A Second Look

I decided to take a second look at the major indexes this morning, and I thought it prudent to point out that while it looks like the markets want to rally a bit, any rally may be very short lived. The pattern on the 30 min charts looks very much like a bearish flat correction, which is 3-3-5. If so, we are now in wave c up of the flat correction and the rally could be over in just a few hours. The thing about this flat correction is that it is hard to know whether it is a 4th wave, an x wave, or a smaller degree second wave. Most elliott wave sites are calling it a 4th wave and that is the most probable count, but if it is either of the other two counts, then the next wave of selling could be severe.

I haven't discussed any of the systems in the System Tracker lately so it's probably a good time to review the current status. The following systems are long but are on the verge of sell signals: Modified Donchian and Moving Average. The following systems are neutral: Cabot Tides, Weekly Trend - Weekly Close, Weekly Trend - Daily Close, MACD, and the 3 Week Rule. The IBD system is short. The Breadth Momentum system is long and not likely to change in the next two weeks.

Clearly, it is not prudent to be adding significant long positions in this environment. It is also not the time to be heavily short either, but increasing short exposure as the correction unfolds is the way to go. I am expecting this correction to last to at least the end of February with an intervening B wave rally. The rally could be sharp and do major damage to short positions, which is why going short in steps is the most prudent thing to do.