Tuesday, October 27, 2009

More Downside To Come

The initial leg of the decline remains incomplete. It may bottom sometime this week, perhaps even tomorrow. The decline in the SP500 looks the most impulsive and I will be using it as a guidepost for the correction. I believe I have resolved the count for the Qs, but I want to wait and see how it looks when the SP500 completes wave A or 1 down.

The Qs closed at 42.34 and below the trendline from the March low (around 42.50 today), which is another strong indication that the trend is now down. Volume was higher on most indexes, so it is hard to imagine that IBD will not call this a "Market In Correction" in tomorrow's edition. Support remains at the 50demas and October lows for most indexes, but the Russell 2000 and Dow Transports are below their 50demas and rapidly approaching their October lows.

Other indications that the correction is gaining momentum is the recent reaction to earnings and guidance by BIDU, SOHU, ILMN and APOL. These stocks have been crushed. Also, AAPL closed below the $200 mark on higher volume today and other market leaders are being sold hard, e.g. FUQI and DTG. This is why I highly recommended selling into the new rally highs in September and October. FUQI is down 33% from its September high. It will take weeks to repair the damage.

An interesting development today was the traditional McClellan Oscillator closing at -280.36. Such low closes have often led to sharp rallies in the past. The rally this time may correspond to wave 2 or B and will likely be a bull trap. As long as the October highs are not exceeded on higher volume, this would be a good opportunity for those who have not opened initial short positions to do so. Again, keep in mind, that I am not expecting an impulsive return to the March lows as many are calling for, but rather a choppy correction to the July lows. Adjust position sizes and stops accordingly.

At this point there is little doubt that the correction is upon us. The only question that remains is how long and how deep. In my opinion the probable answers to those questions are until December 2 to 24, most likely around December 9-11+/-, and down to the July lows. This is certainly not a time to be buying stocks, although many will try.


dave said...

This seems much more like 'real' tops (seen in hindsight) harder to recognize, slower developing, drawing less attention than ones that start with a sudden one day drop but end up going nowhere.

Craig, your thoughts on the points above ?

Anonymous said...

Absolutely! The big pops in high profile stocks like AMZN have masked the underlying distribution that has been going on for most of October. The smart money has been selling to the late-comers, who are now exhausted.

The action like we have seen in October has been one of the most difficult areas for me to master, primarily because it only occurs every 2 to 3 years.

I keenly remember in 2006 kicking myself for buying into the breakouts at the end of the rally only to watch my account get murdered before I realized what was going on. Experience is the best teacher and I was glad to sit mostly on the sidelines this October with a stable account knowing that I have not suffered a huge drawdown this week (and I am increasing short exposure).

It is hard to sit on the sidelines while the likes of AMZN and others are popping 20%+, but probability is against you when you go after those trades in the last innings of a market move.

dave said...

"!" an exclamation mark ? LOL

Another way of saying it is "real tops" don't scream at you with a big down day at the beginning. They don't draw a lot of attention to themselves (until it's too late for bulls).

Already have some broken March uptrend lines so far today, but the prime rib, the turkey drumstick will be closing under the neckline for DJTA & IWM/RUT. We already hit the initial stops & bounced...now test the strength of the 'pivot'.

Buona fortuna to us.

dave said...

Of the stks & sectors that i watch financials have been weakest so far & amongst them GS & BAC are amongst the name leads. They have alrady broken below their Oct lows.

Thankfully, CNBC hasn't noticed.

dave said...

What a striking difference ! Yesterday, i bought back my Q puts. It didn't seem like i had missed that much after having sold them for a small profit days ago.

Timewise, yesterday Q/NDX was essentially only the 2nd day from the highs. Compare that to RUT/DJTA/SPX. For them yesterday was essentially the 5th day from the highs.

AAPL & AMZN have joined the crowd.