The Qs dropped through support like a knife through butter today. Of particular note is the way the Qs reversed out of a long squeeze into a short squeeze which triggered today. While the critical level of 43.76 was not hit, the low was 44.04, which is so close as to be irrelevant. It will be hit soon enough.
The combination flat correction I postulated was invalidated today. One thing that led to my error was that the Qs matched the earlier January high of 46.64 on Tuesday, but the NDX did not match its high. This discrepancy, while small, means that the January 11 high was the end of wave (5) of [A], and today's action is wave 3 of (A) or [iii] of 1 of (A) of a correction that is expected to last into late February or March. I suspect the meat of the first leg of the decline is nearly over, but there is no way to know for sure. I am expecting waves 4 and 5 to complete early next week with a sharp countertrend rally to follow. The first target for the Qs is the 200dema currently at 40.94. The second target is the June high of 37.23.
The primary reason that I expect a sharp countertrend rally soon is that the McClellan Oscillator closed at -271 which puts it in the severely oversold category. The rally would be a good chance to enter new short positions.
Hopefully, you had a few short positions going into today. I am currently short AMZN, RIMM and SLV. I will be looking to add new short positions. I suggested earlier this week that the semiconductor stocks looked like good candidates. I didn't expect that they would get annihilated today, but that's what it looks like. There is surely more downside for the semis.
The question that traders must ask is whether to exit existing long positions. I have addressed this question before, and I think that it really doesn't matter which approach you use, but you must be consistent. Either exit all short term long positions on a market sell signal or hold them and exit using your plan for each trade. Personally, I have exited positions so many times just to see them run in my direction afterward that I prefer to wait for a clear sell signal rather than make a discretionary exit. Also, with a sharp rally possibly on the horizion, I would rather give them a chance.
Using the downside targets above, we can calculate the ultimate rally target using a measured move: 46.64-25.63 = 21.01 pts, 37.23+21.01 = 58.24 is the first target and 40.94+21.01 = 61.95 is the second target giving theoretical gains of 56% and 51%, respectively.
I know that the wave 3 crowd will be out in force over the next few weeks, but there is a significant problem with that thesis: the percentage of stocks making new highs has been high while the percentage of stocks making new lows has been almost non-existent. I calculate the % New Highs on 1/11/10 at 14.6% with only 2 New Lows. According to Lowry Research the average at market tops for the last century is 6% and new lows at tops were expanding. I continue to believe that the wave 3 interpretation is invalid, but we will know in a few weeks. If that view is correct there will time to change our stance.
Lastly, I am sure IBD will call the Market In Correction in Monday's edition. I will be putting on a position using that call but I will wait for a bounce first. Also, it should go without saying that this is not a time to be looking for long positions.
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