Treading Water

The markets sold off today on heavier volume, adding to the distribution day count. The sell off in the Dow and the SP500 appeared to be impulsive, but the action in the Qs was less clear. Tomorrow is historically a bullish day, but I expect the action will be muted given the upcoming employment data on Thursday.

The markets remain at a key juncture and until they move one way or other there is little that can be added to prior analysis. The Qs remain hung up below the 36.50 resistance level. A solid break above that level could turn the tide up, but a strong move below 35.61 should accelerate the correction.

The June lows are the most important support level as they now are the low of the high month for most indexes.

An important range that I look at is the first 5 trading days of the month. Often a strong move above or below this range will set the trend for the month. Also, the end of month close relative to this range often will indicate trend continuation or reversal. The Dow and the SP500 both closed below the low of the range of the first 5 days of June, which may be pointing toward lower prices in July. It will take 5 trading days in July, using this method, to see if things are changing.

Gold headed lower today and will probably try for 900 before another rally attempt. Oil looks like a small double top, which may be portending a correction to the 53 to 58 retracement zone. The DTO might be worth a look here with a target around 100.

Qs Up Against A Trendline

Just thought I would add a follow up to today's post on the SP500 with a look at the Qs. While the market has rallied for 4 days, the fact is that nothing as changed. The Qs are still below the broken trendline and resistance at 36.50, and the MACD is still on a sell signal. Volume has continued to contract. Not a bullish picture, but things could change.

SP500 Stopped At Median Line

Today the SP500 finished higher but closed just below the median line (Andrew's Pitchfork) show on Saturday's post. Volume on all indexes was anemic, so it appears that the institutional players are happy to coast in to the end of the quarter.

The only problem is that there doesn't seem to be a catalyst to justify a breakout at the beginning of July. Even if the jobs numbers come in better than expected on Thursday, it may not help much as everyone seems to be expecting it.

Carl Swenlin gave a nice interview at Financial Sense Online Saturday. His current take is that the market is stuck in neutral with more sideways action likely over the next couple of weeks. He is of the opinion that the current sideways action is building a base before another move up in later summer. I rather agree with Mr. Swenlin. His analysis is usually very astute and I give it a lot of weight. I had expected a more severe pullback before the late summer rally. Unless we see a breakdown very soon, the May/June lows should hold any further weakness and provide a nice entry point for the next rally.

It is just wait and see for now.

A Median Line Study On The SP500

The above chart of the SP500 shows a median line study, also called Andrew's Pitchfork. Marketclub's blog recently had a post on the usefulness of this kind of analysis, so I thought I would check out the SP500 relative to its current median line.

As you can readily see, the SP500 has been travelling along its median line since hitting that level in April. However, the most interesting point is that it is currently below the line. In order for the rally to continue its advance, the SP500 will have to get back above the line, while a strong advance above the June high could propel it to the upper line near 1100. At this point, I do not see a return to the lower line in the near future, although it is a remote possibility.

Once the high of the rally has been seen, we can project the next median line for the fall correction.

An Elliott Wave In QCOR

I first noticed QCOR back in September 2008 when it showed up for several weeks as the top relative strength stock in the Russell 3000. As market conditions improved, it fell out of the top spot, but I have a hunch that QCOR may be under stealth accumulation, and I have been slowly building a long term position. If QCOR breaks out to new all time highs, it will likely move up dramatically to 25 and possibly higher.

The recent low in May may mark the completion of a large 2nd wave flat correction (not shown). Since then QCOR has traced out a nearly perfect impulse wave with 5 clear non-overlapping waves, a flat correction and a triangle. Wave 3 also clearly subdivides into 5 non-overlapping waves. This may be the beginning of a powerful 3rd wave. If so, the critical level is the May low, which must not be breached. After the current 5th wave is complete, we would expect a 50% to 61.8% correction of the move up from the May low, which would provide a low-risk entry point to initiate a new position or add to an existing position.

Given that waves (1) and (2) took almost two years to complete, wave (3) may take one to three years or longer, so this definitely has the potential to be a long term position with significant upside potential. Intermediate term traders can simply trade for the next rally after a correction, which may approach the all-time high around 10.

Please do your homework before entering a trade, and as always, use appropriate position sizing and risk management.

Important Juncture

The markets have reached a critical juncture: either the correction from the June high is over or another leg down should be underway fairly soon next week. The fly in the ointment is that the period ahead of and after 3 day weekends tends to be bullish. The day after the July 4 holiday is often decidedly bullish. So, if the downtrend doesn't begin in earnest soon, it would be hard to see how the market could still be in this correction.

That said, several things point to lower prices: 1) the Qs were up this week but on declining volume (today's volume was the lightest of the week, 2) the Dow and SP500 both had narrow range days today, which should lead to a breakout in volatility (one way or the other), 3) today was an expected turn date which coupled with the narrow range bars could be pointing to a turn down on Monday, 4) the volatility indexes made new lows but the indexes did not make new highs (a bearish divergence), 5) the bearish divergence MACD sell signal is still in force, and 6) the markets have been rising with gold, which appears to have completed a 3 wave rally and is set to turn back down.

In addition, the EUR/JPY currency cross has been a good leading indicator for the stock market for several months. As the above chart show, it has recently completed 5 waves down from its June high. It may rise another day or two, but the downtrend looks set to resume soon, which should lead to further declines in the stock markets.

Curiously, the high in the Qs today was 36.50 which was exactly the high on June 1, meaning there has been little progress for the month. Will 36.50 prove to be strong resistance?

Fortunately, as I have been partially short the indexes via ETFs such as the QID, I have also been long several stocks: SOHU, ORCL, MEA e.g and my account has been relatively flat.

My expectation is that we will see the correction continue into mid July, but should the Qs form a proper pivot with a pullback, I will go long. Better to buy back in at a higher price than to miss the next rally, but I will need to see more evidence before I am ready to take that step.

IBD Says Uptrend Resumes

I can't agree with IBD on this one. Please read the comments in my prior posts. Volume was well below average even though the intraday volume action was bullish. Yet their main point is that we have yet to confirm an intermediate term downtrend, and that is certainly correct.

Regardless of a possible deepening of this correction. I still stand by my statements from April and May that the risk in this market is to the upside. Any shorting should be done with that in mind in terms of position sizing and targets.

Thursday Trivia

A little known fact about Thursday's is that when the market closes within the top or bottom 10% of Thursday's range, Friday tends to close down most of the time. The end of the month shenanigan's may override it this time, but I have seen it enough times to know that it is statistical fact.

Dow Stopped At June 1 Low

Just another look at a possible scenario as the Dow may be forming a head and shoulders top. Volume remains well below average, so days like today are suspect until a higher swing low is confirmed. Dow relative strength continues to fall, while the Nasdaq 100 relative strength continues to rise. This type of scenario is often associated with topping action.

Possible Outlook For The Qs

Today's action, so far, increases the likelihood that the Qs are in a double zigzag correction from the June high. This means that the flat correction interpretation is now a low probability and it is quite likely that the Qs will only test the May lows or stay above them. The above chart shows that the Qs are rising to a test of the broken trendline. The measured move target for this move up from June 23 has been met, although the Qs could go a little higher. The measured move downside target is now 33.85 for the entire correction. Normally, we would expect the MACD to at least test the zero line, but it is not a requirement.

I think it would be premature to say that today's action is a resumption of the uptrend. However, if the Qs fail to take out the June 23 low over the next several days while trading sideways, we might conclude that a breakout to the upside was imminent. If the Qs make a new high in the next few days, then we should expect that a flat correction is underway and a retest of the June 23 low would follow. Only a breakout on significant volume would alter either of these views.

The Dow and the SP500 are only testing the previous June low at this point, and once the test is complete can be expected to resume the correction.

Of course, the big money can be expected to do everything possible to keep this market up until th end of the quarter.

A Poor Close For The Dow

Whatever conclusion one may wish to draw from today's action, it is not that it was a bullish day with the Dow closing near yesterday's low and under the 50dema. While the SP500 and the Qs closed up for the day, volume was lighter than yesterday.

It is also clear from the intraday action that the morning rally in the Qs traced out 3 waves up. Even if it extends tomorrow, we should expect lower prices afterward.

If the upmove in the Qs does extend, the measured move target is 36.19. We can then calculate a measured move downside target of 33.73, which fits with previous calculations. If it does not extend, the measured move downside target is 33.41.

The primary reason that I do not believe the correction is over is that the Qs have yet to tag the 50dema. It is not a requirement, but it is a high probability after the Golden Cross, which we have discussed previously.

The Dow components are a mess, with most showing bearish patterns. WMT in particular appears ready to break down out of a bearish triangle. I think the Dow is going down to retest the Oct 08 and Jan 09 lows before the correction is over.

On the bullish side, ORCL broke out today on heavy volume and I will continue to hold it throughout this correction unless stopped out.

Gold is following the seasonal pattern so far, closing in the lower half of the range today and below the 50dema. It is on track to make a low in early July. That may be a good time to take profits on short positions in gold as it may complete 5 waves down from the June high at or below the 900 support level and near the 200dema. We could then wait for a retracement rally to re-enter short.

Let's continue to be patient as this correction unfolds. I think patience will be rewarded.

Interesting Juncture

Unless the market rallies strongly tomorrow, it is quite possible that we will see a confirmation of an intermediate downtrend sometime between tomorrow and Friday as determined by IBD. However, all but one of the systems I am following in the System Tracker are either long or neutral. In addition, the Qs are coming down to the 200dema from above, and even if they go below, a first test would still have bullish implications.

The Dow Transports and the XLF/BKX are only 2 to 3 days away from possibly completing zigzag (ABC) corrections. A confirmed downtrend signal, should it occur, will likely prove to be a false one as the Qs come into the previously cited support zones and the SP500 finds support in the 850 to 875 area.

The McClellan Oscillator stands at -214 today. If we see a -300+- reading as the Qs hit the support levels on or about Friday, I will be looking to exit index short positions and reverse and go long. I typically do not buy into pullbacks, but this is one case where the pattern, timing and technicals are lining up to give us a low risk long entry.

Many of the leading stocks have triggered trailing stop levels which is probably the time that institutions will be stepping into to buy the next rally.

If I am all wet, it will be plainly obvious very soon as any rally from an impending low will sport the usual bearish technicals such as falling volume, lack of leadership, flat to falling breadth, etc.

Shorts beware.

IBDs "The Big Picture"

I was surprised to read in IBDs "The Big Picture" this morning that "The lack of trading interest made the decline less damaging to the overall picture than it otherwise may have been."

In order to reach this conclusion, the editors are only looking at the volume in relation to Friday's volume, and indeed it was less. However, Friday was an opex day and volume is typically skewed higher. Excluding Friday, Monday's volume was the second highest in June. That, together with the fact that NYSE advancers were 2733 and decliners were 360, almost 8 to 1 negative, should clearly mark Monday as a distribution day raising the count to 4 for the NYSE, Nasdaq and SP500. Therefore, the next distribution day would be 5 and possibly signify a market in correction per IBDs method.

This demonstrates why it is so important for each trader to completely understand the method they are using and not to just blindly follow trading signals.

Another 5 Waves Down

Today's decline is close to completing 5 waves down from Friday's high. There is the slight possibility that could be the end of the correction, but all of the other evidence is pointing to more downside. We should, however, see a small bounce before the downtrend continues.

Gold may rally from here before the downtrend continues, but expect downside surprises. A continuation in the decline to the 900 level from here will solidify the downtrend and point to very much lower prices in the future.

Broken Trendline

The Qs have decisively broken the uptrend line from the March low confirming the negative divergence MACD sell signal from June 15. The talking heads are already bringing on guests who are suggesting the bear market rally has topped. I would say the guest commentators are evenly balanced between those calling for a top and those who say the rally will extend, to be fair, but it is interesting how quickly the cheerleaders can switch sides.

The fact is, the June 11 high in the Qs was a top, but probably not the top. We have at least 3 levels of support: 1) the 50 and 200demas, which coincide with fib retracement levels from the May lows, 2) the May lows, and 3) the Jan/Feb highs. It is now a little late to be shorting this decline given the obvious levels of support. However, a retracement to the broken trendline followed by a continuation of the decline could provide an additional low risk short entry.

I went short a 1/4 position in the Qs using the QID on a break of the low of the high day. I added to the position on a break of the low of the MACD sell signal day. I added to the position today on a break of last week's lows. I do not intend to add any more to the position at this point.

If volume does not pick up, I will be looking to exit as support levels are reached. If volume does pick up and the decline accelerates, I will look to hold for the Jan/Feb highs. I see nothing at this point that would give us a clue as to where we might expect the bottom in this correction other than an upcoming turn date on Friday June 26, which may mark a bottom going into the end of quarter window dressing.

Why A Late Summer Rally?

During the course of the last few weeks, I have postulated that the low of March 9 was the beginning of a new 10 month cycle. This required a phase shift as the low in November 08 should have coincided with a new 10 month cycle. As I pointed out, Tom McClellan has shown conclusively that such a phase shift often does occur every few years usually in conjunction with a significant long term low, so this is a legitimate possibility.

The 10 month cycle generally takes the shape of a big M with the first leg up lasting 12 to 18 weeks, the small leg down lasting 4 to 10 weeks, the small leg up lasting 4 to 10 weeks, and the final leg down lasting 12 to 18 weeks for a total of 44 weeks. Of course, this is a general pattern and after major bottoms or tops, the form may be suppressed due to the effects of the larger cyclical forces.

It appears that the first leg up in the Qs lasted 13 weeks from March 9 to June 11. We might normally expect an extended correction of 4 to 10 weeks at this point. However, as I have also postulated that the March 9 bottom was also the "4 year" cycle low, we can expect that the correction would be muted, i.e it may only last a couple of weeks as occurred in 2003. If it does extend to 4 weeks, the bottom would likely occur around July 15+-.

Thereafter, we can expect another substantial rally which either will or will not make new highs. Most likely it will make new highs, I believe.

As Tom McClellan has also shown, when the second high of a 10 month cycle makes a higher high, it generally means that at least the first high of the next 10 month cycle will make a higher high. Thus it would follow that we could expect another high for this cyclical rally in April to June of next year if we see a higher high in July/August of this year.

It is at that point that we will see the resumption of the bear market. In a few weeks, I hope to present a small paper on my projections for the rest of the bear market. There seem to be few people expecting the rally to continue into 2010 who are also secular bears. I am putting forth this viewpoint in the hopes that it will aid traders in navigating this difficult period and perhaps prevent a few overzealous bears from trying to go for broke on the idea that the bear market is set to resume in earnest in the near future.

5 Waves Down In RIMM

With RIMM falling in 5 waves from its recent high, we can draw a couple of conclusions: 1) the market correction is likely not over, and 2) we may see more bounce on Monday.

RIMM would likely rise early next week in a b wave, which should be concurrent with a continuing upward correction in the Qs. However, another wave down should ensue, which will in all likelihood mark the end of this market correction.

A number of other Nasdaq 100 stocks are sporting similar patterns, so there is ample support for this interpretation. The Qs may move up to 36.55 to 36.80 before rolling over again, which would give us a measured move target of 33.67 to 34.77 for the end of the correction. Or course, we will need to see how it unfolds.

If this correction extends beyond next Friday, the likely bottom would be around July 15, which was last year's bottom after the June correction began. I don't think it will last that long, however.

Possible Triangle

The intraday pattern in the markets is beginning to look like a small b wave triangle, which could morph into a flat. If so, we will likely see a sharp spike up in wave c before the markets roll over again to continue the correction.

I have a feeling that a lot of people are going to think the correction is over. I think it would be surprising if the correction did not last two weeks. Also, we are due for one of those 7% to 9% corrections that occurred so many times in 2003. 9% on the Qs is 33.88. It is beginning to look like the zone around the Golden Cross will be a buying opportunity.

A Pause In the Correction

Today's light volume action is consistent with a pause in the correction before the next leg down. Breadth continues to decline. I would not be surprised to see another pop tomorrow and/or Monday before we see further declines, however. Overall, the correction appears to be relatively mild so far, which is bullish, but the next wave down will be more telling.

Gold is forming a bear flag, but unless the next move down is a 3rd wave, I expect we will see a rally soon. The form and extent of the rally will tell us what to expect thereafter.

There is not alot to say about the markets today. Let's hope the action picks up next week.

I am having trouble with my mouse, so some comments didn't post. I've got a new one coming, so hopefully it will be resolved soon.

Total Put/Call Ratio Sell Signal

Arthur Hill, a frequent guest technical columnist on CBS Marketwatch, has noted in the past that that when the 10sma of the $CPC, the total put/call ratio, rises from below to above 0.90 it is a market sell signal. That signal triggered today. The market may not follow through to the downside but it would be prudent to let the $CPC rise to a higher level and turn down before jumping in on the long side. Ideally, we would like to see, per Mr. Hill's recommendations, the 10sma of the $CPC move above 1.20 and turn down. We will see what happens over the next week or so.

AMGN Attempts A Breakout

As the Marketclub chart above shows, AMGN is now in a monthly uptrend by a making a new 3 month high today. While it failed to breakout convincingly, I believe it is just a matter of time. The wave count, not shown, would appear to put AMGN in wave 3 of (3). This means that price should hold up around these levels and explode upward. I have been dutifully holding on to my half position since late April when I was stopped out of a short position and reversed to go long. Today I added to the position. If it pulls back on light volume and forms another pivot, I will add to it one more time on the next breakout below 55.00.

Overall, the market action today was mixed as the SP500 and NYSE logged another distribution day while closed up on higher volume. I expect the action will choppy to up for the next day or two before the correction resumes, but it could breakdown at anytime.

An Elliott Wave In The JJC

As discussed in the earlier post today, the JJC is being used as a leading indicator for the stock market by many market technicians. If that relationship is accurate, then there are several conclusions that can be drawn from the above chart:

1) The JJC has completed an almost ideal 5 wave impulse wave with a 2nd wave flat and a 4th wave triangle.
2) Now that 5 waves are complete a correction in the JJC is underway which is coinciding with the correction in the stock market. There is a negative MACD divergence which is often seen with 5th waves supporting the wave count.
3) The JJC bottomed in December. The rise in the JJC in March supported the view that the stock market was bottoming.
4) The JJC bottomed 10 weeks ahead of the stock market. If the same relationship holds with the current top, then we can expect a top, a higher top I believe, in the stock market around August 25 when the JJC should be making a lower high in wave B of its ABC correction.
5) We might expect that the current stock market correction will end when wave A of the correction in the JJC is complete.
6) The JJC should correct to the zone between 24.59 and 26.20 which is the area of the 4th wave of lesser degree, a typical target for correction of impulse waves. When the correction reaches this area and reverses later this year, we can anticipate that a bottom in the stock market will seen a few weeks later. This bottom should be the end of the correction that will ensue once the market tops in August.
7) The JJC supports the view that the bear market rally will continue into 2010 as previously proposed on this blog as at least one more impulse wave should follow the correction of the above impulse wave.

In my view, this is exciting information for traders as we can expect many excellent trading opportunities over the next year as this bear market rally continues.

5 Waves Down In The Qs

The Qs are showing a clear 5 wave impulsive decline since the top last Thursday. The alternative is that the current wave down on the hourly chart is wave iii of 3, but most likely a small rally is imminent which may last for 1 to 2 days. If the current decline is wave 1 of c, then the low projects to around 32.75 at 2.618 x wave 1, which is a common relationship for impulse waves. That would put the low just below the May low. We will see how it unfolds, but today's development indicates that lower prices will be seen in the coming days.

JJC Points The Way

Kudos to Dave for his regular comments on the JJC as a leading indicator. IBD ran an excellent article on using various ETFs to gauge market action today on page A12. It was one of the best articles on intermarket analysis I have seen in a while. They specifically mentioned the JJC, iPath DJ-UBS Copper Subindex Total Return ETF, as a leading/coincident indicator for turning points in the stock market.

Later today I will look at the big picture for the JJC, which has some really interesting things to tell us about what may be coming up in the stock market.

MACD Sell Signal

A powerful negative divergence MACD sell signal was triggered today in the stock indexes. If we follow Gerald Appel's advice on using the MACD, we would only buy back if the MACD itself makes a new high above its June high even if the stock indexes make a new high. This is critical to understand because until the markets come below the May 20 high, there is still a chance that the current selloff is a 4th wave a smaller degree. We would not want to buy the next breakout unless the MACD confirms, and we would not want to exit short positions on a minor new high unless the MACD makes a new high.

My hunch is that this is not a 4th wave. Just like the positive divergence buy signal that occurred on November 25, which led to a rally above the 50dema, we should expect a move to or below the 50dema now.

The question was asked as to why I gave the fib retracement levels relative to the May 13 low and not the March low. The reason is that the .618RT to the May 13 low around 34.59 also happens to be just above the current 200dema level of 34.25. Until that level is broken decisively, the larger fib retracement levels should not come into play. If that level is broken, then we can look to a larger retracement toward the Jan/Feb highs.

The current near-term turn dates as well as the post-election year seasonal chart suggest that this correction will be a short one regardless of the depth. For a probable example of this type of correction we can look back to the March 2007 correction that ended abruptly at the 200dema. Of course, it will not follow this pattern exactly, but something similar I expect. So we will need to monitor the confluence of retracement levels and turn dates while looking for a positive signal to get long again for the final runup into late July and early August.

Working On A Top

This morning's action appeared to be an impulsive move down followed by an upward correction this afternoon on diminishing volume. If so, we should see an increase in selling activity by Monday afternoon.

Elliot Wave International is calling Thursday's top wave W with an expectation that wave X and wave Y will follow to complete the rally. I am not sure if that is the correct labelling as I still am of the opinion that the May high was wave W or A and the current decline is wave c of B or X. Either way, a correction is likely underway which more than likely should see a decline down below the May lows and possibly the Jan/Feb highs in the Qs.

Unfortunately, it is too early to tell what form this correction may take. If it is wave c of a flat, then it will be impulsive. If not, we could see any number of corrective forms.

The key is to be patient and let the market inform us as to what it wants to do by the price action and the breadth.

A Top In The Qs

A somewhat rare ending diagonal triangle has formed in the Qs on the hourly chart. As I suggested yesterday, a top at the June 12 turn date would not be surprising. The first target is the June 3 low of 35.93. After that the fib retracement targets are 35.68, 35.21 and 34.73. The May 6 high of 35.34 will provide support. It will take a drop below the May 20 high of 35.04 to confirm a deeper correction toward and possibly below the May lows. Otherwise, any pullback that holds above 35.04 could be a 4th wave from the May 13 low of 32.96. This, obviously, would mean one more high before a deeper correction.

Given the pattern completions occuring in other markets as discussed in previous posts, we may see some sharp selling near term. Assuming today's top marks the top of a b wave of a flat correction, the obvious dates to expect a bottom would be June 19 and June 22, the Friday and Monday on either side of the summer solstice, which often coincides with market turns. The next turn date is June 26. So, we are likely looking at one to two weeks of selling if the above analysis is correct.

I was stopped out of TNDM today as it continued to crater. It seems the IBD names, high RS leaders, keep getting sold, which also occurs near tops. At this rate I will be flush with cash once this correction runs its course.

Gold is setting up a bear flag and looks to be going lower.

The Dow reversed right at its 200dema today.

The Qs are only one to two days away from completing a golden cross, the 50dema crossing up the 200dema. This is bullish for the intermediate term, but may be bearish near term, as discussed previously, in agreement with the expectations of a top today.

So far I am still 1/4 long the QID and now also the TWM. I will look to add to these positions on further weakness in the indexes.

5 Waves Up In CSCO

CSCO was recently added to the Dow 30. Based on the behavior of past stocks that have been added to the Dow, this does not bode well for the stock. We can now see a clear 5 wave pattern up since the May 26 low. At the least, a pullback to the .618 retracement of the move near the 200dema is expected. If the 5 waves are wave c of an upward flat correction, then a retest of the May lows is expected. Either way, CSCO should have one move leg up after the correction is over.

A number of other Dow stocks appear to have completed patterns, which supports the expectation of a near term correction.

In the Nasdaq 100, AAPL and GOOG look like they need one more up move to complete their recent advances, while AMZN and RIMM look as though they are ready to roll over.

All in all, the case for a correction is building. Of course, all of these patterns can be blown to smithereens if the broader markets breakout solidly above the recent consolidation, but it looks like the weight of the evidence is still pointing down.

Stuck In a Range

Well today lived up to its billing with only a small loss to show for all of the increased volatility. Yesterday I said that any move up in the morning would be suspect, and it proved to be as the futures failed to hold up prior to the market open. Overall, the action is near term bullish with the sideways consolidation. However, one could consider the above pattern to be a symmetrical triangle which would point to the next up move being the last of the rally from the May low.

On the other hand momentum and breadth continue to deteriorate. We will just have to wait and see which way it breaks out. One interesting fact is that the SP-500 has closed at/or below the 200dema 7 out of the last 8 trading days since it first touched the moving average on June 1.

As I mentioned on June 5, June 12 is a turn date. So we could see another attempt at a breakout fail tomorrow or Friday.

I continue to wait for a suitable re-entry point in the indexes. Trading a breakout is fine for daytraders, but I would like to see a pullback first.

Quote Of The Day

I did not get the gentleman's name on CNBC this morning but I liked what he said:

"I'd rather lose an opportunity than lose capital."

In hindsight it appears that I have lost an opportunity in the Qs. In retrospect, it seems clear that the Qs should have been bought after the huge rally on 5/26. However, the underlying conditions that kept me out of the trade still exist: low volume, narrowing breadth and diverging momentum. All of that could change today, but somehow I don't think it will.

Past experience suggests that more often than not when a market is rising on low volume and declining participation, a correction is likely sooner than later.

While it is true that price rules all other considerations, that rule applies to risk management and trade direction. It is not meant to compel us to take every price signal when there are sufficient reasons to stay on the sidelines.

Even in the runaway Nasdaq market from October 1999 to March 2000 there were two sharp pullbacks to the 50dema prior to the top. I suspect that a pullback to the MAs will occur prior to the end of the first leg of this bear market rally. We can assess the market action when that happens and decide if it is time to take a new position in the indexes.

This mornings pop may be completing a small degree 5th wave that will lead to the expected correction. In the meantime, I remain long GE, JPM, ASIA, TNDM, SOHU, ORCL, DZZ and short JNPR and GME as well as a few other positions.

VRSN Crashes

VRSN broke out of a long sideways consolidation on May 4. After an apparent 3 wave pullback, it set up a proper buy pivot. I elected to go long at 23.70 with a stop under the pullback low at 21.90. On June 5, VRSN moved higher setting up a sell pivot. It was not acting very well, so I raised the stop to just under the sell pivot at 22.30. On June 8, VRSN crashed and I was stopped out for a loss of 6%. (The labelling above should read S2 for second stop. S1 is not shown.)

The Dow and SP-500 today finished as NR7 days, ie the range was less the range of any of the prior 7 days. This suggests a big move may be coming by the end of the week, if not tomorrow. I suspect the move will be to the downside, however, it could go either way. The key is to wait for confirmation with volume in either direction. For an upside breakout, I would look for a target of around 975 in the SP500. For a downside breakout, I am expecting a move to 850 to 875.

Wednesday's tend to be flat overall, so a morning advance will be suspect.

The financials, in particular, look very heavy right now. C is rolling over and other financial names may follow suit. Although the financials are no long the leaders of this rally, I think the market will correct with them if they break down.

Even though the broader markets are higher since the beginning of May, it doesn't feel like it. To me it feels as though they have been treading water for 4+ weeks now. A serious move in either direction would be welcome relief from this tedious market.

Late Day Reversal On Light Volume

Stock markets reversed to close mostly higher late in the day, but volume was very light. Many will see a bullish flag or pennant forming, but I remain skeptical. One caveat though, a powerful breakout from this level should probably be bought because it would mean a short covering rally was underway, the one I talked about in May. At the same time, I would ease into a position and not go all in on such a breakout. My intuition is telling me to lay low. I think the bears are going to have one more stab at trying to take the market down a notch before the real breakout begins. That's all pure speculation though.

Leading stocks are behaving well overall, which is a good sign for the later this summer.

At the moment there is little to add until we get some definitive action on volume one way or the other.

A Trade In The DGP

As gold turned up from its April lows, I took an initial 1/2 position in the DGP just above the first valid pivot. I then added 1/4 position just above the high each successive valid pivot to complete the position. I exited when gold closed within the zone of its previous high week. This is not a requirement, but the combination of seasonal patterns and a potential turn in the dollar made it a reasonable place to take profits.

A basic fractal buy pivot requires a high with two lower highs on either side. I typically also want to see a higher sell pivot on the right side of the buy pivot to show that the trend is advancing, but at least no penetration of the sell pivot on the left side of the buy pivot. These are general guidelines. Each situation demands its own analysis.

I am now 1/2 short using the DZZ. A valid sell pivot has not formed, however, the failure to hold up in the zone is enough reason to expect a correction.

Gold Reverses

The weekly chart of gold shows how effective weekly reversals have been at signalling a reversal of the trend. This weeks reversal was not as powerful as some previous ones, but it should portend a decline that retests the April low at least.

Today marked the one year anniversary of the 2008 rally high in the Qs. We also have the following turn dates coming up 6/12, 6/19-6/22 and 6/26. I am not sure how this will play just yet, but today's high likely completed 5 waves up from the 5/26 low. It is still possible that a slight new high could be seen on Monday, but the next significant move should be down in either a 3 wave correction of the recent 5 wave move, or 5 waves down to complete a flat correction that began on 5/6.

Once we see 3 waves down, it will be time to begin looking for a valid entry point for the final move up. This could be a MACD buy signal, a move above the b wave high, a move above the previous week's high, a 3 week high, a weekly reversal bar, a daily reversal bar, a test of the Jan/Feb highs or the May lows. The key will be to let the market action let us know the best method for entry and choose something we have tested and are comfortable with. I will probably be using both the MACD and the previous week's high, weekly reversal bar, or a powerful daily reversal bar.

Overall, it will have taken 6 to 8 weeks of frustrating action from May 6 before we will have seen the next big trend move. This points to the need to curtail trading action during corrective periods to preserve capital for the next trend.

An AAPL Wedge

Market Action Consistent With Near Term Top

Today, the Dow and SP500 failed to make new highs while the Qs equaled Tuesday's high. The Qs definitely appear to be near to completing 5 waves up from the May 26 low, if they have not done so already. The SP500 closed just under its 200dema and just under its Jan 09 high. I think at least a pullback is imminent if not a strong correction, which should trigger a negative divergence MACD sell signal.

We are also seeing a negative divergence in the McClellan Summation Index. While this does not necessarily have immediate implications, it does suggest that the current rally is weakening. Oftentimes, we will see the Summation Index decline steadily for some weeks as the market continues to rally. When the Summation Index makes a lower top or falls below 0, a market top is often in the making. My proprietary market breadth indicator has declined steadily over the last 4 weeks as well. Both of these facts point to a narrowing of the rally.

Sometimes this type of breadth divergence will lead to a sudden swoon that seems to come out of nowhere, but I am also cognizant of the fact that the market can rally longer than anyone expects. Nevertheless, I'd rather wait for a better entry point than chase this rally.

The post-election year presidential cycle has worked very well so far this year in modeling the market's behavior. It is suggesting a top is imminent as well.

It will be interesting to see what the reaction to the employment report is tomorrow.

One More High Still Possible But Not Likely

The Dow and the SP500 declined in 5 waves today indicating that the trend is most probably down. The Qs appear to have traced out a different pattern, but it could be a leading diagonal. Even if the Qs retest yesterday's high, I'm not expecting them to go much beyond it due to the simultaneous reversal that occurred in so many markets today.

Gold, silver, oil, nat gas all declined sharply while the dollar rallied. In my opinion, the rally in these commodities is probably over with gold and silver headed below the April lows at least and possibly the Oct 08 lows.

The outcome in the indexes is open to debate. However, we should see at least a 3 wave correction, and possibly a 5 wave correction followed by new rally highs. It should not go unnoticed that if the selling continues for 2 to 3 more days, the MACD will give a negative divergence sell signal. This is usually significant and more selling should follow if it occurs. However, the post selloff buy signal that follows should be the first valid MACD follow-up buy signal since the rally began in March.

Let's see how this correction develops and look for an optimal re-entry point for the final leg up in this historic rally.

Sold DXO

The move down in oil looks to be greater than would be expected for a continuation of the uptrend. Bernanke's comments about not printing money to pay the debt seems to have triggered a reversal in the dollar. Gold and oil have either made or are near making 3 days lows. See Marketclub for information on the 3 day trading signals for commodities.

I am now short 1/2 position in the DZZ with a stop below the Feb low in DZZ, with a view of gold retesting the 850 level or lower.

The TRIN is running strongly higher suggesting that the selling at day's end may be severe.

TRIN and Comments

The TRIN has been in an uptrend all morning which is consistent with the selling action we have seen. If it breaks down and begins to trend downward this afternoon, then we will probably see an afternoon rally with new rally highs today or tomorrow. Any new high should be a 5th wave. It remains to be seen if that 5th is completing wave (c) of b of B, i.e. wave b of a flat correction, or whether it is wave i of C. In either case, a strong pullback or correction should ensue.

If the TRIN continues higher this afternoon, then the pullback/correction is probably underway.

On Comments:

When I first started this blog in January 2008, I had trouble leaving responses to comments under the comments link for the posts. I don't know if I was doing something wrong, or if it was Google Blogger. Anyway, it works now, so I will respond to comments by leaving a comment under the comments link when I can be of help or explain something.

Comments are welcome. Constructive criticism is welcome. Insights are welcome.

Muted Action

Today's action was rather muted after yesterday's breakout, but the intraday pattern points to at least one more push higher before any significant correction appears. Wednesday's tend to finish flat, erasing morning losses or gains by the close to end with little change. Perhaps we will see a morning push higher followed by an afternoon selloff.

Today I was stopped out of short positions in STRA and APOL. The losses on each were less than 1% of my account although the initial risk was greater than 1%. More and more I see the benefit of sticking to a trade until I am taken out by the trailing stop or the position reaches expected target zones. So far this year I have taken early discretionary exits on a couple of positions. Those positions eventually went on to be profitable, and I would not have been stopped out. Last week I exited my long position in YHOO because it had not gone anywhere for some time, I was concerned about the market topping out, and I had a small profit. Well, of course, it is up 10% since then. If you are using a system that works, being stopped out is a good thing. It means capital is freed up to be used on new positions.

In that regard JNPR looks as though it may have completed 5 waves up. Look for a lower swing high with a minimum of two higher lows on either side of the intervening swing low and a break of the lower trendline for a short entry down with a target around 19.

The most important thing is to only take a position to begin that has a good reward to risk ratio, that has excellent upside or downside potential. Recently, a stock mentioned in IBD was nearing a buy point, but some analysis showed little potential upside so I passed on the trade.

If you did not go long this market, like me, at the recent May lows, be patient and wait for a good entry in either direction. It may take a few days, but it will come.

Qs At Fib Resistance

The Qs may be temporarily halted in their advance at the 38.2% retracement from the 2007 high. The exact level is 36.52. Yesterday's high was 36.50.

From another angle, we can see that the 50dema is near to crossing up the 200dema. Take some time to review past crosses of these two important moving averages. My general observation is that more than half the time, markets will correct strongly just as or just after the crossing of the 50 with the 200.

These are just a couple of more reasons to expect that the current breakout is not for real. If the Qs move above and hold above the 36.52, then we can conclude that 39.93 would be the next logical target.

Spotlight On Gold

Please see this discussion on gold at Decisionpoint Chart Spotlight. I think it points to the upcoming correction to below $850.00.

Triangle Or Flat?

Is the correction over? It depends on whether the correction was a triangle or is an expanded flat in progress. While today's action goes along way toward eliminating the flat, several points still seem to lean toward the flat interpretation: 1) Today's volume was average to below average for most indexes, not what you expect or want to see on a breakout, 2) The extent of the rally is still within the range for an expanded flat, 3) The SP500 closed just below resistance at its 200dema today, while the Dow is closing in on its 200dema and a trendline drawn along the April/May tops, and 4) The financials stalled out today at the underside of the broken uptrendline from the March lows.

If it was a triangle, for those of use who did not jump on board the index rally, we should see a pullback to at least the May highs, which could provide and entry point before the final leg up into July. If it is an expanded flat in progress, we will have an excellent entry just below the May lows. Time will tell which one it is, but I do think it is premature to call it one way or the other.

Today, I exited the DGP as gold stalled at its upper trendline. I took a new position in VRSN, which did not close that well. I am looking for a breakout in SNDK. Still long in ASIA, SOHU, TNDM, and the DXO.

If gold breaks down here, it could go to 850 or all the way to 600. If it breaks out above 1000 and holds, I will be looking to go long for a run up to 1400 using the DGP.

Volume Not Confirming Breakout So Far

While today's breakout is technically valid from the point of view of price, the current volume run rate is not confirming the breakout. Things may change by the end of the day, but right now I will hold out for a retracement/pullback/wave c for an entry in the indexes.

I was stopped out of TWM this morning and am close to being stopped out of QID.

TNDM and SOHU are moving up nicely. SNDK looks like it could break out in a 3rd of a 3rd wave with a target around 24 to 25.

Exited DGP near the open this morning. Still holding DXO which looks to have at least one more push higher. Oil may go to $75.

Will discuss breakout in more detail this pm.