Sunday, March 7, 2010

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.

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