Friday, April 30, 2010

Market Entering A Correction/Consolidation Period

We have distribution days piling up with another one today. We have a negative divergence MACD sell signal. And we have the 4/27 swing low coming under the 4/19 swing low. All we need now is a move below 1181.81 to confirm that the short term trend is down. However, the 50dema is just below at 1170 followed by the January high at 1150.

There are a number of reasons to believe that markets will attempt another high in May, but the 20 week cycle is due to bottom in late June. This suggests that we may see a flat correction develop over the next few weeks. I postulated that possibility after the January high, and it was summarily dismissed by the market, but sentiment has reached an extreme that will take some time to work off.

The RSI 14 has room to move to the downside so we should assume the correction will take more time to complete. Only after we see the form of the current decline can we make a more educated assessment of the nature of this correction. Of course, we could see just a small 3 wave pullback and then a burst to new highs, but given the extreme nature and duration of the rally since February 5 that would be unlikely.

An impending low next week would offer opportunities for short term longs, while a double top or lower top in May would provide the best opportunity for short term shorts. An expected low in June should give us the last chance for intermediate term longs this year.

The bears are now beginning to growl again, but I believe their noisemaking is premature. As I showed with the charts of the XHB and XLF on Wednesday, the markets have at least one more upswing to complete the rally. And as I showed in last Friday's big picture view of the SP500, this cyclical rally is probably far from over.

Unfortunately, technicians can get locked into singular viewpoints about future market direction. Corrections by nature can take many valid paths and the best that we can do is estimate the probable direction. It is rare that conditions are such that all but one outcome is determined. Consider the XHB and XLF. After completing a double zigzag upward correction later this summer, they could easily correct in another 3 wave movement only to move higher in another double zigzag to form a more complex combination, or in an impulse to form a very large upward flat correction. This would allow the broader markets to move back to the all time highs, while the housing and financial sectors remain down near the bear market lows. The entire process might take years to unfold. So don't get caught up in this notion that we have to fall off of a cliff with the Dow going to 4000 next year. It might happen, but we are along way from having enough information to come to that conclusion yet.

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