Wednesday, June 9, 2010

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.

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