qs and the SMH. Also, the low in the Dow violated the November 21 low finally eliminating the triangle possibility. The only obstacle to look out for now is an ending diagonal triangle in the Dow which could still allow for a sharp rally. We should expect at least one or two sharp rallies before the bottom, i.e. 2% to 4%, but just like the 11/13 rally last year that occured before the bottom, these should be false rallies.

A couple of weeks ago I said that if the Qs moved below 29.69, it would confirm the downtrend. That did occur on 2/12 but the Qs closed up for the day so that was not a reliable signal. However, I did use that signal to become more aggressive in opening new stock short positions while maintaining my index short positions at 50%. On 2/17 the Qs broke below the 2/12 low confirming that sell signal and I increased my index short positions to 75% while adding stock short positions. Today we got the final 3 week low signals for the Qs and the SMH and it would not surprise me to see another bounce tomorrow.

For the Qs 29.69 was the low of the opening day and opening 5 days of January, 28.74 recently was the 3 week low and the low of the opening 5 days of February. I do not trade the opening 5 day range of the month as a rule, but it can provide an early entry. Oftentimes, a break of the opening 5 day range of the month will determine the trend for the rest of the month. Also, watch the relationship of each month's 5 DOR. If each 5 DOR is higher than the last, the trend is up, regardless of what happens in between, and vice versa. Also, watch for false breaks. If a market breaks below the low of the 5 DOR and then reverses and breaks above the high of the 5 DOR, then that is usually a great buy signal. I hope that clarifies any confusion I may have caused.

Looking ahead to targets, I expect that the Qs will more than likely only test the November 21 low and not go much below, while the fibonacci extensions of the current elliott wave count in the Dow is pointing to 6356 as a target. However, the key market to watch will be the financials as they are likely to lead the recovery. The XLF is in wave v of 3 of (5), so we are looking at maybe one bounce followed by another new low. My target for the XLF is 6.00 to 6.90. Today it closed at 7.55, so it is getting close.

If you are long the SKF, I would not overstay as violent reversals are common with it. I have not been happy with the performance of many of the Proshares ETFs this year. The SKF overshoots in both directions and the DUG was a disaster. Compare to the DTO. There is debate about ETNs vs ETFs, but the DTO delivered and DUG did not. Also, I was ambushed with the early dividend announcement from Proshares without warning that stopped me out of 3 positions. I wonder if we will find out that there have been shenanigans in the ETF management later on.

To summarize, we are now in the heart of the downtrend in wave (5) down to complete primary wave 1 down. The risk of new short positions is rising so caution is advised. A market bottom is expected in March probably sometime between March 10 and March 17. Gold will likely top at the same time or a little early. There is no indication yet that the uptrend in gold is over and my target is now at 1029 to 1118. Today's pop in oil is probably not the bottom, but a bottom is in sight. The trade for March, April and May will be long stocks, short gold and long oil, barring a 3rd of a 3rd wave crash.

Wednesday, February 18, 2009

Pause Day

It seems to occur with great regularity that the day after a macd sell signal is an up day or a pause day. Today was a pause day that closed poorly. Whether or not we get another bounce tomorrow is an open question, but nothing that happened today affected the status of the trend. In fact, IBD finally called the "market in correction". It is rare that there is not some downside follow-through after such a market call by IBD. So we have another nail in the coffin.

The Qs came close to a 3 week sell signal today. Maybe tomorrow will be the day and then all the ducks will be in a row. As I said yesterday, patience is the key here.

Just one note of caution. I don't think it will happen because of the cycle timing, but there is still a remote chance that today completed wave D down of the triangle that just won't go away. If the Dow moves under the November 21 intraday low even one tick in the next few days, then we can eliminate the triangle. However, it we were to get a sharp rally out of the blue before undercutting the previous low, it would not be a sign to bail on shorts since once wave E finishes, wave (5) down would begin. In other words don't get caught in a bull trap here.

Tuesday, February 17, 2009

Downtrend Accelerating

The markets have finally gotten in gear to the downside. If you have been following the market's signals over the last 3 weeks, you should have been initiating and adding to short positions. At this point there is still a little time to add to shorts, but for the most part the seeds should have been sown as the trend has germinated. I still have 4 open orders left for new short positions, but I won't be disappointed if they are not filled as I am well positioned. The only thing to do now is monitor your positions for opportunities to take profits. Expect this to take some time as we are still at least 2 to 4 weeks away from a bottom.

(The Qs and the SMH are the only majors that have not made a new 3 week low and they offer opportunities for new shorts with the QID and the SSG, respectively.)

An exception to this scenario would be if the negative breadth surpassed the negative breadth from the Sept/Oct crash. If that were to happen, then it would be a signal that we are in primary wave 3 down and not intermediate wave (5) of primary wave 1 down. The outcome would be a crash to levels unimaginable to the public with the Dow falling to 2700 or below. I don't think that will happen, but it is an outside chance that we should monitor. If we were to see such an acceleration in negative breadth, it would be a signal to hold short positions for larger profits, and possibly add to positions, although the volatility could make that tricky.

In any case the weak close today should lead to more selling tomorrow. However, we may see a bounce at the open as the Dow closed just pennies shy of the November closing low.

Saturday, February 14, 2009

Dow Squeeze Charts

The top chart above shows the Dow daily squeeze setup. The black 20 day 1.5SD Bollinger bands are inside of the 20 day x 1.25 Keltner channels indicating the Dow is in a "squeeze" setup. These parameters have been slightly massaged to work with Telechart as it does not have the Keltner channels built in. I have also found that these work a little better for me than the ones in John Carter's book "Mastering The Trade". The first panel under the price is the 10 day rate of change which is negative. The bottom panel is a %true indicator for price above the midpoint of its 14 period range. Both of these indicators are negative, which generally means the likelihood is greater for a short breakout.
The bottom chart shows the same indicators on a 2 day time frame. It is a little difficult to see, but the Bollinger bands on the 2 day chart moved outside of the Keltner channels on February 2nd "firing" off a short squeeze to use John Carter's language. The exit signal for this trade occurs when the Dow begins to lose downside momentum, and definitely, when either the 10 day rate of change or the range indicator turn positive (there's a candlestick term for this, but I have forgotten it).
When (if) the daily squeeze fires off short, the decline should accelerate.
Looking at the charts of gold, oil and the stock indexes last night, it appears that we may see gold top and oil and the stock indexes bottom at around the same time. Last year gold topped on March 17, which fits with the March 10 to March 17 dates I gave earlier. I am beginning to lean toward a later bottom based on other investigations, perhaps March 17 to March 21.
In any case, long oil may be one of the best trades after the bottom.

Friday, February 13, 2009

S&P Earnings Down 62%

Standard & Poors is projecting that S&P 500 earnings will be down 62% in the 4th quarter over the 4th quarter of 2007. Assuming no contraction or expansion in the P/E ratio, if we multiply the peaks in the Dow, SP500 and QQQQ by 0.38 we get the following downside targets:

Dow 5395
SP500 599
QQQQ 20.93

It is very interesting that these numbers are not far off several calculated targets using moving averages and fibonacci. Given time, fundamental and technical analysis can reach similar conclusions, although no analysts that I am familiar with in the public arena predicted this decline in earnings.

I will publish a chart tomorrow showing the squeeze signal in the Dow. No time tonight.

Thursday, February 12, 2009

Small Rally Likely Near Completion

Today's afternoon rally appears to be a small degree 2nd wave upward flat correction that is either already or nearly complete. If this is the case then tomorrow should be a big down day. Of course corrections can extend into more complex combinations so there is no guarantee, but when Thursdays close at the high, Fridays tend to be a down day.

Triangles are appearing all over the place. The XLU and XLE look set to break down out of 4th wave triangles. The XLF (financial ETF) has completed wave d of a small 4th wave triangle. Wave e should complete tomorrow, leading to more selling. The downside target on the XLF is 6.00 to 7.10 which gives an upside target on the SKF at 200 to 230. However, the SKF tends to overshoot in both directions so it could move above the target range.

On the bullish side, a lot of stocks are building strong bases right now in the face of the recent selling action which bodes well for after the bottom is in. Nevertheless, today's action is no cause to be bullish on the indexes.

Dow In Daily Squeeze

The 2 day squeeze in the Dow fired off short on Feb 2. The Dow has now setup in a squeeze on the daily time frame. The last 3 daily squeezes fired off short and lasted 35 days, 29 days and 17 days respectively. If it does fire off short, the signal doesn't have to last as long as previously, but those instances give us some idea of what to expect if and when it does.

Wednesday, February 11, 2009

Gold Breaks Out Again

Today's breakout in gold above the highest downtrend line from the all time high puts the $1,000 target in sight. The most likely topping zone is above the July 2008 high of 988.50 up to 1000. The target should be reached in the next 8 to 10 days. While it is entirely possible that the all time high could be exceeded in an expanded flat B wave, this not as high a probability.

I went long the DGP (double gold long ETN) on the 1/23/09 breakout and will hold until we get a valid sell signal or the target is reached.

Today the markets barely moved after yesterday's downdraft. We may see another day or two of this kind of behavior before the bottom gives way, but it could just as easily happen tomorrow from the outset.

A couple of days ago a money manager on CNBC indicated that his fund was long with an expectation that the SP500 would be heading to 1000. However, he qualified his statement by saying this is a bear market rally and the fund's stop loss was 800 on the SP500. In other words they will exit all positions if the SP500 breaks through the 800 level. I have a feeling they are not the only ones. It looks like the flood gates will be opened at that point and the real selling climax will be underway.

Yesterday I indicated that I had exited my long RIMM position. After years of following the markets and stocks, I have developed a certain level of intuition and I have found that usually I am better off following it. My intuition told me that the selloff was a sign that the rally was over and RIMM selling off with it was a strong indication that the run was over in RIMM even though I did not have a sell signal. Last night RIMM warned that its margins would be at the lower end of the range and the stock opened down 12%. Things don't always work out this well, but experience and daily involvement with the markets is a large part of developing success as a trader.

Tuesday, February 10, 2009

The Writing Is On The Wall

The Dow closed decisively below 8000 today for the 6th time since October last year. It is clearly leading the way down. The Qs stopped at a 6 day trendline, so a bounce tomorrow is possible, but any bounce is not likely to last long. Today's action appears to be more than just a correction of the rally, but as bad as it was it may be premature to rule out one more attempt at a rally high. A break of 29.69 in the Qs, the January 2nd opening day of the year low, would confirm the downtrend. Any number of other methods could also be used to confirm the downtrend in the Qs: 1) a 3 week low at 27.96 (or 28.74 if not broken this week), 2) a macd sell signal, 3) a break of the lower trendline of the rally from the November 21 low, or 4) 2 days of higher lows which would create a fractal sell pivot followed by a break of the pivot.

I don't think the choice of method is all that important. What is important is recognizing that the intermediate term trend is aligning with the primary trend, and that is where the money will be made until we get a climax bottom.

Looking at the Dow, I see the two primary targets at 6400 and 5000, based on fibonacci extensions and long term moving averages. I really don't think 5000 is likely, so 6400 is the most probable bottoming area. 6400 is at the confluence of the 400 month ema, a long term trend line beginning at the 1987 low and is a fibonacci extension of the recent decline from the January high. If we happen to hit that area around March 10+-, then I will be exiting all short positions at that time regardless of whether or not other targets have been hit as the upside risk will be tremendous. The rally off of the upcoming low will most likely be similar to the rally after the 9/21/01 low and the 3/12/03 low, the kind of rallies that can wipe out a month's worth of gains on short positions in a couple of days. The point is: don't be greedy.

The most likely bottoming time frame should be March 10 to March 21 based on the 10 month cycle and Gann turn dates. Due to the large number of turn dates in March, it could be a violent bottoming process with several big swings before it gets off the ground. Either way, again it is best to be out of shorts during that time frame.

The only thing that would alter this outlook would be a collapse below 6400 well before March 10. If that were to occur, then the 5000 target would be the next most likely outcome.

Since today's action most likely signals the beginning of the final leg down, I exited my RIMM long position today for a modest gain of 16.6%. I see no point in waiting around to get stopped out at the three week low of 48.99 giving up all of the gains when it will most likely follow the Qs down. I am still long POT as it appears to have one more up leg left. Other than a couple of biotech longs that I intend to hold through the final leg down, I am mostly short. I have at least 3 more short stock positions to add and I will add to index short positions using one of the confirmation methods I listed above.

Good luck and be patient. This downtrend should last 3 or 4 more weeks.

Monday, February 9, 2009

Still Waiting

The Qs finally pushed above the Jan 6th high by a whopping 4c today. While this probably means that we will see at least one more push higher, it will probably come after a pullback. Several of the indexes today including the Qs had a narrow range day indicating a contraction in volatility. November 3rd was recent example of an NR7 day after a rally. The Qs broke out to the upside by 4% the next day, but then collapsed. We may see an immediate decline tomorrow or a similar pattern with a breakout tomorrow followed by a decline.

As the Qs have approached the January highs, the patterns in a large number of stocks are beginning to mature, which is a tell that there is not that much upside left without a correction first. A good example is AMZN which has hit its upper parallel trend channel for the last two days just above the 200dema.

It would seem obvious that the markets have priced in an $800 billion dollar "stimulus" bill and a another bank bailout, so it is hard to imagine what additional positive news would drive the markets higher. At this point we can be confident that this is a countertrend rally. The only question is how much upside is left. We are now 52 trading days from the November 21 low. For the past two years, the Qs have consistently turned at 55 trading days +- 2 days. We may see another one in the next 2 to 4 days.

Dave posted some interesting comments on gasoline and the refiners on my last post. I definitely see some potential there, but with regard to TSO, it appears that it may have completed 5 waves up from the November low and may have completed an ending diagonal 5th wave today at the 200dema. There is room for one more up down sequence to complete the ending diagonal, but it may be time to consider taking some profits. If this is the first wave of a new impulse or zigzag correction, there will be another good opportunity after a correction.

Friday, February 6, 2009

Pushed To The Limit

It looks as though the Qs may break above the January high next week, but it is not a certainty by any means. Today was a Gann turn date and as the previous dates have worked out well, we may see a selloff on Monday. If the Qs do break above the January highs, then the likely target is 34. If that happens, then the decline into January 20 was wave (c) of a b wave flat as I had thought. It is abundantly clear that the rally from November 21 is an upward correction with overlapping waves, but just because it is doesn't mean that it can't continue substantially higher.

While the Qs may be making new rally highs, it is likely that the broader indexes and the Dow will not. The question is what will it mean if the rally continues for another few days or weeks. Most likely, we will be returning to the triangle interpretation in the Dow. If the Dow is in a triangle then we are in wave C up with waves D and E to follow.

Trading in this environment is tricky at best. For trend followers it is the pits. However, adaptability is a requirement for the job and each trader must have a plan for how to trade in a range bound market. One option is to change to a hit and run style exiting with smaller gains after a 1 to 5 days. Another is to trade long and short trends with wider stops and smaller positions. Sometimes the best option is to be in cash. I know I would have been better off if I had remained in cash from late November. I don't like changing my overall trading style because one must then rely on discretion to determine when to change.

Nevertheless, I have kept a mix of long and short positions while trading half positions in the indexes. The longs are beginning to pay off while the shorts have not worked so well. At this point though I am not expecting to significantly increase long positions. If markets do head significantly higher over the next weeks and months instead of falling to a new lows, there will be plenty of time to get on board.

Thursday, February 5, 2009

Qs Gaining Relative Strength

The Qs broke above the Jan 28 high yesterday and today failing to close above that level. Previously I said that this did not invalidate the bearish case meaning the potential for a near term resumption of the decline in wave 5 down of primary wave 1. This is true because the rally high of 31.63 on January 6 has not been exceeded and the current advance is likely wave ii up of 5 down. As long as the January 6 high is not surpassed the weight of evidence leans towards a resumption of the decline near term (within days). If the January 6 high is exceeded, then either the November 21 low was the end of primary wave 1 down, which I doubt, or wave 5 down will be delayed for another week or two.

An interesting observation looking back over the last year is that the QQQQ relative strength has peaked with each rally. What seems to be happening, as pointed out by Robert Prechter, is that the small speculators are becoming bullish relatively quickly after each bottom as demonstrated by buying the riskier high beta Nasdaq 100 stocks before there has been a true climax bottom. So, rather than viewing the QQQQ relative strenght as a bullish omen, it is probably a sign that a top in the Qs is near.

It is clear today that people want to be long before the employment report. Either they know something that I don't or this could be a good setup for a sell on the news event. Tomorrow is a Gann turn date as stated previously so the rally into the turn date also suggests tomorrow may be a down day.

The intraday pattern suggests that we will see another attempt to push the indexes higher before they roll over later in the day regardless of the report.

On a side note, today's action confirmed IBDs market rally call as the macd on the SP500 and Wilshire 5000 turned positive and the markets closed up on higher volume. Obviously, tremendous tension has built up that will be released one way or the other very soon. Currently I am not fully positioned for either direction, but weighted toward the downside.

Wednesday, February 4, 2009

EUR/JPY Leading The Way Down

Over the last few months, the direction of the EUR/JPY currency pair has been an excellent leading indicator for the US stock market. This morning it is moving down impulsively after completing a 3 wave rise yesterday. A move below 113 will confirm the downtrend and suggests that the next major move in US indexes will be down.

Tuesday, February 3, 2009

In The Squeeze

The above chart is a 2 day chart of the QQQQ with the 20 day 1.5 SD Bollinger bands in black and the 20 day Keltner channels in magenta. The first indicator panel is the 10 period rate of change and the second indicator shows if the market is above or below the midpoint of its 14 period range (14 period maximum - 14 period minimum).

This squeeze has been setting up for the last 4 weeks. We can expect that at some point in the very near future we will see an explosive move in one direction or the other. The 10 period rate of change is suggesting that the breakout will be to the downside. The range indicator is suggesting the opposite. The Dow and the Transports have already signaled a short breakout, but there is nothing that says those signals can't be false.

We are approaching the choke point. Either markets will continue to trade in a narrow range invalidating the bearish wave counts, or we will see a breakout within the next week. Today the Qs and other markets appeared to complete a 3 wave rise from yesterday's low. If so, markets should move down from the start in the morning. The Qs could move above the 1/28/09 high and not invalidate the bearish case, but anything beyond that will put the bulls in complete control.

The seasonal pattern indicates that the current rise is just part of a small countertrend and the larger trend should be down. However, the markets need not follow the seasonal pattern. Price is the final arbiter of the trend and price still says the trend is down. If this changes, we must change with it.

Monday, February 2, 2009

Working Lower

The Dow closed below the 8000 support level again and the Transports closed below the November low confirming the trend is down. However, it looks as though we will see one to two more days of rally in the Qs. Looking at a chart of the Qs it is actually beginning to look rather bullish, but I think this is a deception. A 2 day short squeeze fired off today in the Dow as the bollinger bands on the 2 day chart moved from inside to outside the Keltner channels and the Dow is below the midpoint of its 14 period range. (See John Carter's "Mastering The Trade" for details on this setup.) This squeeze setup has been developing since November and could be very powerful once the Dow begins to accelerate to the downside. This process may take the rest of the week, but there does not appear to be a catalyst to alter this outcome at the present time. Even the vaunted "Bad Bank" is probably already baked in so any positive response to news with that is likely to be short lived.

This month is the time to be looking for longs on the other side of the low and a number of stocks are building bases that look positive for March and beyond. Take a look at GMCR, SQNM, PETS, AMZN, RIMM, CPSI, QSII, AZO, HANS, ATHN, CMN, COGT, CEPH, TSYS, SAFM, EBS, OSIR, VRTX. These are a few that I like for later. I am currently long RIMM from early in January and I see no reason to exit just yet. It seems to be rising against the tide.

Patience. Patience. Patience. This narrowing trading range has eaten up 2 1/2 months, but we should soon see a strong trend or two.