Sunday, February 28, 2010

Battle For Direction

The week ahead will hopefully provide some information that will help us determine how the rest of March is going to play out. At the moment the SP500 is trapped in a range between 1086 and 1112. Volume since the rally off of the 2/5 low has been only average and we have not seen a valid follow-through day. The volume oscillator has yet to turn up to confirm the trend as well. On the other hand, the SP500 is sitting above its 50dema and the MACD is in a strong position as it is crossing up through the zero line parallel to its signal line. This type of action typically points to continuation.

The 61.8% RT of the January range is around 1120. Given the first of the month positives, the most likely outcome is that we will see wave (B) continue higher into that level, which conflicts with my top wave count at the moment.

The question arises as to whether we are already in wave c of X up. The balance of the evidence suggests that we are not. We have not seen a buildup of negative sentiment as measured by the put/call ratio. Bullish sentiment increased significantly over the last week even though we have only seen a tepid rally at best. And finally, we would expect wave b of X to last at least 1/4 of the length in time as wave a of X which puts us out to the end of March. Other cycles point to a low in mid to late March as well. So, the best interpretation is that we are still in wave (B) even if the market moves higher. We should at least see a retest of the February low before the market can move higher in wave c.

A couple of things could help us come to an earlier conclusion about the near term action: 1) if the market sells off early Monday and comes under last week's low, then wave (C) down is most likely underway or 2) if we see a small triangle or expanded develop this week, then we know that wave (B) is headed higher.

Either way, it seems that the only option is trade both sides of the market or stay out. This is one of those times that we will have to wait for the market to tell us what it wants to do.

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