The Boy Who Called Wolf

We've talked about a top so many times in the last few weeks that your eyes may be glazing over, but the fact is that a number of indications point to at least a short term pullback. The NYSE TRIN has been running low numbers showing excessive bullishness, the Absolute Breadth Index is now down to 18.03 - a level seen at several important turning points over the last two years, various measures of investor sentiment have reached extreme levels, and the McClellan Oscillator has only just turned back up to the zero line.

The McClellan Oscillator turned down early in March creating a negative divergence with price. This would normally be expected to lead to a selloff in markets as the Oscillator moves down to an oversold level. It hasn't got there yet, but it may be that it becomes oversold has market just treads water. If so, markets could be setting up for an explosive upward move without a correction.

It may be another 6 weeks before we can really decipher what the real pattern is, but it certainly looks as though we will see some selling early in April. If the overall behavior of this rally continues, it should be another buying opportunity.

Housekeeping Notes:

I haven't had time to stay on top of the System Tracker over the last month, so I will make an effort this week to take care of that. I need to post the rules clearly for each system above the results. I've fortunately had plenty of engineering work to do this year which has kept me busy.

That said, I will take a break from posting the rest of this week as my family is on spring break and I need a break too.

Happy Easter.

A Similar View

The above chart was posted by Nadeem Walayat at http://www.marketoracle.co.uk. While my count is slightly different than his, it points to a similar view that a triangle is unfolding. In his view, it is a 4th wave triangle. In mine it is a [B] wave. While I have begun to doubt the [B] wave triangle interpretation per my previous post, it is still possible that a running ascending triangle is underway. This would be very bullish. In any case, we both agree that the current market condition is essentially a sideways consolidation that will lead to a much higher prices later this year.

Loud And Clear

Today's action really puts the (B) wave interpretation at the low end of probable views,and although not expected, it does help us gain a better understanding of the market condition. There are a number of reasons to eliminate the wave (B) option, but one of the most obvious is that stocks that look like good short trades are exploding higher today. I don't think that would be the case for a (B) wave. If we eliminate the (B) wave view, then we are left with 3 possibilities: the current move is wave (5) of [A], wave (1) of [C], or wave (C) of Z.

The wave (C) of Z interpretation is the one currently held by most elliott wave technicians who are looking for an end to primary wave 2 up at any time. In my opinion it is the least likely explanation of current market behavior, mainly because the A/D line is making new all time highs, which really is not consistent with a second wave.

So, which is it: wave (5) or wave (1)? Volume continues to lag considerably in this rally, and for that reason, I am of the opinion that we are in wave (5)of [A]. However, the wave (1) view cannot truly be ruled out. Once the current rally is over, which may last well into April or early May, we should expect a multi-week 3 wave correction which could be deeper than many expect. It hasn't happened yet, and with the recent advance, few will be looking for such an outcome, but markets do correct. The most likely target for wave (5) for the Qs is 50+/- and the Dow is 11,750+/-. The most likely target for this correction is the 200dema for the various markets.

Based on Terry Laundry's work and my own cycle work, I am now expecting that after the upcoming correction, we will see new rally highs in August/September (wave (1) or (3) of [C]) followed by a low in November (wave (2) or (4) of [C] then followed by another new rally high in the spring of of 2011 (wave (3) or (5) of [C]). Hard to believe, I know. This will only be wrong if the wave 2 crowd is right, and they haven't been right in a long time. Then again, I've underestimated this rally since October myself.

If the Qs are in wave (5)and the target of 50 is seen, we can estimate the final target for the Qs as 1.618x[A]+25.63 = 65.06. The 38.2% RT of the 2002 bear market for the Qs is 58.24, the 50% RT is 70.13. The average of the 2 is 64.19. So, overall the target range is 58.24 to 70.13.

Based on this the logical approach from here on out is to limit intermediate term short trades, take short term short trades only when there are very clear setups and exit at conservative targets, and focus primarily on intermediate long trades with some short term long trades when setups are clear with a strong reward/risk ratio.

Also, when markets pullback to the 50dema and 200dema, we should be looking to go long perhaps even ahead of IBD confirmed market rally signals if the market is called in correction.

In conclusion, markets are probably in a 5th wave and a correction beginning sometime in April or early May is likely. This correction should be a great opportunity to initiate and add to long positions for a rally that may continue well into next year. This is not the consensus view, and I may be dead wrong, but the current action would appear to validate this interpretation.

McClellan Oscillator Drops Below Zero

Today the McClellan Oscillator fell below 0. This usually precedes a selloff. Momentum continues to rollover and precious metals seem to be leading the stock indexes by 4 to 6 weeks. Gold topped December 3 and the indexes followed in mid January. Gold topped again March 3. Perhaps we are on the verge of another top in the indexes.

I am still leaning toward the triangle view for the correction. Primarily because there are so many completed triangles in various sectors and stocks. GE is a perfect example. I think the stock indexes will form a running triangle that will last into May at this point.

One conclusion that must be considered now is that wave [C] up may last well into next year if the x wave hypothesis is correct. If the top of [A] was in January then it lasted 9 months. 9 months from this May for a measured move is February 2011. If the top of [A] is now, then that would push [C] even further into 2011. I know this doesn't fit with most other forecasts out there, but I am beginning to take it seriously. However, before addressing it further I want to see a clear and complete correction. Many have forgotten that the market consolidated for 20 months after the January 2004 high. I don't think that will happen this time, but it serves to remind us that markets can move sideways longer than most expect.

Hard To Believe

I was thinking this afternoon why it has been so hard to believe in this rally and it occured to me to look back at rallies since the 1970s bear market to see if the rate of change was more or less, and to my surprise the only rally that matched the current one was the rally off of the 1974 low, which was the nominal low for that secular bear market.

The current rally has advanced some 4424 points in the span of 12 months for a gain of 68.4% in the Dow Jones Industrial Average. The rally off of the 1974 low was approximately equal in rate of gain. However, it took 15 months to gain 68% from the 1982 low, 22 months from the 1987 low, 24 months from the same level in 1997 as the 2009 low, and 43 months from the 2002 low.

From that perpsective, we are witnessing something not seen in almost 36 years. It is reasonable for traders and investors to doubt the sustainability of such a rally. Indeed, a few months later in 1975, the Dow fell 28% over 18 months. Not a rip-roaring decline, but a long steady decline nonetheless.

Today, the Wilshire 5000 index closed slightly above the resistance level cited in yesterday's post. However, volume lagged again today, except for the Dow. The McClellan Oscillator is forming a larger negative divergence, and the negative MACD divergence continues for the Qs on the hourly charts. Perhaps these divergences will resolve themselves over time without a pullback or serious decline, but it doesn't seem prudent to believe that they will. I suspect something in the nature of a shakeout is coming. It's just a matter of when. As long as critical levels are not broken that will be an opportunity to initiate new longs and add to existing positions.

NOT!

Obviously the pullback is NOT yet underway. But should we expect the rally to continue indefinitely? So far we are up to 30 trading days since the current rally leg began on February 5, but the Wilshire 5000 index is coming up on serious resistance at two prior intermediate swing lows. (34 days would be a common fibonacci number of trading days for the rally.) I will be highly surprised if it pushes through on the first try. If it does, then we must assume that this market is getting ready to go parabolic without a pullback.

Even though markets are at new rally highs, various measures of momentum are not. This is cause for pause for the bulls. A number of valid wave counts can be made. The wave (B) view has almost lost legitimacy, which leaves us with either a 5th wave of [A] or a 1st wave of [C]. I really have no idea at the moment, but I continue to be surprised by how much more robust this market is even though I have believed all along it would go much higher. This really speaks to high levels of liquidity due to Fed monetization of the debt.

One thing is clear with today's action: markets prefer certainty over uncertainty out of Washington even if it is not clear that policies are market friendly. We did not see a selloff with the passage of the health care bill.

I was at a seminar today on "green" building technology - more institutionalization of the economy. I'm all for energy efficiency. I'm just not for more layers of bureaucracy which don't actually add value to already existing structures and methods. It just adds cost and complexity. There are some very interesting things coming down the pike now that health care reform has passed. There are bills in the works that will mandate 30% reductions in energy usage in new residential and commercial buildings as early as next year. How this will be a boon to an already sagging construction and development industry is hard to understand. Over the last 10 to 15 years the frequency of building code changes has increased dramatically. This makes it difficult to measure the effects of these changes. Even so, a measured approach to changes in performance standards rather that huge leaps would make alot more sense.

Many years ago the industry adopted new ventilation standards in response to sick building syndrome. Now we know that the adopted standards went too far, and we have been spending way too much on energy to heat and cool all of this additional outdoor air to ventilate new buildings. New standards that will be coming out in two years reduce the required ventilation rates in half after 24 years. This is why I think a slow but steady approach to change is best. When we mandate major changes that have not been tested, it may take many years to realize the unintended consequences, and by then it may be too late.

Pullback Finally Underway

The pullback that we have been looking for since late February has finally shown up. We can be fairly confident of this as the McClellan Oscillator has broken down from a negative divergence with 3 declining tops as the indexes made new rally highs. However, as much as I would like to see the Qs pullback to 45, that need not happen. What is most likely to happen is that the Oscillator will move to below -200 to signal an end to the pullback. We can compare the form of the pullback with the Oscillator level to help us confirm the end of the pullback. The pullback should last 5 to 8 days. The Qs would have to fall below 43.83 for me to consider an alternate view from the triangle discussed earlier. Holding above 46 would put the 1, 2 count alternate on the table.

This has been a long drawn out corrective process that has served to consolidate the stock market gains of 2009. Even though various indexes have made new rally highs, the consolidation process is still in progress in my opinion, but it is nearing it's completion. Stock indexes have developed weekly squeezes (the coiled-spring effect) which should lead to a sustained uptrend after this process is completed in late March to early April. There are still alot of bears out there, and a breakout above the recent rally high should be the last nail in the coffin of bearish sentiment. The Investors Intelligence bull/bear spread should move back to its previous highs by the time the next leg of this rally gets in gear. This will be the warning that we are in or nearing the end of wave (3) of [C] of x.

I believe that there will be at least two more excellent opportunities for gains this year. The first will be after this pullback is complete. The next will be after wave [C] tops later this year. So, don't worry. Even if you haven't made much progress yet this year, we have a long way to go. Don't overlook opportunities in oil and gold. Oil is gearing up for a move and gold may be heading toward an intermediate bottom in the next few weeks. Retail still looks strong also.

The semiconductor sector has begun to lag in this rally and is ready to roll over in wave (C) down. The pattern is a very clear 5-3 with a lower top. However, there doesn't appear to be many stocks that are good short candidates. AMAT may be an exception. Again, this supports the overall view that we have weeks and months of rally ahead.

KKD popped higher in an extended 5th wave out of the ending diagonal triangle Thursday. A pullback began Friday that should end in the 3.20 to 3.50 zone - a sharp pullback lasting about 5 days. A sustained move below 3.20 would be a serious problem.

Perfect Impulse In KKD

I wish the stock indexes would count so easily as KKD has since its low in February 2009. KKD is exhibiting a nearly perfect textbook impulse wave up from its January 26 low of 2.56, which did not violate the origin of the previous impulse of larger degree on July 9, 2009 of 2.51. The decline from the October 2009 high shows 7 waves and is either a deep 2nd wave retracement or a X wave, the former being the most bullish. If we take the most bullish interpretation, then after a brief and possibly sharp pullback that does not violate the January low, KKD should take off in a 3rd of a 3rd of a 3rd wave that propels it to at least 8.00 and more likely 10.00. The thing about 3rd wave setups like this is that there is no determinate price objective. The stock can run to unexpected levels. There would be resistance at 12.00 to 13.00, but beyond that it is mostly clear sailing.

The less bullish view is that KKD is tracing out a very large double zigzag, but even in that view price should move above 6.00. If the 3rd wave interpretation is correct, there should be a surge in volume as KKD breaks out above 4.75 and particularly 5.00. I would like a see a 10MM share day to confirm demand for the stock. If volume fails to show up, then the less bullish view must be given the greater weight.

First Sign Of A Top

Well we haven't had too much success with nailing this top so far, but signs are beginning to show up. The top 2 min chart shows a fairly clear 5 wave decline. The hourly chart below shows waning momentum and a potentially complete wave count. I wouldn't rule out another new high just yet, but at least we should get a pullback to the January high. The hourly chart shows my best guess at the unfolding wave count. Wave (C) should stop short of testing the February low, while wave (D) up should retest the January high. Thereafter wave (E) will complete the wave [B] triangle.

One of the biggest reasons to believe that the entirely rally from the February 5 low is not an impulse wave is that even within the light volume there was no expansion of volume where wave 3 should be.

Out Of Service

I have been under the weather the past couple of days, but not much has happened to change the overall picture. Breadth divergences are showing up which portend at least a short term pullback. The McClellan Oscillator has not confirmed the new rally highs. New Highs-New Lows is not confirming the new rally highs and so on. In particular, we also have the SP500 closing above the January highs yesterday on lighter volume that the January highs. All of these factors together point to an impending short term correction. It looks like the Dow will be the last to make a new high today if it does.

We still have open the question as to the form of the pulllback. Is it wave (C) of an expanded flat correction, wave (C) of a triangle, or wave (2) or 2 of (1) or 1 of [C] of x up. My vote at the moment is for the middle option - the triangle. If we were going to see a retest of the February low, I believe it would have been seen by now. The April to May period is generally bullish and we have bellweather stocks like GE advancing to new rally highs already. This doesn't fit with a retest of the February low. On the other hand, there are a number of individual stocks that are working on bearish patterns, so that doesn't really fit with the 1, 2 setup either. It is beginning to look like the market will hold up for the rest of the week into the Spring Equinox. This will leave 8 trading days for a selloff into the end of the month, but then there is the so-called end of quarter bullish bias. More than likely this pullback will only be a 5 day affair next week.

I will not be short this market after the next pullback in preparation for an upcoming rally in April and May unless something really surprising happens in the last two weeks of March.

Oil continues its march higher. I have highlighted several times the overall bullish intermediate term trend for oil. Few seem to believe that oil can move up to 100+, but a breakout in the next few weeks should lead to a sharp rally to 100 to 105. A weekly long squeeze setup is in force and only needs another up week to trigger a long signal.

Gold is still working on the second half of its double zigzag correction - silver likewise.

Shorting this correction has been a generally futile effort, but the truth is we never really know when a market correction will turn into a rout in this secular bear market, so it makes sense to at least nibble at the short side during corrections. I know this contradicts my early statement that there is little point in shorting corrections that are part of longer term rallies, but in retrospect, if we avoid the short side entirely, it may be psychologically difficult to transition to shorting when the real opportunity appears.

This spring rally could be explosive as the late-comer bears realize the train is leaving the station. What I expect we will see is a breakout on increasing volume followed by a sharp but quick pullback, and then a parabolic move in wave (3) of [C] followed by a double top with wave (5) of [C]. The wave (3) move will be the one to really knock the bears off their feet, which will be the perfect setup for the next multiyear decline in this secular bear market. With the SP500 so close to its all time high by then, it will be difficult for most people to accept that another devastating decline is coming just as they feel a great sense of relief, particularly as the economy may continue to show signs of improvement into the summer of 2011.

As a side note, this next year will probably offer the best economic prospects for small businesses for some time. After mid-2011 economic conditions should begin to deteriorate again and will not show much improvement until 2014. Don't be caught off guard by making premature expansion plans based on the current economic improvements. Even though the real "inflation-adjusted" low for this bear market is not likely to occur until the 2019 to 2022 time frame, the greatest opportunity for small businesses to make great advances will be from 2013 to 2017. When it appears darkest, those that use this period to build a solid foundation for their companies will be able to reap the benefits during the next secular bull market that follows in the 2020 to 2040 period.

Trapped

The Qs have come up to strong resistance at the underside of the broken trendline connecting the June and November lows. Just ahead is weak resistance at the August 2008 high of 48.57. The trendline connecting the March 2009 and February 2010 lows will provide strong support. However, my suspicion is that this trendline will be broken at least a little to trap the bears. If we don't see significant selling early next week, then a 4th wave from the February low may be in progress with a 5th to follow. Afterward, we would expect a pullback to the lower trendline in a larger degree 2nd wave.

The primary argument against the latter view is the volume is not consistent with a 3rd since the 2/25 low. Thus, we are left with an expanded flat or triangle. The overall strength in breadth is pushing us toward the triangle outcome at the moment. Another reason to expect that we are in a triangle is that a number of sectors and stocks are forming triangles, some of which are already complete. Examples are XHB, WYNN and GE. GE may have broken out of its triangle on Friday, or it may have just completed wave B of its triangle. In any case, the bearish view is becoming dimmer by the day.

The general elliott wave approach to trading triangles is to wait for waves D and E to complete and then either buy at the low of wave E with a stop under D, or buy on a breakout above D with a stop under E. This will work. However, I have found that oftentimes in strong markets, waves D and E fail to form or wave E is very shallow and the market breaks out unexpectedly. I call this an impulsive triangle because it is really a false triangle that is actually a 1,2, i, ii setup.

It is very frustrating when this happens because you realize that you just missed a powerful 3rd wave move that was actually more profitable than the triangle breakout would have been. The solution to this dilemna is not to wait for waves D and E to form, but rather to buy a reversal off of the wave C low with a stop somewhere below wave A. The risk is only marginally higher, but now you have the best of both worlds. If it breaks out early, you haven't missed the move. If you get stopped out, your risk was not much greater than if you had waited.

That said, I will be waiting for wave (C) to develop over the next week (if it actually does). If the form is 3 waves down, then I will be looking to buy the turn. If the form is impulsive, then I will simply be looking to buy at support at the February low. Either way, I will not be waiting for waves D and E to develop. If the February low does not hold, then we will have to re-evaluate.

Where She Stops Nobody Knows

Markets broke out from a small degree triangle late this afternoon as they continue to wedge higher. The Dow seems to be the laggard as other markets are at or about to make new rally highs. At this point it is beginning to seem as though a resumption of the correction in wave (C) is becoming less likely. Even a pullback seems like it may not happen, but usually that's when they do happen. However, I could see the Qs going all the way to 48.37 without invalidating the wave (B) view. At that point we would be looking at an expanded flat correction or a running triangle. The less likely but possible interpretation is that we are in wave 1 or (1) of [C] of x.
Even so, we should see a wave 2 or (2) pullback soon.

The light volume continues to contradict the breakout, and the McClellan Oscillator continued its divergence against the market advance today, so I will remain in the camp that wave (C) is imminent until I see a 4th and 5th wave in the current rally followed by a 3 wave pullback.

Mid-term election years are typically volatile and I suspect we will see that effect upon us soon. Nevertheless my bias overall has been and remains to the long side with various long and intermediate term long positions in various stocks and oil with attempts at shorting which have year to date been a waste of time except for a couple of notable exceptions. I may take a stab at a couple of short term short positions if wave (C) gets going, but after that I will be looking long only until wave [C] matures.

Divergences

While most momentum oscillators are not showing much of a divergence with price with the recent new rally highs in the Qs and the Russell 2000, the traditional McClellan Oscillator is beginning to show a negative divergence. Note how the positive divergences at the bottom of the chart above led to significant rallies. The current negative diverence at the top of the chart should lead to a substantial pullback or even a retest of the February low.

Other factors are consistent with a short term top: % stocks above 40dma at 83%, absolute breadth index in topping range, equity only put/call ratio at low levels and overbought momentum oscillators. On the other hand, advance-decline lines have made new highs pointing to a continuation of the rally once this correction is over.

Today the markets managed to eke out a new wave (B) high by subdividing into an ending diagonal triangle for wave [c] of Y of (B). However, the pattern showed selling this afternoon. I expect the selling will accelerate tomorrow. Gold has already rolled over into wave Y of a double zizzag correction that looks to bottom in early May. Oil had an overthrow of a ending diagonal triangle today and will probably be correcting over the next 2 to 3 weeks with the stock market.

A selloff is imminent if not already underway, but caution is advised on the short side since recent new highs put a damper on downside potential. Some short term short positions may be worthwhile, but overall this selloff should be viewed as a setup for a great long opportunity.

Did Anniversary Date Mark A Turning Point?

I believe that today's high marked the top of wave (B) up. While some may take comfort in the fact that the Qs closed at a new rally high, the volume today was less 5% greater than it was at the high in January and was below average at that. Usually, valid breakouts will show a volume expansion greater than 10% above the previous high. I was expecting more of a shakeout for wave [b] of Y, but that did not happen. Instead wave [c] of Y wedged higher to complete wave (B).

Now, the only question is whether we will see a 5 wave impulse move down to retest the February low, or whether we will see a 3 wave move down to set up a triangle, or some other combination to extend the correction. There is no way to know at this point. However, if we are to see a 5 wave impulse down, most of it should happen next week with the Qs moving below 44 by the end of next week. If the Qs remain above 45 for most of next week, then the triangle alternate is the likely interpretation.

The new highs in the Russell 2000 and the Nasdaq 100 negates the imminent return of primary wave 3 down, in my opinion, which means that open short positions should be closed sometime between now and the end of March in preparation for wave [C] of x up. I have a couple of remaining short positions which I will looking to take profits on during this time frame. I have been stopped out of my other short positions.

Longs have been somewhat rewarded in the past two weeks, but it is probably time to take profits on short-term longs. I exited WYNN today as it approached its upper trend line. I will give a couple of other short-term longs a few more days to see if they will reach targets.

If markets advance strongly from these levels, then we will have to reconsider the interpretation.

A Quiet Day

The market action today was rather quiet overall. We did not see immediate selling as might have been expected if wave (B) up were complete. Conclusion: wave (B) is still in progress. We should see a pullback, and then another run at the highs before wave (C) begins.

The charts at seasonalcharts.com show the Dow selling off into the end of March after a mid-March peak in mid-term election years. This would seem to fit with the current wave count.

Inversion?

I have noticed over the years that markets tend to turn at points that are in sympathy with the markets turning points one year earlier. This is known as the solar return cycle. However, it doesn't say anything about market direction. Oftentimes, we will see that the turning points are highly correlated and then suddenly they will become inversely correlated. Looking back at the first quarter of 2009, we see there was a high around the first of January followed by low in mid-January, a high in early February and a low in early March. This year, we have two highs in January followed by a low in early February. Will we see high in early March?

Note that the momentum oscillators are holding below previous peaks as the Qs have come within ticks of a new yearly high.

Snow Job

Friday's employment report was benign against the backdrop of overblown expectations of a large loss of jobs due to the heavy snows in February, clearly a propaganda campaign designed to take the sting out of continuing job losses. The question that confronts traders, however, is whether the advance over the last 4 weeks represents a resumption of the uptrend or just a test of the top of a trading range. As the chart above shows, the advance counts very well as a double zigzag with 7 waves. If Friday's high is the top of (B), then selling should follow quickly from the open on Monday, but I suspect that Friday's high may be wave (b) of [b], and after a sharp shakeout Monday, we may see another attempt at the high to set up a negative divergence before wave (C) begins. Notice how volume on the hourly charts never really picked up during the entire rally. This is not the typical behavior for a bull market rally.

If we see a solid close above the January high on increasing volume, then the wave (B) view will have to take a backseat. Friday's action did confirm the IBD follow-through call, which creates a number of conflicts for traders. I suspect these conflicts will be resolved by the end of this week.

The McClellan Oscillator has now reached an extreme level that has either marked the kickoff to a long advance or the end of a rally. What I would like to see is a sharp selloff and a retest of the high with a negative divergence in the McClellan Oscillator.

Sentiment has also reached an extreme in several surveys, so whether we see a full test of the February low, or whether we just see a pullback, there will most likely be some selling in the days ahead to setup the best buying opportunity of the year.

Oil, gold and silver all look poised for at least a pullback. Silver may see new lows.

Again, I have to say that the P3 hypothesis appears to be on the ropes. Traders should consider being long only, or long and short with a long bias. Consider selling short term longs that have hit targets. It may be difficult to short wave (C) down depending on whether it is wave (C) of a flat or whether it is just wave (C) of a triangle, so again targets on shorts are preferred.

Pullback Before The Final Wave (B) Top

Today's action confirmed that wave [b] of Y of (B) up is in progress as the current action is clearly corrective and appears to be forming a small double zigzag as expected. It will be interesting to see how the market reacts tomorrow after the employment report, but it should be down. As long as the Qs remain above 44.60 to 45.00, we should expect wave [c] up to follow. If the Qs fall beneath 43.83, then wave (C) down is underway.

KKD failed to confirm its 5th wave up today but the 3/2 high might have been a truncated 5th wave, or a 4th wave may be in progress. In any case I would like to see it remain above 3.10.

Oil is nearing a correction as it is completing a 5th wave diagonal triangle. Oil's correction should move in concert with the stock market or lead it slightly based on recent action.

Gold is about to complete a double zigzag B wave up. Afterwards, I expect another choppy downtrend lasting 3 months or so. This is probably just part of an even larger correction, so intermediate term trading will probably not do well.

Silver on the other hand looks like it is ready to fall soon and perhaps dramatically.

Turns in dollar/yen have coincided with turns in the stock market over the last several months, although the direction has not always been the same. It looks like it is approaching a near term top that may coincide with the end of wave (B) in stocks.

Recently, there has been much talk about the SP500 failing to break above a downtrend line from the 2007 high. I don't know how others are drawing their trendlines, but by my calculations the SP500 broke above this trendline in November or December of 2009 depending on whether you use an arithmetic or logarithmic chart. At the moment it appears to be retesting this trendline before moving higher.

Last summer I posted an article showing how the Qs had already broken above the downtrend line and nobody was talking about it. In fact, I have yet to see an article or post by another commentator that shows that breakout. These kinds of technical errors can seriously mislead traders. We can't achieve perfection, but we shouldn't be sloppy either.

XHB Headed Higher

"No Double Dip - But Housing Horrendous" reads the headline. Sentiment toward housing is very pessimistic, but the XHB is almost at a 6 month high today. Any uptick at all in the housing numbers should ignite the XHB out of the symmetrical triangle pattern that counts complete. Today's high exceeded the wave B high, so the pattern is either complete or today's high is the wave B high. I think the former is correct, however, the 2/25 low of 15.26 must hold. So far, XHB, XRT and XLY look like the strongest S&P sectors. This is hard to fathom given the dismal state of the housing numbers and consumer confidence, but the market appears to betting on an upturn soon.

Closer By The Day

Yesterday definitely marked the top of wave [a] of Y of (B), and now we are in wave [b] of Y of (B) which should pull the Qs down to 45.05 to 44.60. Prices topped yesterday right in the cited resistance zone of 45.82 to 45.92 at 45.85 respecting the January 5 day opening range resistance.

By the guideline of alternation we would expect wave [b] of Y to be a sharp decline, probably a zigzag, to alternate with the wave [b] of W triangle. Afterwards we will either retest yesterday's high or shoot up to the January high before rolling over.

I would hold off on new short positions until next week. I would also hold short term long positions until we see wave [c] up. If you plan to trade on the short side during wave (C) down, be prepared to exit at predetermined targets. I think the whole affair will be a sharp but quick decline to set us up for wave [C] of x up.

Time is running out for the P3ers. If the mother of all 3rd waves doesn't get going soon, the shorts will be scrambling. The large speculators and commercials are building long positions, and I think that's the way we should be thinking too.

CISG broke out of a nice double bottom base today with an advance of 9.94%. I bought it Monday as it broke out above a low handle but above the recent downtrend line. Again, this is the type of action that doesn't fit with the P3 hypothesis.

Cabot has now called the market in an uptrend based on the Cabot Tides. I think we may see a whipsaw here with the IBD and Cabot's calls, but that's why it's prudent to wait for additional confirmation. So far, there has not been a confirmation of either call.

One More Swing To Go

As long as the Qs remain in the wave (B) channel it would be hard to argue that the current rally off of the 2/5 low is impulsive, particularly given the clear running triangle. However, so far we have completed only 5 waves and we should have either 3 or 7 for a corrective move. This leaves [b] and [c] of Y to go. If the Qs make it all the way back to the January high, we would need to consider the entire correction to be a flat or expanded flat, which means that the decline from the January high would be a 3 wave movement. The labelling for the decline is open to that interpretation, so we will be left with either a triangle or flat. Only time will tell us which it is going to be.

The main point though is that the current up move is corrective, which means there is more downside to come. If the January high is tested or exceeded, we can be sure that once wave (C) is over, the bear market rally will continue to new rally highs.

The type of action I was talking about last night occured today with a number biotechs popping higher. This is not bear market action. SQNM, QCOR and OSIP have made big moves. I own the first two. I have mentioned QCOR on this blog many times in the past. I don't like it as much now as I did two years ago, but I do think it has a chance to hit $20. The pattern in SQNM lends itself to new all time highs above $30. These are vey speculative stocks and it may take many months for these targets to be seen. I found QCOR using a relative strength screen during the middle of the 2008 decline. SQNM appeared to have a climax selloff last year, which now seems to have been the case.

My favorite speculative trade, KKD, is close to completing 5 waves up from its 1/26 low. The action marks it as a bear market stock. It has been going up as the market went down. So far, KKD is either working on a very large double zigzag targeting the $7.50 to $10.00 zone, or a (1), (2), 1, 2, [i], [ii] buildup for a power 3rd wave move that would propel it to its all time high. We should know by mid-summer which way it is going to go.

I recently took a small position in YRCW. This is basically a call option on the survival of the company. I like the CEO's willingness to fight the powers that are trying to take down his company, and I think he might be able to turn things around.

Be prepared to exit short term long positions early next week in anticipation of the wave (C) decline. I don't think we will see much more action this week ahead of the employment report.

IBD Calls Follow-Through "With Caution"

IBD has called yesterday's action a follow-through day, but with "Signs Of Caution". I don't think I have ever seen such a qualified call from IBD in The Big Picture headline. So, how do you handle such a call - wait to see that the market follows-through on its follow-through, i.e. wait to see that markets are up at least 1% in early trading before taking action on the follow-through. That is what I will be doing.

Interestingly, a number of our other systems switched to long yesterday as well: the weekly-daily, modified donchian, moving average and the 3 week rule. As I said in last night's post, perhaps the best way to trade this market is long only - with targets at the moment. I will not be looking to add any more shorts until wave (B) completes.

How Long Will It Last?

Sometimes it is difficult to believe yourself even when everything seems to be saying you're right. I have been arguing since the beginning of this rally in March of 2009 that it would last longer and go further than most would think, that it would be a very large x wave that would probably look like a double zigzag and that it would last into June to August of 2010. The pattern of the current correction can be interpreted in multiple ways, but with only a few exceptions, it is rare that significant declines begin from deep second wave retracements from my observations since 2000. The current retracement will most likely be deep and possibly even exceed the January high. This, in my opinion, greatly reduces the likelihood that the current rally is a second wave, which means it is a (B) wave as I have shown above that is now subdividing into a double zigzag. We are close to completing wave [a] of Y of (B), so wave [b] should begin tomorrow or Wednesday at the latest. Wave [c] of Y will follow to complete the rally.

The reason I said that it is hard to believe yourself is a little fact that is not widely understood: it is generally not profitable to short intermediate term corrections in an ongoing bull market or bear market rally. The reason is that even though some stocks are correcting, sometimes significantly, overall the bias is to the upside and large speculators and institutions will be using the correction to buy at lower prices. You are better off to stay long only, but switch to taking profits at targets rather than letting positions run and forget shorting. So far, since this correction began, I am in the Small Gains - Small Losses = Zero category, which is frustrating though definitely alot better than Small Gains - Small Losses - Large Losses = Large Losses category. Anyway, since we are this far into it I won't switch strategies now. Better to keep with the same plan until the correction is over, and it will be over before too much longer.

If wave Y is the same length in time as wave W, then it should last well into next week. There is no way to know if we will see a complete retest of the February low, but I expect we will.

Now we have a new problem to consider. Since wave [A] of this bear market rally lasted into January and wave [B] is taking a longer than expected time, we should expect that wave [C] will last into the first of next year. This does not fit well with other cycle projections, so we will have to be careful to watch for a shorter wave [C]. In particular, we will have to trust that once wave [C] completes 5 waves up, the rally is over.

Some sectors are already moving or ready to move into new high ground for the rally: retail (XRT), home builders (XHB), e.g. The semis are holding up well also. This action doesn't fit with primary wave 3 down, and I am not seeing that view at the moment.

Well, the end of [B] will be coming soon. Let's make the most of it.

Toward A Retest Of The January Highs - II

The upside breakout this morning brings the possibility of a retest of the January highs. Unless we see a substantial increase in volume and breadth we should consider this to be wave (B) up, to be followed by wave (C) down. Whether or not wave (C) will be a full retest of the February low remains to be seen. If breadth improves, this correction may turn into a triangle with wave (C) only retracing part of (B) and waves (D) and (E) following into early April. What I would like to see at this point from the intermediate term bullish perspective is a strong enough move toward the highs to put the bears on their heels, so that we can position strongly to the long side off of wave (C). We should know by the end of this week, if that will be the case.

The other possibility that will come up is if the current movement turns into 5 waves up. Then we could hopefully look to position strongly on the long side on wave 2 down.

Thankfully, we are getting close to a resolution of this correction that will help us make the most of the rest of this year.


Added Qualification On Retest

February 5 day opening range resistance is at 45.82 and January 5 day opening range resistance is at 45.92. I expect that this area will be difficult to get through, but if it does the January highs will be next. Volume is falling off since my earlier post, so this will probably not qualify as a follow-through day.