Monday, November 30, 2009

Correction Is Still In Progress

Today's rally on below average volume coupled with weak breadth was not enough to alter the view that the market is still in a correction, however muted the correction happens to be. Tomorrow being the first day of the month is likely to be an up day, but the overall pattern of the action since the low last Friday is corrective, which means that lower prices will likely be seen in the coming days.

While the action over the last few weeks has been quite bullish and supportive of the view that this cyclical bull market will continue as expected into next summer, a number of factors are also consistent with the interpretation that this is a bear market rally which is undergoing a correction. For example, both the IWM and XLF have broken down below their October lows and are sporting anything but impulsive looking patterns, advance/decline lines are not breaking out even as the Dow has made new rally highs, and the summation index continues to decline. In particular, the IWM remains below its broken trendline from the March low with falling momentum.

Unfortunately, the market behavior since the October highs does not lend itself to an obvious elliot wave interpretation at the moment. However, my hunch is that the IWM is in the middle of a b wave triangle that will resolve to the downside once it is complete. This next leg down should complete the correction. If my hunch is correct, then the subdivisions of the triangle should become readily apparent by the middle to end of next week. Triangles are a trader's best friend as they almost always point to the end of a movement which allows us to anticipate the beginning of the next movement. Let's hope we see a triangle.

Thursday, November 26, 2009

Rogue Wave

Tonight the Dow futures are down over 200 points on the news out of Dubai, and while some have been calling for the beginning of the next leg down in the bear market, history does not support such a view. The October 2008 crash followed after months of distribution with markets making lower lows and lower highs. That is not the case now. Sharp declines that come off of rally highs are the market's way of washing out the weak hands so that the rally can continue. The most recent example of this type of behavior is March of 2007, which was followed by higher highs in July and October 2007. It may feel scary, but it most likely is not the start of a new downtrend.

When markets push higher into an intermediate or long term cycle low, a sharp decline often follows which pulls the markets down hard into the low. I believe the expected selloff tomorrow will be doing just that. At the moment I am not entirely certain whether the 10 month cycle low will occur in December or January. Even if the current decline resolves as a 5 wave decline, it probably won't help us much since it could be wave C of a flat correction. The only way we will know for sure is to watch the following rally to see if it is a 3 wave or 5 wave rally.

Either way I will assume that when the dust settles next week or the week after, it will be a buying opportunity for a christmas/year-end rally. The first level of support is the November lows, followed by the 200demas. If the correction needs another leg down to complete it in January, we can always reverse and go short again.

A word of caution - a sharply lower open tomorrow would probably not be a great time to go short except possibly for daytraders. If you are not already short, it would probably be best to sit this one out and wait for the next opportunity.

Monday, November 23, 2009

Warning On Leveraged ETFs

I wasn't going to post today, but I received an email from my broker today that FINRA has increased it's margin requirements on leveraged ETFs effective December 1. Since I have indicated that I am trading these instruments, I felt that I should inform you of this change. The proposed change would effectively destroy the benefits of these ETFs for those trading on margin since the double leveraged ETFs will require twice the margin as the unleveraged ETFs they track. They still offer an advantage for those not trading on margin. I had my broker run a simulation to determine what my buying power would be under the new rules just to make sure that I would not have to exit any positions prematurely.

The double leveraged ETFs had significantly enhanced my portfolio performance since I began using them with index trend following strategies. In my opinion, the indexes do far better with these strategies than individual stocks, so I am greatly disappointed that I will have to retool my trading plan again to deal with these rule changes.

At the moment, I am looking at going to some combination of ETFs and long options, but I am not sure yet. Traders should be prepared for the inevitable ban on short trades once the next leg down in this great bear market is underway. Index futures may be the only way to short the market by that point.

Friday, November 20, 2009

For Once I Agree With Cramer

This afternoon Jim Cramer made the statement that the market action next week will likely dictate the outcome for the rest of the year, and I agree with him. It looks as though the major indexes need one more new low to complete an impulse wave down from the 11/16 & 11/17 highs. If the typically bullish period from the day before Thanksgiving to 12/1 does not exceed those highs, then the correction will remain in force, and we will likely see lower lows in December. If however, those highs are exceeded, then markets may begin to accelerate into the new year and on into the summer.

So far, I see little evidence to convince me that the correction will not pick up speed after next week, if not during it, as my weekly breadth indicator turned negative again this week after being mixed in the prior week. It is rare that the markets will not follow-through for at least a week after a new signal, and this one was also accompanied by a negative divergence.

My hunch is that after a rally attempt next week, we will see a March 07 type swoon that will shake out the bulls to set up the next leg of the rally. We will have to wait and see how the market behaves after that selloff to determine if that will be the extent of the correction or whether there will be one more leg lower.

Both the dollar and gold were up today. It is beginning to look like the trend in gold has decoupled from the dollar. Oil continues to hold up and as long as it remains above 68.32, the trend is up. However, it would be better for the bullish case if it remains above the 73 to 75 level.

Barring any unexpected market action next week, I will be taking a break from posting until November 30. We were able to sell the last of the townhomes that we had on the market since 2008 as well as complete a renovation at a shopping center this week, and I need a break.

Happy Thanksgiving!

Thursday, November 19, 2009

Correction Underway

When a apparent 3 wave correction fails, it usually means that it was not a 3 wave correction, but a 1,2,i,ii setup. This appears to be the case today as the chip sector is leading the markets lower. I may be going out on a limb, but I believe this week's highs in the major stock market indexes will mark the high of the first leg of the rally from the March low and we are now in a correction that will lead to the 10 month cycle low in December or January.

The primary evidence for this is the lack of new highs in the small caps, semiconductors and financials coupled with the Qs coming decisively back under its October high this morning. If the current volume run rate continues, the Qs will have the highest volume of the last 3 months on a down day.

I will be looking for a completed 5 wave impulse pattern down on the 30min/60min charts and/or a daily fractal sell pivot, macd sell signal, IBD "Market In Correction" call for confirmation and a chance to add to index short positions for a retest of the November lows and a likely test of the 200demas. Of course, a reversal a breakout to new highs would seriously derail this viewpoint.

I am expecting that gold will test support at the October highs around 1050 to 1100 before moving higher.

Wednesday, November 18, 2009

Ascending Broadening Wedge Pattern

The Dow Industrials are tracing out a very clear ascending broadening wedge pattern. The upper trendline will be at 10529.55 on Friday 11/20 and at this point, it seems likely that this level will be hit or an attempt will be made at it anyway. The latest rally has been accompanied by sharply declining volume and a multi-week negative divergence in the RSI that suggests that the rally is coming to an end soon.

The likely path of the correction would be down to the lower wedge trendline followed by a bounce into yearend and then another leg down to complete the correction in a head and shoulders top pattern.

This pattern sometimes leads to an overthrow of the upper trendline, but failure to reverse quickly after the overthrow would imply a more bullish outcome. It looks as though options expiration will keep the markets up until Friday.

If a correction does not follow, I will be exiting half index short positions and looking to buy breakouts of leading stocks for a continuation of the rally into yearend.

YEN May Be Portending A Turn

The action in the Japanese Yen appears to be repeating a pattern from January of this year. In December 2008, the Yen made a new high against the dollar, but then a lower high in January as the US markets posted new countertrend rally highs. The subsequent impulsive decline in the Yen coincided with the final leg down in the US markets.

Once again the Yen appears to be making a lower high as the US markets are making new rally highs. Is this pattern giving us a heads up that the rally in US markets is about to end? While there is no guarantee, as long the Yen remains below its October high, it would seem to suggest that is the case. In particular, however, if the Yen makes a new high, then the anticipated correction may not occur. There are other negative divergences still in force as well. The volatility indexes have not made new lows against the recent rally highs.

Unfortunately for the bears, today's action appears to have concluded a 3 wave pullback on the hourly charts, which means new rally highs. As long these divergences remain in place, I will be expecting a correction.

Tuesday, November 17, 2009

Running Out Of Time

Volume continues to contract as the rally makes new closing highs, which suggests a turn is near at hand. However, if a meaningful decline is to get underway, it should do so soon. Although it does not occur frequently, sometimes a potential 10 month cycle low can become a point of acceleration. We are rapidly approaching the time frame when the 10 month cycle should bottom. My calculations show the 10 month cycle bottoming a little early, around 12/9 to 12/11, while traditional methods could put it as late as 1/9 to 1/12. We also have the typically bullish Thanksgiving holiday period coming up next week. If we do not see a sustained decline into these dates, we may need to consider the possibility of an acceleration move.

Last year the markets bottomed on 11/21/08 and topped on 1/6/09. Will we see a reversal of these turn dates with a top at the end of this week and a bottom on 1/6/10? That is certainly a viable outcome. If, on the other hand, markets begin to consolidate next week rather than decline in earnest, the bearish near term case would be severely compromised.

Monday, November 16, 2009

Dow At Trendline Resistance

The Dow's high today of 10434 hit right on the upper trendline of the rally from the March low. While volume was higher today, it was still below average. Potential negative divergences are developing. An overthrow of the upper trendline is definitely a possibility, but would likely lead to a more severe decline than one that begins from the current level.

I am still expecting a retest of the November low, but due to the fact that we are rapidly approaching the expected 10 month cycle low, it is unlikely that the correction will extend much below that level. Markets have managed to forestall a more severe correction that would have probably ensued had the October decline continued after a modest bounce in November instead of the rally to new highs.

I realize that I stand in the middle between the bears who are out in force calling for an imminent retest of the March lows and the bulls who are calling for the rally to continue into year end, but make no mistake about it, the patterns that I am seeing develop in a number of stocks point to a significant rally once the anticipated correction is over, whether that be November, December or January. I haven't seen this many solid looking setups in individual stocks since June. While some select large caps have been carrying the major markets higher, other stocks have been correcting and building new bases. That alone is enough evidence for me to discount the extreme bearish case.

As always though, we trade what we see and not what we think.

I survived the camping trip with some really sore quads. It is always an experience with my boys' scout troop as the scoutmaster plans some fairly challenging hikes. We started near Rocky Knob on the Blue Ridge Parkway and hiked about 6 miles to the campsite with a precipitous decline of about 2000 feet over 2 miles on a trail which was more suited for a goat than hikers with 40 lb packs. The campsite was very pleasant with a cold and clear running stream. We enjoyed a nice meal of chicken and rice next to the campfire. After a reasonably restful night and eggs for breakfast, we hiked the rest of the loop for another 6 miles back up to where we had started.

The trail, stream crossings and campsite were built by CCC workers during the Great Depression. While I am for less government, it is hard to argue with the benefit that some of the work that was done back then has added to our lives over the decades. The difference today is that I don't see the obvious benefit to the average person from the government's stimulus efforts.

Friday, November 13, 2009

Gone Camping

The critical levels for the immediate bearish case are 10302.37 for the Dow, 1096.99 for the SP500, and 44.09 for the Qs. If these levels are exceeded then the rally is likely to continue or at least move sideways for a few more days.

One reason to suspect that the rally will not continue is the action in the dollar and the euro in particular. The euro looks ready to roll over to retest its November low, which should correspond to a rally in the dollar, which should in turn lead to a decline in US stocks, since the seemingly eternal inverse correlation between the dollar and stocks is still in force. However, at the moment I do not see a major rally in the picture for the dollar. I expect the dollar decline to resume once this little upward correction ends. Traders should not become complacent about the inverse correlation to the dollar. It will end at some point.

While at the moment I feel a little like a teenager standing over in the corner all alone at the dance, there is nothing that says that we have to participate in every market swing. Let's see how things pan out next week assuming I survive the weekend.

Thursday, November 12, 2009

Wait And See

The Dow turned back after just surpassing the 50% retracement of the October 2007 to March 2009 decline at 10334. (I had incorrectly stated that level as being 10350 earlier.) We will need to see a continuation of the downtrend with a sustained move below the October high to confirm that the correction has resumed. I say resumed because I suspect that the recent runup from the 11/2 low is wave (B) of a flat correction, and we should see a retest of that low by 12/2 but more likely before Thanksgiving.

It has been observed by seasonal market timers that the period from the Wednesday before Thanksgiving through the first of December is generally quite bullish. If we get a retest of the low by that date, I will be looking for an opportunity to exit short positions to reverse and go long for an expected year end rally. The year end rally may or may not be the beginning of the next leg of the cyclical bull market. It could be just another part of an extended correction. We will just have to wait and see how it unfolds.

Wednesday, November 11, 2009

VIX Does Not Confirm New High In SP500

Not Yet Convinced

As long as the small caps, financials and other sectors do not participate in this rally, I will remain unconvinced that the latest breakout is for real. While the Qs broke out to new rally highs today, volume was 23% less than at the October 21 high. Volume on the Dow30 and SP500 also contracted as the Dow came within 8 points of the 50% retracement level of 10350. However, the rally may last one to two more days before some sort of pullback or correction.

Bullish And Bearish

With futures this morning pointing to a new high in the SP500, I am forced to consider alternate views on the market action since the October 21 high. However, the big question is whether or not this is a time to begin building new long positions for a another rally leg. In my opinion, it is not. Yesterday the market paused after it's big advance on Monday, so today might confirm Monday's buy signals, but there are some troubling issues with the advance from the November 2 low.

In particular, new highs are lagging even as the Dow is making new highs. The small caps and semiconductors are still lagging significantly. The current rally seems to be a much more narrow affair than the previous rally off the October 2 low as a few stocks have had big gains while others have lagged. The bulk of the advance seems to be in the large caps.

For example, in the Russell 2000 during the first six days of the rallies from 10/2 and 11/2, there were 1706 gainers vs 1404 gainers, respectively, while for the Russell 1000, there were 900 and 878, respectively. For the Russell 2000, 17 stocks gained more than 30% after 10/2, but only 15 have since 11/2, but for the Russell 1000, only 6 stocks gained more than 20% after 10/2, but 12 have since 11/2.

These differences are not huge to be sure, but when you combine that with below average and declining volume, it seems clear that this is not the real beginning of the next leg of this cyclical bull market rally.

In addition, the Dow is closing in on 10,350, its 50% retracement level from the October 2007 high, and the SP500 is still below major trendline resistance from the October 2007 high.

The bottom line is this doesn't feel right to me. There are too many inconsistencies. Although I am forced to conclude that my "meticulous" analysis of the decline from the October 21 high is not an impulse wave as I had labelled it, neither am I satisfied to conclude that the 8 day decline at the end of October was all of the correction. By a process of elimination, however, the current rally must be either wave 1 of a new rally leg or wave (B) of a flat correction. All of the evidence supports the latter. In either case though, we should expect some sort of pullback or decline in the near future, which will allow us to determine which case is correct. If the former, then begin building new long positions, and if the latter, wait for a retest of the November low.

My work with the elliott wave count highlights the difficulties with elliott wave and definitely demonstrates that one should rarely take a full position solely on an elliott wave interpretation. I did not, and I hope that readers of this blog did not either. I have maintained some long positions including gold, oil, and two gold stocks throughout this correction and my account has not been damaged by adding half index short positions on this latest rally (I exited my initial index short positions off of the 10/21 high on 11/2 very near the low). If my suspicions are correct, we will soon see a dramatic swoon toward the November low, which will be the next opportunity to profit from this still ongoing cyclical bull market.

Tuesday, November 10, 2009

IBD Calls "Market In Confirmed Rally"

For those who read IBD regularly this should be old hat, but I thought it would be instructive to repeat the following from IBD's Market Pulse today:

"But keep in mind that some follow-throughs fail. A confirmed uptrend is not a green light to buy anything that moves ..... Open half positions and follow up if the stock proves itself." (Bold by me).

The same applies to any trend following methodology. Yesterday also saw valid buy signals using the Cabot Tides, Weekly-Daily, and MACD systems. The Donchian and Breadth-Momentum systems remain on a buy. These signals are not a license to put the pedal to the metal. Sometimes the market can run away from you, but I don't get the feeling that is going to happen this time.

Monday, November 9, 2009

IWM At Resistance

While the Dow Industrials and the SP500 got the coverage today, most of the other indexes are lagging and some significantly. The IWM and SMH are more than 5% below their rally highs while the Dow made a new rally high today. The financials and the transports are also lagging. The above chart shows that the IWM is at median line channel resistance and approaching its broken trendline for the March to October rally. The upmove in the IWM has been on declining volume which doesn't confirm the breakout in the Dow. Perhaps these lagging indexes will play catch up, but it seems more likely that the correction will resume over the next few days. However, we may see the Dow stretch for the 50% retracement level of 10,350 before it tires out.

Today's action will likely be called a follow-through day by IBD. However, I would want to see a follow-through of the follow-through. Most indexes are now overbought and due for a pullback. Let's see how that plays out before jumping back on the train.

The value of maintaining some core long positions is being demonstrated again.

Dow Heading For New Rally High

The pattern in the Dow is slightly different than the SP500 and the Qs. It appears that the pattern in the Dow is going to be a flat or expanded flat. The action in the Dow underscores again what I have been saying since March - the risk in this market is to the upside. This doesn't mean the correction is over, but increases the likelihood that it is unfolding as a sideways consolidation or shallow correction. Be prepared to exit index short positions early when the November low is restested.

Wave (c) Pop

This morning's gap up in the stock indexes should complete the rally from the 11/2 low. As always, anything is possible, but this correction would be quite short relative to the preceding wave (C) rally if it was already over. I suspect that given the weakness in the dollar, wave (B) may morph into a more complicated pattern such as a triangle or a flat that will allow the correction to extend into the expected cycle low dates. So, as long as the October 21 high remains intact, I see little reason to exit short positions at this time.

Another possibility that traders should keep in mind is that the current correction could be wave (W) of a more extended correction that lasts into January. Wave (X) would allow for a retest of the 2009 high into year end and wave (Y) would retest the wave (W) low. Such a retest in January, which often shows some weakness in the first two weeks, would not invalidate the 10 month cycle low in December.

The reason I mention this possibility is that position sizing over the next 8 weeks will be critical to minimizing drawdowns. Traders who take oversized positions may be whipsawed if the correction does extend. I continue to be cautious with 1/2 positions. I will let the market give me clear signals to add to those positions as the real trend becomes evident.

Friday, November 6, 2009

Grabbing At Golden Straws

Almost on a daily basis, we are bombarded with calls for a bottom in the dollar and a top in gold. Of course, at some point these calls will be right, but once gold broke out above the February high and the dollar broke down below the August low, the balance of power shifted from the gold bears to the gold bulls. Now, I am seeing calls for a top in gold because it has traced out a 5 wave movement from the August low. I question the validity of that interpretation.

If the form of the move from the October 2008 low was a flat (3-3-5), then the breakout from the triangle should have been down, which is what I originally expected when I went short after the February 2009 high. However, this is not what happened at all as gold broke out to the upside. In order to satisfy the necessary symmetry with wave (A) of the unfolding pattern, gold needs to complete some sort of 3 wave pattern, or combination thereof, in wave (C) from the August low. This means that the advance from the August low would have to be 3, 7, or 11 waves, and therefore, 5 waves is not a completed pattern.

In addition, we would normally expect the time of wave (C) to be approximately equal to the time of wave (A). Wave (A) was 80 trading days, while wave (C) is only 58 trading days to date. I would expect wave (C) to be at least 80 trading days as well, or 1.382 to 1.618 times 80, which is 111 and 129 trading days, respectively. We also have the seasonal pattern for gold which is normally bullish in December and January.

I think it would be premature to exit long positions in gold at this time for intermediate term traders. Until we see a lower high, I will give gold the benefit of the doubt and expect higher prices. When wave Y of (C) is complete, it would be prudent to take at least partial profits. If and when wave Z of (C) is complete, I will exit long. Wave Y projects to at least 1145. While wave (C) would equal wave (A) at 1246.

I have also seen a wave count showing a series of 1s and 2s with gold going to the stratosphere. This is not a reasonable point of view either. While the dollar is likely to go lower down to the 72 area. It will not go down forever, and once it turns in earnest, gold will probably top as well.

I may eat crow on this analysis, but I believe it is correct.

One More Thrust Higher To Complete Wave (B)

Well, as it turns out the impulsive move down from today's high around 10am was wave c of a flat correction, which itself is part of a running triangle. This means that there is at least one more thrust higher to complete the countertrend rally. I will remain short the indexes barring a move up on substantially higher volume. Unlike the fairly clear and distinct impulse waves during the decline from the October 21 high, the rally from the 11/2 low has the character of an upward correction with choppy overlapping waves. Even if the October 21 high is approached or exceeded, it is likely that a retest of the 11/2 low is in the cards.

Also, from another perspective supporting that the correction is still underway, IBD did not call Wednesday's action a follow-through day as the volume was lower than Tuesday on all of the indexes. My charting service showed higher volume for the Nasdaq, so I don't know where the discrepancy is. In any case, it looks like the markets have more work to do before the uptrend resumes.

Countertrend Rally Appears To Be Complete

The rally from the 11/2 low appears to be complete. The markets made a new countertrend rally high this morning around 10am followed by an unmistakable impulse move down in 5 waves clearly visible on a 2 minute chart. Markets are presently in a small degree second wave rally up which should not exceed this morning's high. The risk is that the impulse move down is wave c of a flat correction and more rally is to follow. Of course this rally could extend in a more complex upward correction, but at the moment the upside risk is constrained by the October 21 high.

I have re-entered half short positions in the QID, TWM and SSG. I may add to those positions on a sustained move below the 11/4 low. I may exit these positions on a sustained move above today's high on higher volume.

One wonders after the disappointing employment report this morning how bullish enthusiam could sustain a continuation of the wave (B) rally.

Thursday, November 5, 2009

Wave (c) of [c] of (B) Up In Progress

The current rally from the 11/2 low is not impulsive, no matter how exciting today's rally may appear. The retracement targets should be hit or exceeded tomorrow as wave (c) of [c] of (B) (or 2) up completes. I suspect that based on the wave count the market will respond positively to tomorrow's employment report. Once complete, the selling should return in equal measure.

Today's rally qualifies as a follow-through day by IBD's standards, so it will be interesting to see if they call it that way in tomorrow's edition. I would be very cautious in giving that call too much credence. This is one of those times that the principle of the second signal applies. The principle of the second signal is a concept that I developed several years ago which states that "after a countertrend correction has begun, the first buy signal is likely to be false, so wait for the second signal". Occasionally you will miss a rally, but this principle has saved me a great deal of pain.

Once the next wave down is underway, we will be able to gauge whether it is wave (C) or 3. At the moment, it looks like it will be wave (C).

Wednesday, November 4, 2009

More Rally Near Term

Today the SP500 broke out above the upper channel line of the short term decline and then pulled back to that channel line. The next likely move is wave [c] of 2 or (B) up to the target. If the time of [c] is equal to [a], the whole thing could be over as soon as tomorrow afternoon. On the other hand wave [b] could extend sideways for some time before wave [c] begins. I will be looking to re-enter index short positions at the target zone. whether it is hit before or after the employment report. It is a low risk entry point against the October 21 high. I will add to those positions on a break of today's low (after the target is hit). Of course, there are myriad ways that wave [b] could go at this point including a retest of Monday's low, but at the moment the pattern looks pretty unambiguous.

Supporting the notion that the rally will continue tomorrow is the positive report after hours by CSCO which is up 1.30 or so after hours. The best of all worlds would be a rally tomorrow followed by a gap up after the employment report on Friday. I will sell such a gap near or above the target zone.

While the 30 minute MACD gave a sell signal today, after a positive divergence buy signal, it is generally prudent to wait for the second sell signal to take a position. We may see a negative divergence buy signal at the wave [c] high (or maybe not, it is not required, just beneficial).

Wave 2 Or (B) Up

Markets have broken out above the high of the low day of the correction and above the upper channel line on a higher volume rate than the day before giving strong support to the view that an upward correction of wave 1 or (A) down is now underway. Since wave 1 or (A) down was an impulsive move, the October 21 high should not be exceeded or something different is going on. The most likely target for wave 2 or (B) is the 62% retracement of wave 1 or (A), which puts the SP500 at 1074+/-. However, anything less than the October 21 high is possible. This countertrend move will likely be choppy and could last for several days. Any follow-through day on this move should be regarded with suspicion as it is extremely rare that a correction not complete at least a 3 wave movement.

Tuesday, November 3, 2009

Gold Breaks Out Again

Gold breaks out to new highs again during a normally weak period. The seasonal charts show that gold typically peaks in late January to mid February. There's really no need to sell before then unless we get a decisive break below the previous all time high of 1029. The recent pullback clearly established that level as a zone of support. The next target is 1170+/-. A blow-off top could see gold extending to 1400 and above and would certainly be a time to take profits.

With other nations raising rates faster than the US is or can, it is unlikely that the dollar is going to reverse its trend any time soon, although many are calling for a dollar rally. Or course, everything could change tomorrow after the Fed announcement, but do we really expect a change of course yet?

Wave [4] May Be Complete

Today's excitement over Buffet's purchase of BNI notwithstanding, it looks as though wave [4] is complete as of 2:10pm and wave [5] down of 1 or (A) is underway. The targets posted this morning should still apply. A breakout above this afternoon's high would be strong evidence that wave 1 or (A) has already bottomed and wave 2 or (B) is already in progress.

Wednesday's are quite frequently turn-around days, so if wave [5] is underway, it may bottom during the day tomorrow. A reversal day tomorrow would be strong evidence that wave 2 or (B) up has begun.

Downside Targets For SP500

This morning's news is that the rate hike in Australia is spooking markets, but does that really make sense? The answer is clearly no. The central bank of Australia said that "economic conditions in Australia have been stronger than expected and measures of confidence have recovered". This sounds like a recipe for Aussie dollar up - US dollar down, which at least for several months has meant US dollar down - US stocks up/Gold up, etc. I would not be too quick to jump on this morning's weakness as a selling opportunity, as it is most likely wave [5] down to retest yesterday's lows.

Downside targets for wave [5] down range from yesterday's low at 1029.38 to the October low at 1019.95 to the 38.2% retracement level from the 2007 high at 1013.74 to the 1000 area. All of these are within the allowable range for wave [5]. At the moment, this morning's gap down in futures does not appear to have the intensity one would associate with a 3rd wave. If we see a 3 wave rally develop followed by break of this morning's low, then it would be time to reconsider that point of view.

Monday, November 2, 2009

Updated Wave Count For The Decline

The SP500 either completed an impulse wave at today's intraday low around 1:30pm or will do so with one more 4th wave and 5th wave. While I show waves [i] and [ii] on the small swing on 10/21, I don't have a high degree of confidence in that labelling. I show the alternate labelling for [i] and [ii] at the 10/22 and 10/23 low and high, respectively. One reason to believe that today's low was all of minor wave 1 or intermediate wave (A) down is the positive divergence buy signal on the 30 minute chart. Even if there is a new low, it will likely just be a retest of today's low.

Given the fact that my position is that we are in a correction of the rally from the March low of uncertain duration and depth rather than a full blown resumption of the bear market, I made a descretionary decision to exit my index short positions today shortly after the intraday low.

I will be looking to re-enter those positions after a sharp retracement to around the SP500 1075 level, which should complete wave 2 or (B). We can then assess the subsequent market action to determine if it is in wave 3 or (C). The impulsive nature of the decline makes it clear that we must be in wave (A) of a zigzag (5-3-5) or wave 1 of an impulse (5-3-5-3-5) movement. The depth and intensity of the next 5 wave down move should help us determine which interpretation is the correct one.

In the event that the market gaps down to a new low, I will evaluate whether it is the end of wave [5] or the beginning of wave 3 based on the action in the first 30 minutes to 1 hour of trading. If it does appear to be wave 3 down in that case, I will re-enter the short positions. However, at the moment that outcome does not appear to be likely.

Near Term Low?

This afternoon's low may market the completion of wave 1 or (A) down. If not, this afternoon's low may be retested before a more significant countertrend rally develops. The countertrend rally may be sharp and could retrace 62% or more of the decline from the October 21 high.