Thursday, January 7, 2010

2010 The Year Ahead - Part IV


Tonight I present an slightly enlarged view of the combination flat. We are currently near the end of wave a of X as shown above. Whether we are in case I, II or III, the current position in the overall pattern of the secular bear market is the same.

Given that it is fairly clear that we are very near the end of wave a of X (note: this is shown as wave [A] on the more detailed chart of the Qs shown previously) either because we are in wave (5) of a, or wave Z of a triple zigzag as others propose, this is not a good time to be taking on new intermediate term long positions. For longs, short term hit and run trades and/or intraday trading are the only reasonable options available until the top of a is in.

If you have profitable intermediate term stock positions, you may be content to ride out the coming correction if you have enough cushion. There is nothing that says the expected correction must be deep. It could very well be a triangle or flat in the indexes, which might well support individual stock positions. This is a decision you should make now before the top is in.

As I said back in October and November, shorting this top will not necessarily be easy, as we found last quarter. It may be to your advantage to sit it out until wave c is underway. If we get a very sharp selloff, wait for a retracement to enter short instead of being agressive near term.

Of course, if you find suitable short candidates in individual stocks, now may be a good time to start dipping your toe in. I am short EXPE with a double top pattern from 12/30/09. GME has collapsed from a large triangle pattern. I am short from 26 on 11/10/09 after it broke down through its trendline after a 3 wave rally and then retraced to the 200dema. These are the kind of stocks to look for - clear topping patterns with negative divergences, or stocks making lower highs as the market is moving up to its top.

As far as the near term is concerned, we appear to be in the very last stages of the rally, but I don't think we are at the top just yet. Of course, anything could happen after the employment report tomorrow, but it looks as though we need one or two more up moves to complete the first leg of the rally. With the currently very low volatility, this could take as long as one to two weeks, or if volatility increases, it could happen in just a few days.

Patience is key at the current juncture.

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