Wednesday, March 17, 2010

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.

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