Friday, May 21, 2010

An Alternate View

In my post on May 1 titled "Will The Real Count Please Stand Up" I presented two wave counts for the Qs and the Wilshire 5000. While reviewing other indexes last night and this morning, it has become clear that some have already violated their May 6 lows and the NYSE is within spitting distance of its February 5 low. This raises the odds that the alternate count for the Qs as an impulse is the correct count, or at least some other count that considers the rally from the March 6/9, 2009 lows complete. Note the broken channel line above.

However, all is not lost. A substantial rally that likely will take most of the summer is still the most probable path from here regardless of which count is correct. I took a look back to 1987 at oversold conditions of the McClellan Oscillator and I could not find a single instance when a severe oversold condition in the oscillator did not lead to a significant rally.

Let's take a dim view of things for the moment. Major support for the Qs is in the 40 to 42 zone if current levels do not hold. In the summer of 2000, all of the major indexes rallied at least 61.8% off of the initial low after the top. A 61.8% rally here would take the Qs back to 46 to 48, around the May 13 high. So, we can conclude that if we approach, but do not exceed that level by late July/early August that the intermediate term bullish case is dead, and it will be time to sell stocks.

At the moment let me be clear. I only have one short term long position. I have either sold or been stopped out of all other short term long positions. I still maintain a number of intermediate and long term stock positions. I am short the IWM, SLV and VRTX. I am out of gold positions. So, the question for me is when to dump the short term and long term positions.

I am still of the opinion that a case can be made for an unexpected rally this summer that carries markets to new highs, but that argument is on the ropes, so I am preparing for the alternate case that we have entered a more substantial correction of the rally from the March 2009 low. I still do not agree that this is primary wave 3 down. I believe that whatever form the wave count takes, we are at worst in wave b or x of the rally. Wave c or y up should follow to take the indexes near the all time highs by sometime next year.

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