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.