Expecting A Rally Next Week

Today's action certainly didn't feel like capitulation, but the Dow and the SP500 did come down very near the cited targets. The low in the Dow today of 6469.95 was only 17.95 points above the target of 6452, and the low in the SP500 today of 666.79 was only 1.79 points above the target of 665. (1.79x10=17.90~17.95). The confluence of the two indexes coming so close to the targets, but not having the energy to press through with the QQQQs coming close to the November closing low is strong evidence that minor wave 3 of intermediate wave (5) ended this afternoon or is nearly complete. We should see a sharp wave 4 rally followed by wave 5 down to complete the decline.

I have calculated Gann turn dates for 3/7/09 and 3/9/09 which should coincide with today's low. The next turn dates are 3/17/09, which may be a high, and 3/28/09, which should be the end of wave 5 of (5). It is interesting to note that the 3/28/09 date corresponds almost exactly to the post-election year cycle, which shows a low at the end of March.

How much further down the markets go into the end of March is an open question, but I suspect it will not be as much as many think. The pattern in the XLF could very well be complete, which could lead to a positive divergence at month's end. Strong action in the financials next week would support the view that we are near the end of primary wave 1.

Regardless of potential outcomes, taking on new short positions is risky at the current juncture. Today I exited positions in MCO (+58%), QID (+17%), TWM (+50%). Yesterday near the close I entered a 1/2 position in UYG. Should the XLF move strongly above 7.44, this week's high, by 3/17, I will hold this position through the following correction. The upside target for UYG is the January high of 6.23.

The degree of pessimism has risen significantly in the past week as some sentiment indicators such as AAII sentiment are now at all-time bearish extremes. The current period is reminiscent of March 2003. At that time, there were few who were calling for a rally, but many who were calling for dramatic declines. I don't know why some of the traditional measures of sentiment such as the put/call ratio and the VIX are not showing bearish extremes, but we should not rely entirely on a couple of out of sync indicators to take a stance. At the moment I do not remember which ones, but there were some sentiment indicators in March 2003 that did not give signals either. I think the evidence is building that sentiment has reached an extreme level. The most likely scenario at this point is a sharp rally and a retest of this week's low followed by a rocket launch.

With regard to the SKF and other short ETFs, we should expect that before it is over short sales and leveraged short ETFs could be illegal. To the extent possible, my plan is to convert to buying puts during the next wave down and minimize exposure to straight short sales which might lead to unexpected losses due to government intervention. It is not likely that options or futures will be outlawed as too many big money traders require them. So of course, the government's actions will most likely harm the small retail trader, while big money has other "options".