Thursday, October 29, 2009

Broken Trendlines

The Russell 2000 (IWM) and the Dow Transports have both broken their respective trendlines from the March low. While it is entirely possible that these could be bear traps, it is not the most probable outcome given all of the other factors we have considered in the last week. A retest of the broken trendlines is underway and may last until the middle of next week. Thereafter, expect a resumption of the correction that began October 21.

As long as the Qs remain under 42.79, a small degree 4th wave is probably in progress. Once complete, expect a 5th wave followed by a larger 2nd wave rally. There are many avenues this correction could take. We don't need to get too caught up in the wave count. It will become clearer as the next few days unfold.

The main point is that today we had a sharp countertrend rally off of a deeply oversold condition. That doesn't change the fact that a correction is underway, rather it is consistent with the type of market behavior that would be expected during this correction.

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