Final Thoughts For The Week

Whether or not the move up from 11:00am to 1:40pm today was an impulse or not is open to debate. It had some impulsive qualities, but as frequently happens with ending diagonals the market may extend for another test of today's low before moving decisively higher. The midday move higher occured after the completion of a smaller degree ending diagonal. The selling into the close was clearly a correction which is a positive for Monday.

One possibility that is coming to the forefront is that wave [b] of B up is developing as a triangle in the Qs. If this is the case, then we completed wave (c) of the triangle today with waves (d) and (e) to come next week. This would almost certainly put the completion of wave (e) on Thursday or Friday next week with little net progress for the week just in time for the 2nd quarter GDP report and the June employment numbers. What a nice way to keep us all in suspense for another week.

Any way you look at it a triangle is a bullish outcome for the next several weeks at least. If the market breaks out to the upside after the economic reports, I calculate a target of around 50 for the Qs. If the market breaks down after the economic reports, then we could still have a triangle at a smaller degree which would be wave (b) of [b] of B. This would lead to a retest of the February and May lows with wave C up to the May 13 high to follow. I tend to doubt this outcome based on the action in leading stocks and commodities this week. Oil and copper both turned up nicely, and lagging sectors look ready to turn up as well including housing stocks, XHB, and the financial sector, XLF, and also CME, e.g.

Overall the action this summer has been as dull as it has been volatile. For all the action the market just isn't going anywhere. I believe the adage is "Never short a dull market". I don't know if it fits this market, but it feels like it. I've been sitting on my hands now for over two weeks watching my account oscillate with the market. I've only taken one new position and that is BIDU on the triangle breakout, and yet none of the positions that I have taken since the Flash Crash have have violated their stops, and the action is generally bullish, so all there is to do is wait and see.

I will be occupied with family obligations most of next week, and may not be able to post. However, if I see a significant change from the outlook that I have given this week, I will do my best to let you know.

Almost There

If my reading of the intraday count is correct, the Qs are beginning wave (v) of [c] of y down of (ii) of [c] up in an ending diagonal at the time of this post. If this view is correct a powerful rally should begin sometime this afternoon perhaps within the hour that takes the Qs near or above yesterday's high of 45.99. This would be the first real sign that the pullback is over and wave (iii) of [c] of B up is underway.

Bearish Sentiment Very High

One of the best measures of sentiment is the Trin also known as the Arms Index. Currently the 21dsma of the NYSE Trin is higher than at the 2002/2003 lows. I have seen some people interpretating the high Trin readings as bearish for the market just as they were doing at the 2002/2003 lows. I recall asking EWI a question about it at that time and they basically blew it off saying that the ew pattern was the most important consideration. They were wrong then and I believe they are wrong now. Until we see a true break of recent support, it is my opinion that the current high levels of bearish sentiment will provide a floor under the market. Even this morning there was an analyst on CNBCs website calling for a crash. How many called the crash leading up to and after 9/11? How many called the crash in 2002? And how many called the crash in 2008? Where were these guys then? Now they are everywhere.

According to a recent news article, humans generally only remember events from the past that confirm their present beliefs. Perhaps there were alot of people calling for crashes back then. I just don't remember it. They certainly are calling for one now.

Pattern Completed - But Will It Hold?

The thing that is most disheartening about today's action is that markets closed near the lows which typically doesn't bode well for Friday, but it isn't negative 100% of the time. Earlier this week I stated that the variables in the stock market equation are price, pattern and time. When the conditions for all three have been satisfied the market has reached a turning point. Today the conditions for all three have been satisfied with respect to the pullback that began on Monday. We have seven waves down from the June 21 low - pattern. The Qs have retraced almost exactly 61.8% of the rally from June 8 to June 21 - price. And we are at a short term cycle low due tomorrow - time. So, either the market rallies almost from the open tomorrow or we have a problem. We could still allow for wave y to subdivide lower, but that would take it below the 61.8% retracement level.

If conditions change for the worse, we will have to change with it. For the moment though the Qs remain above the rising 200dema, the MACD remains above its signal line and the Qs closed not too far below the critical 45.49 to 45.60 level mentioned this morning. All in all I think we could see a reversal tomorrow. I would like to see the market move up from the open tomorrow and carry the positive momentum into Monday to feel comfortable that the above analysis is correct.

If it is correct, we should see the Qs above 48.00 by around July 6. If it's not, at least we will finally know.

The Only Bullish View Left

I still think that wave B up is in progress. The fact that it is messy just comfirms that it is a B wave in my mind. The decline so far appears as 5 waves, but they are overlapping which doesn't look like an impulse. 2nd waves can be deep so that fits the profile of a 2nd wave. Any move below the June 8 low will destroy the count and the trend, but still not rule out the retesting of the May 13 high in an expanded flat, so going short on a break of the June 8 low may not be the best approach either. I have a short term cycle low due for tomorrow. I suspect that this decline wil probably end then. If not, we will have to re-evaluate.

Key Level For The Qs

The Qs are trading around a pivot that has developed since January. This is the level that market participants are saying is important for whatever reason. The January high was 46.64. The close of the flash crash day, May 6, was 46.57. The June 3 swing high was 46.77. This is telling us that the January high is THE important level for the Qs. Everything that has occured since January 19 in the Qs has been an oscillation about that critical level.

As long as the oscillations about the January high pivot remain balanced, the market will remain in a trading range. When we see a move appreciably exceed the previous deviation from the pivot, we will know that the trend is probably asserting itself in one direction or the other.

At the moment the swings are becoming tighter as the June 21 high was only 1.04 above the pivot. We would expect an approximately equal swing below to 45.60. Yesterday's low was 45.69, so if things remain balanced to up, we should be near a low for this swing. The average of the June 8 low and the June 21 high is 45.49. We do not want to see a sustained move below 45.49 to 45.60 if the summer rally is to continue in a meaningful way to the upside.

Not So Good!

There's not much good to say about this afternoon's market action. While many individual stocks appear to be working on the right side of new bases (JBL looks like it could develop a very nice base later on), the broader markets look ready to fall further after giving up the day's earlier gains. I didn't expect this rally to be easy. It's a B wave and they are rarely easy, but I remain of the opinion that it will continue higher into July.

Pullback Over?

I think there's a good chance this morning's selloff completed the pullback from the 6/21 high, or least the first leg of it. The volume on the Qs is running well below that of the last two days. Perhaps traders are still waiting to see what the Fed has to say at 2:15pm. The fact the homebuilders index didn't crash and is now positive on the day after the abysmal new home sales data this morning is also encouraging.

I don't expect that markets will rocket higher this week. We still have some work to do to consolidate the prior two week's gains, but another leg up should begin by the end of June. The SP500 will have to clear 1106 and 1131 to gain traction and that could take a few days.

3 Wave Pullback

So far the decline from yesterday's high in the SP500 appears to be a clear 3 wave correction which is confirmed by the symmetrical b wave triangle and the fact that the decline has remained within parallel channel lines. It would be surprising if this is all of the correction and we should expect it to become more complex, perhaps up tomorrow into Thursday and then down into Friday's close for example. Once the correction is over the market should move higher into July.

Reversal To Fill The Gap

Today's reversal off of the early morning high was not all that unexpected. The new high for the rally from the 6/8 low may be complete or may need one more high. I recently made a comment about an impulse from the 5/25 low which was a mistake. I meant the 6/8 low. There are a couple of ways to count the rally so far. My preference is to label the June 8 low for the Qs as wave [b] which makes it consistent with the Dow, SP500 and Russell 2000. This makes the current rally wave (i) of [c] up. I show a target at the upper parallel channel line. It is possible that the 5/25 low is wave [b] which would make the current rally wave (iii) of [c]. Either way I think we have further to go. The pattern in the Russell 2000 looks even clearer than the Qs as it sports an impulse off of the 6/8 low.

Now I know that many will see a 3 wave rally off of the 5/25 low, and that is certainly a possibility, but in the final equation it is price, pattern AND time, not just price and pattern. I just don't think there has been enough time to fully complete the current rally whatever form it takes, and a number of stocks have completed impulse waves from their recent lows which suggests higher prices to come. This may be a volatile week, but another leg up at least seems to be the likely course.

Patience. No need to jump ship yet.

Extending Higher

As nice as it is to see the gap higher this morning there is a very good chance that it is a small degree 5th wave in the impulse from the 5/25 low, which means the gap most likely will be filled. If the gap is not filled right away, then the prospects are more bullish. In any case, we should see the SP500 at 1170 before too long to the dismay of the bears. If 1170 is exceeded for more than one close then a retest of the April high is probably in the works.

After this mornings gap up, it is probably not advisable to add new positions here until we see some consolidation or pullback.

Thoughts On The Week Ahead

It seems pretty likely that we completed an impulse off of the 5/25 low on Friday, but it is possible that the impulse continues to extend. It is more likely that we will sideways to down action this week to correct the impulse before we see higher prices at the end of the month and first of July. Of course the bears will be calling any selloff the beginning of a 3rd wave breakdown, but I just can't agree with that view. An impulse will always be followed by another impulse, Looking back over the last decade it is clear that after strong spring selloffs the usual course is a rally throughout the summer even if new highs are not seen. I don't know why we would expect anything different this time around, and with all of the buy signals last week there is no reason to jump ship this week, unless the bears turn out to be right, of course.

Long Term Pattern In Biogen

Whatever you think about the long term prospects for the stock market, not all sectors and stocks will be affected equally. I've been following Biogen (BIIB) for 3 years now, and I believe that it has just completed a significant long term pattern. The decade long pattern in BIIB is an almost perfect running triangle. It sports all of the main characteristics of a triangle - (5) alternating 3 wave movements, price contraction within symmetrical trendlines, wave (B) is the longest wave, and wave (E) has completed well before the trendlines have converged.

If this interpretation is correct, BIIB is about ready to launch on a 3 year run. The targets range from 93.98 to 123.61 to 171.60, but I suspect that 200 or higher would not be out of the question.

Alternate views are that BIIB is still in wave (D) up or that it is not in a triangle but an expanded flat correction that will lead very soon to a dramatic crash in the stock. I view the latter possibility as very unlikely given the fundamentals on the stock.

The FDA has just ruled that the benefits of its new drug for multiple sclerosis, Tysabri, outweigh the risk of a potential deadly side effect called PML, which has affected 55 people to date. A member of my family is on Tysabri, and I have seen the benefits of the drug first hand, which are dramatic compared to the previous drugs used to treat MS.

I am long this stock and will look to add to my position this year. For your own research compare the pattern in BIIB to that in AMGN. The biotech sector in general seems to be in a long term uptrend as the biotech index BTK appears to be entering a 3rd of a 3rd wave advance after breaking out above its 2008 highs. If so, biotech stocks may be heading higher over the next 1 to 3 years whether the broader stock market declines or not.

Cabot Trend System Flashes A Buy Signal

The Cabot trend following system, as described on their website at www.cabot.net, gave a buy signal today. The system is quite simple and reliable. First, for a buy signal the market must be in a long term uptrend as defined by the 20 and 39 week simple moving averages. Both the SP500 and the Merrill Lynch Technology 100 indexes must be above the lower of the two moving averages and that moving average must be rising. Secondly, the market must be in an intermediate uptrend as defined by the 25 and 50 day exponential moving averages (actually they don't say whether to use exponential or simple daily moving averages, but I prefer the exponential). Three out of five of the following indexes must be above the lower of the two averages and that index must be rising two consecutive days: Nasdaq Composite, Merrill Lynch Technology 100, NYSE Composite, SP Smallcap 600 and the SP500. Today, the Nasdaq Composite, MLO 100 and the SP500 meet that criteria and both the SP500 and the MLO 100 are above their rising 39 week smas. Based on this the market is now is new intermediate uptrend adding to the growing list of buy signals.

Triangle Forming In BIDU

BIDU may not pullback over the next couple of days to complete wave e of the triangle, but if it does the triangle targets 86.88 to 99.66 (100). AAPL is moving higher without completing its triangle and BIDU may too, but if a real triangle does form we will know that the next advance is the last for some time in BIDU. It will probably complete cycle wave 3. Thereafter we should see a correction to around 60 before cycle wave 5 begins.

Breakout And Follow-Through

We finally broke out above the June 5DOR making 3 week highs with an IBD follow-through day today. Volume was higher, particularly on the Nasdaq Composite, and the percentage gain was well above the requirements for a follow-through day. I am not saying it can't happen, but I don't recall two follow-through day failures this close together in a very long time, so it would be surprising to see significant selling pressure in the near term. Another positive factor today was the McClellan Oscillator surging above its March high, which confirms the initiation of an uptrend that should last awhile.

I mentioned last week that this would be a good time to add short-term long positions, and if you haven't done so already, the next five days will likely be the best time to initiate new short-term longs. However, we are probably in wave B up, so profits should be taken at conservative targets.

My calculations point to a top in the July 16 to July 27 time frame with a possible lower top around August 26. In my opinion, the prudent thing would probably be to start taking profits by July 9 to July 16. The idea is to be prepared for a sharp wave C down into the fall which will be deeper and longer than wave A down has been. Also, B waves can terminate unexpectedly, so it will pay to be conservative here. Only the best long term positions should be held during wave C down. New short-term and intermediate-term long positions can be taken this fall after wave C down is complete.

For those trading trend-following systems, we have a MACD buy signal, 3 Week buy signal and and IBD follow-through buy signal. I am using these to enter new index longs in stages. I am already long the XLK via the MACD buy signal. I will be looking to add the QQQQ on the 3 Week signal and the IJR using the IBD signal. This doesn't have to happen all on the same day. The market could be choppy and entering over the next 3 days in stages as the rally proves itself may be prudent. This allows for diversification across systems.

A Clear Impulse Wave

After several weeks of wild market swings, we finally have something that looks like an impulse wave. The Qs have clearly moved up in 5 waves from the June 8 low. The bears will be calling this the completion of a small degree 2nd wave that will precede an imminent 3rd wave decline. We will only know for sure if and when the June 8 low is taken out. My view is that the current impulse wave is wave (i) of [c] of B up. The most bullish interpretation, not shown, is that this morning's advance is the beginning of wave iii of (i) of [c]. The most likely target is the 5/13 close at 47.85 to fill the gap from 5/14. The next most likely target is the 5/3 close at 49.93 to fill the gap from 5/4.

At least we should know one way or the other by the end of this week or the first of next week at the lastest, but I am leaning to the upside for better or worse.

Not Such A Pretty Day

The bulls had a chance to break it out today and failed, but thankfully on generally light volume. The daily charts look horrible - I mean really horrible. If the short term daily chart was your only reference point, you would have to conclude that the market is getting ready to fall hard. But the daily chart is not our only reference point as I showed in my post this morning. The number of technical buy signals are beginning to pile up. The RSI 14 rose above 50, the MACD is on a buy, and today I got a PSAR buy signal for the Dow and SP500. It is rare for the PSAR to reverse immediately to a sell signal after 33 days on a sell signal. We also have the Euro rising from a positive divergence MACD buy signal that is not likely to fail near term which is supporting the market. This leads me to believe that my current view that we will chop higher into July is accurate.

However, it looks like we could see some selling tomorrow, but we should see a turnaround by mid-day Wednesday at the lastest if we are going to break out above the 5DOR for June. Once we see that breakout, the market should advance fairly quickly to the 1160 to 1170 level in the SP500.

If we fail to break out this week and sustain a close above 1105, I will be looking to get defensive against another selloff into Friday June 25. I don't know exactly how I will do that at the moment, but put options are a possibility. The last 3 days of June and the 2nd quarter will likely be positive so next week is the biggest concern.

It is going to be one day at a time until this market tips its hand one way or the other.

Another Trendline No One's Talking About

Last year I pointed out two trendline breakouts that got very little if any attention in the technical analysis community for the Qs. Both of those breakouts have proven to be very important with respect to the the long and intermediate term trends. In the top chart above, I am showing another trendline that has gotten very little press as well, and that is the Dow Industricals breakout from a downsloping trendline in December 2009. As bad as the recent correction feels to many, all that has happened is that we have retested the trendline for the second time. The first test came just a little too quickly for such a long trendline and the market got ahead of itself. I see little reason for believing that we could crash through that trendline after it has been tested 5 times. On the other hand we could test it or the recent lows again.

This view supports my larger hypothesis that we will see another leg up in this cyclical bull market. The next move up may not begin until later this year, but the probability that it will occur is increasing. After we slog through most of this year in difficult fashion, we should see a return to strongly trending markets that could provide exceptional upside returns before a return of the secular bear market.

SP500 Support & Resistance

On the chart above I am showing support and resistance levels created by the high and low of the five day opening range (5DOR) of the last three months. It is interesting to note that the panic selloff occured on a break of April's 5DOR low which was also the April low. In hindsight I admit I really missed that one. Even if the panic selloff was unexpected the break of the April low was a sign to lighten up and look short or buy protection.

Amazingly, the reaction off of the panic low stopped right at that same critical level. Then, even though May's 5DOR low, the panic low, was undercut the market did not close below it demonstrating significant support at the level.

It is beginning to look as though the dip back below the panic low is a bear trap. If the market makes it back above the June 5DOR high, also the June high to date, there is no resistance all the way back up to the April low of 1170.69. We could see a buying panic in that zone, but even if we don't there is strong reason to believe that 1170 will be revisited.

Thereafter, the May 5DOR high, also the May high, will be formidable resistance and the 1170 to 1205 zone will likely mark the high of any retracement whether it occurs in June, July or August. In my opinion, that will be an excellent area to take an initial short position should we get there.

Of course, all of that hinges on next week's action and whether or not the June 5DOR can be overcome, but I suspect that it will.

Sometimes The Simplest Approach Is The Best

I sent the above chart to a friend of mine whose been asking me what my views are on the market for the coming months. The action over the past week seems to be setting up a retracement to the underside of the trendline for the Qs. This would be the B wave we've been talking about. It would be fortunate for the bulls if it makes it all the way, but not at all out of the question either. The rally today, 3rd best of the year in percentage terms, is typical B wave action.

The meat of the action, if the above chart is correct, should occur over the next 2 to 3 weeks. That would be the ideal time for some short term long positions with smaller size. Going into July would be the ideal time to sell intermediate long positions that were not sold in April and May in preparation for the fall selloff, and to add protection for long term positions. This would also be the time to prepare to get short against a double top with the expectation of a retest of the May low.

Right now it may not feel like this scenario could be possible, but that is almost certainly why it is likely to happen, and why we are not entering primary wave 3 down. According to Investors Intelligence sentiment is now as bearish as it was at the July 2009 low. We should expect a rally to work off this bearish sentiment.

New Lows Would Be Bullish

One area that many traders and technicians fail is in recognizing bottoming formations. The classic double bottom or zig zag are easy to see, but if you've been trading for 10 years or more you know that oftentimes bottoms form without these wonderfully elegant patterns. Oftentimes, in fact, bottoms just look ugly. On several occasions over the last 10 years I recall seeing patterns that looked something like a bear flag or upward correction and bears were calling for another leg down. Usually there is an expectation for a 3rd of a 3rd or C wave breakdown or another low to complete the impulse, etc. And then very soon afterward the market would rocket higher out of nowhere to the amazement of bulls and bears alike. The elliott wave technicians would have to rework their wave counts and would start looking for the next top.

I don't know the reason why so many bottoms over the last ten years have been of the ugly variety, but I would venture to say that the ratio is close to 50%. I think we now have the potential for an ugly bottom scenario right now. The wave counts are messy. The bears are looking for a 3rd of a 3rd breakdown or a solid break of the February 5 low, but it is just not happening. Bulls just can't seem to get any traction: IBD has called the Market In Correction again as of today's issue and after every day with a nice gain the market sells off for two days. This tension between bulls and bears favors the bulls most of the time. When the market is heading into a intermediate downtrend the bears usually have an easy time of it. The wave counts work and support levels break on the second test, etc because the buyers are just not there. However, the Janaury and February lows are being vigorously defended right now and this is not consistent with a full blown intermediate downtrend developing. For the bulls, one more test of the recent low would be enough to wash out the sellers, and that would be the most bullish, but may not occur.

I am now seeing calls for a leading diagonal pattern in the SP500. Maybe it is or maybe it isn't. I don't know. But what I do know is that the lack of a breakaway downside gap doesn't fit with a 3rd of a 3rd wave count. I see oil regaining its footing. I see positive divergences developing in the Euro. I see gold and silver not really breaking out to new highs. I see a lot of nice bases developing in leading stocks. Take a look at HMIN for example.

So, I am beginning to believe that we may be seeing an ugly bottom formation that will eventually be called the end of a run of the mill but somewhat deep ABC correction. If this is the case, then new highs in the indexes may be just around the corner. It is too early to tell, but don't count it out either, and if you are loaded for bear, you are now forewarned.

Probing For A Bottom

The Euro is trying to put in a bottom and the VIX is rolling over from a lower high. Both of these together point to some potentially imminent reversals. I didn't have time to show a chart tonight, but there are positive momentum divergences developing in the Euro/Dollar that could lead to an explosive up move in US stocks. This is not the consensus view and it may only be a B wave. Shorts beware! You could get a surprise. While the drumbeat for lower markets continues ad nauseum online and on TV, the case for a renewal of the uptrend is building. However, it may take another week before it manifests outright. I am seeing nice bases in a few leading stocks and lack of downside follow-through at a critical juncture in the wave count that typically means the bears have jumped the gun. Reversals in gold, silver and other commodities should follow as well.

A Look At The XLK

Well today certainly was discouraging for the bulls, but does it mean that all is lost for the bullish case? I took a 1/2 position in the XLK on 6/2 with an imminent MACD buy signal. With today's selloff the MACD is close to a sell signal. However, notice that there is a positive divergence developing in the RSI and volume was lighter than on Friday. The rule for the MACD is that a sell signal that occurs before reaching the zero line is not valid until it is confirmed by falling below the previous low in the MACD itself, not when price falls below its previous low. So, the XLK could very well make a new low, and as long as the MACD stays above its stop, the signal is still valid.

I have marked the January low above as critical support. The XLK is holding above that level so far showing relative strength against the SP500, which is below its January low. It is quite possible that it will dip below that level before we see a bottom.

For the SP500 there are 3 support levels: 1022.85, 1008.55 and 992.73. At this point it appears likely that we will see at least 1023 and probably 993 to 1009 before wave A down ends. For those that are pushing the primary wave 3 interpretation, I still do not see it. We are not seeing a breakaway gap down that would be indicative of that count. What we are seeing is some sort of declining wedge formation that is actually bullish. If that is the case, we could see a massive rally that retraces all the way back to the 5/13 high in as little as 2 weeks. Perhaps that will be wave B up. I don't know, but it doesn't seem prudent to be shorting or selling at these levels at the moment.

Base Building

Overnight the Euro tested the 1.18 handle and looks to be retesting that level which was the target zone I cited on Saturday. Stock futures reversed higher after the Euro bounced off of this level and this bodes well for a continuation of the rally. The lack of a 3rd of 3rd continuation gap down also bodes well.

My view is that last week's action was a b or 2nd wave flat correction. Now that it is complete we should see a move higher over the coming days, but markets may spend a few days building a longer base from which to move higher first. In any case, I will not be adding to index longs until we see a minimum 1% move higher on higher volume.

I have added two new short term long orders this morning with stop-limit entries. If the market moves higher they should be triggered. I'll let you know how they work out.

Euro Points To A Low

Late in 2009 I was trying to relate a potential selloff to the action in the Yen. As it turned out I was off on my correlation since the Euro has proved to be the controlling currency. However, now that the relationship is obvious, we can see that an important low in the Euro is near. Friday's decline came as a breakdown out of a bearish descending triangle. Triangles always precede the final motive wave of a movement. This triangle targets 117.84 for a low which could easily be seen on Monday. This analysis supports the view that the 5/25 low is an important low. The overall pattern in the Euro suggests that we may see one more 4th and 5th wave down in a few weeks. This may complete a large ABC correction in the Euro. If so, it may be pointing to an early end to the stock market correction in 2010 in contrast to predictions by many for the resurgence of a bear market.

Is It As Bad As It Feels?

So far the major indexes are holding above their respective 5/25 lows on mixed volume. I think in hindsight today's action may be viewed as the last shakeout of the base building process that is needed before the market can move higher. If this was really the beginning wave a 3rd of a 3rd wave down as some are proposing, I think the decline would have been far more severe today. It should have been far more severe today given the big miss on the jobs number. On the other hand if we wake up Monday morning with a huge gap down, I will be going short. I just don't think that is what we will see.

The fact is that none of the markers that we would normally see with a primary top in the market were not present in April: large percentage of stocks already off of their 52 weeks highs, divergences in breadth, expanding new lows, etc, etc. The top will come, but I still think it is not now.

Have a good weekend.

Should Bulls Be Worried?

Obviously the employment data was disappointing this morning, but all is not lost. As long as the SP500 can find support at the 1065 to 1070 area, and the Dow at 10000+/-, the rally that began on 5/25 can continue. Clearly if we take out the 5/25 lows the near term bullish case will be in jeapordy.

Another point that this mornings reaction to the data makes clear is that one should not go all in on new signals. Entering in steps is the way to go.

Waiting On Employment Data

Markets showed resilience today by finishing higher after a mid-day selloff. I exited two short positions and only have one left. I took a 1/2 position in the XLK and will be looking to add some IJR and QQQQ over the coming days depending on how things play out. While I would normally consider these to be intermediate term positions, I am prepared to sell at anytime should the current rally show signs of failing. Markets need to hold firm tomorrow or risk falling back into the abyss. I am limiting new individual stock positions to short term longs. Shorting may be an option if the current rally leg begins to fail. It is interesting to note that the Qs closed above the January highs today.

Also FYI, I use different systems to trade the XLK, QQQQ, and IJR. For the XLK, I use the MACD, for the QQQQ I use the 3 Week, and for the IJR I use IBDs market calls. Diversifying across systems helps to mitigate the risk as signals often come at varying times which reduces exposure until all systems are in agreement. In addition, during more volatile market periods I enter new positions in steps in case a signal turns out to be false.

IBD Calls Follow-Through Day

Apparently I misread the volume on the Nasdaq Composite. It was slightly higher than Tuesday's and thus IBD is calling yesterday's action a follow-through day. My only concern is the weak volume overall and the small increase in volume on the Nasdaq Composite is not a ringing endorsement. Yet, until we see more distribution, you may want to build new long positions in stages.

SP500 Headed Higher

Today's rally was nice but lower volume ruled out a confirmed follow-through day. I believe the SP500 is headed higher toward 1133 to 1150 in wave (c) of [a] of B of an upward correction that should last well into July. After reaching the target zone, we will likely see a pullback or consolidation for much of June which should bring the market back down to the 200ema before moving higher in wave C. My calculations put the target for wave C at 1190 to 1220.

Should we see a move to the proposed target it would confirm that we are in a flat correction as I have suggested. Failure to sustain above the 5/27 high followed by a move below the 5/25 low would be a significant turn for the worse, but with pessimism continuing to rise I will be surprised to see such an outcome.

One way that the market could move below the 5/25 low which would be bullish is if we are still in wave [c] down in an ending diagonal that terminates later in June. We will just have to wait and see how this plays out, but for now I am going with the more near term bullish view.

Notice that we are near a MACD buy signal. Although generally I require the 50ema to have a positive slope to accept a MACD buy signal, I have found that signals off of a flat to rising 200ema to often be valid, so I will be taking a 1/2 long position on a move above the 5/27 fractal buy signal high.

Short term longs may be initiated now with the view of exiting in 3 to 5 days. Smaller size would be prudent given the downside risk. Intermediate long positions should not be initiated at this time.

QCOR At An All Time High

Questcor, QCOR, a stock that I have mentioned since the fall of 2008, made a new all time high today. At that time I took an interest in QCOR because it was the #1 stock on a relative strength basis in the Russell 3000 off and on for several weeks at a time when the market was crashing. This led me to believe that this small cap biotech had institutional support that could take it to much higher highs. I started with a small position in 2008 and have added to it during its 2009 declines.

Now, QCOR has made it back into the top 200 stocks in the Russell 3000 again at a time when the market has had a severe selloff. I believe that this behavior confirms the underlying support for this stock. From this point my elliott wave analysis of the stock indicates that it is either going to crash, or it has the potential to move up to 25. Until I see evidence that it cannot sustain a breakout above 10, I will continue to hold this stock for higher prices. However, I think we will probably see further consolidation and testing of the 8 to 10 zone before we see higher prices.

What's Up? Futures Down

I made the statement that the probability of an up day was around 94% today based on historical seasonal trends. We could certainly have a selloff today, but perhaps a more likely scenario would be a morning low from 1065 to 1073 in the SP500 followed by a rising market the rest of the day. This would allow a fib retracement of last week's rally and a close above the open, so the negative futures may not be as bad as they first appear. We would like to see last week's lows hold near term though.