The Market Popped & Then It Dropped

As I had expected yesterday the ending diagonal pattern played out. It can be seen clearly in the Dow 30 5 min chart below. While it is too soon to be certain, it does appear that today's action will mark the top of the rally that began on August 27. We will need to see a 5 wave impulse down at one larger degree of trend to confirm, but the initial move down should be fairly swift. It may be followed by an extended attempt to retest or at least approach today's high before greater downside acceleration occurs.

Longs should be extremely cautious at this point and some profit taking is warranted regardless of you intermediate term views. Even if the bull case wins out, lower prices should be seen in October before the market can advance further.

Pop & Drop Coming

Most of the major stock market indexes appear to working on the final subdivisions of ending diagonal triangles. It is quite common for the 5th wave of an ending diagonal to overthrow the upper channel line, which is what I expect for tomorrow. It will be hailed as a victory for the stock market and bull market proponents just in time for a sharp selloff at the beginning of October. A pop followed by a sharp drop.

See Terry Laundry's mid-week update at http://www.ttheoryfoundation.org/t-theory-calculations.html. He discusses the impending market turn based on T Theory and another possible rally attempt into the second week of November.

My personal view is that the current surge into the end of the month of September represents a mid-term election year cycle inversion that will lead to selling for the rest of year, and the possible rally into the second week of November should be a lower high. Under normal circumstances markets would have sold off in September into early October and then would have rallied the rest of the year, but the generals have likely already spent their ammunition.

1-2-3 Top In McClellan Oscillator

The McClellan Oscillator is showing a 1-2-3 topping pattern that is often coincident or precedes market tops as breadth momentum fades against the trend. The 1-2-3 pattern works much better with bottoms. I did not give enough weight to the 1-2-3 bottom in August due to the fact that the Oscillator had not fallen to low levels seen at prior bottoms since 2008. Nevertheless, the pattern did portend the incredible September uptrend that has transpired.




Now we see the topping pattern has developed, and the longer it takes for the market to turn down, the greater the selling pressure will likely be. In April the Oscillator made a lower 1-2-3 top pattern as the market continued higher which preceded the "Flash Crash". I don't think we will see that here, but the likelihood that we are within a couple of days or even hours of the rally top is great.

Almost There

The powers that be seem to be doing everything possible to keep the market levitating into the end of the month. However, a few cracks are beginning to emerge. They are subtle though and hard to interpret. For example, AAPL had a sharp plunge this morning and appears to be recovering in 3 waves. The pattern in the Qs is the same. These events could just be shakeouts before the market moves higher, but the overlapping 3 wave movements in some indexes look more like ending diagonals. It seems that as long as the Euro continues higher and the Dollar lower, the markets will move higher as well. We see the same action in the precious metals. This clear correlation makes the market vulnerable to a sudden selloff if and when the Dollar bottoms, which may be sooner than most think.

Head & Shoulders In The XLF

While most seem to be enamored with the recent head and shoulders bottom in the broader stock market indexes, a relatively small pattern formation, a large text book head and shoulders top has formed in the XLF which projects below 11.44 if triggered. Although there has been some mention of weakness in the financials in the media, I haven't seen anything anything about this bearish formation. Which pattern would you give more weight: the one widely mentioned in the media as was the supposed H&S top last year that failed, or the one above that has received almost no attention?

At Or Near A Short Term Top

The Qs are in the process of completing a small degree five wave impulse from the 9/23 low that may be completing wave (v) of [c] of B up from the 8/27 low. While an impulse of this nature can continue to subdivide, it is not without significance that today's volume is the lowest since the August 9 top. Note the negative divergence MACD sell signal on the 30 minute chart. Whether or not we see higher prices this week, it is more probable than not that we are near at least a short term top, if not an intermediate term top.

Best Performance Since 1939

CNBC is reporting that the market's performance this month is the best since September 1939. There was no mention of the fact that the Dow fell 30% from September 13, 1939 to June 19, 1940 with most of the decline coming in May 1940 in a deep zigzag correction. In 1939, the Dow fell modestly after September with two multiweek rallies. I'm not suggesting that the same thing must happen this year, but the parallels are interesting.

PCLN Goes Parabolic

PCLN has nearly doubled in price since June in what may be wave (5) of [3] as PCLN has retraced over 1/3 of its all time high of $990 at the 2000 top. Typically these kinds of price moves are completely retraced, and the targets are the 8/3 close to fill the gap at 230.67 and the June low at 173.32. Note the negative divergences on the daily chart. But the intraday chart suggests PCLN may continue up to at least 350 before the move is complete.

Pushing The Qs To The Limit

The Qs are up a whopping 14.27% for the month of September - the best performance since October 2002. Yet, all is not well. The IWM, XLF, IYR and the Dow Transports remained below their 9/21 highs today. The SP500 remains below its January high and only barely closed above the 9/21 high. Gold and silver are making new rally highs while oil is languishing. Oil may make another attempt at its broken trendline, but the pattern is still bearish.

The Dollar made its most recent swing high on 8/24 just two trading days before the August bottom in stocks. The Dollar made its previous swing low on 8/6 just one trading day before the August high in stocks. While this obvious negative correlation doesn't always hold true, it does appear to the case now. Perhaps we cannot attribute all of the rally to a falling Dollar, but a turn up in the Dollar would likely mark or precede a top in stocks. Positive divergences are developing in the Dollar. Given that the patterns in the stock market are bearish, the recent rally notwithstanding, a turn may be imminent.

We've seen this so many times before over the last 10 years. The speculative large caps are pushed higher as other indexes lag. In 2007, the Qs topped on October 31, 3 weeks after the SP500 topped. I don't think that will be the case this time, but it's clear that the Qs have significantly outperformed this month and are very near the April high, while the SP500 is down 5% from its April high.

I think if the Qs do make a new rally high it will still be a B wave in an expanded flat correction. I don't think it will happen though. The huge runups in some Nasdaq 100 stocks have pushed many of them to round number resistance and completed patterns. NFLX probably completed an ending diagonal triangle today. I tried to short it near the close, but could not get shares. It is in danger of a precipitous drop as is PCLN which has completed 5 waves up from its June low and has a confirmed negative divergence sell signal. These types of parabolic runups are more consistent with tops not the beginning of new rallies.

Pattern In IWM Is Complete

The IWM sports a near textbook upward flat correction, with a 3-3-5 wave count that moves from simple to complex. Today the IWM closed below the low of the high day of wave [a] which occured on 7/27 and closed below the trendline of wave [c] up. These are the first indications that wave C down is underway. Perhaps this should be labeled as wave Y down, but in any case, there is strong evidence that the top is in. The small caps and financials did not participate appreciably in this rally, while the speculative large caps represented by the Qs came within 3% of the April high. The XLF closed below the 50 and 200 demas today and should lead the market lower with the IWM. A measured move would take the IWM down to 51.43, 21% below the current level.

Well there were some really great runups in popular names this month, but they should feel the brunt of wave C down as well. Once its over, we will look at stocks with completed corrective patterns for the next leg up in this cyclical bull market.

At this point, we have two things to be watching out for and we really won't be able to know anything until well into October. The first is that this is not wave C down and the next major rally leg has already begun. While unlikely, if markets fail to post lower lows in October, then this becomes a greater possibility. The second is that Robert Prechter is right and this is Primary Wave 3 down. If it is, then we probably won't know until we see a confirmed failure below the current correction's downsloping base channel, shown as the Andrews Pitchfork in yesterday's post. While all of this has been difficult, at least for me it has been, the picture is getting more clear with each passing day.

Sometimes A Different Perspective Helps

Bearish Action In Adobe

ADBE is now trading below $28 afterhours and PMCS is trading down as well. The rally in ADBE is now clearly a 3 wave rally that will continue below the July low. GOOG and FWLT also likely completed 3 wave rallies today. The action in these stocks is no coincidence. The weaker stocks are set to fall hard after 3 months of an upward correction. If we see downside confirmation going into the end of the month in these and other weak stocks, it will be a strong indication that the rally in the Qs since July 1 was also a 3 wave rally.

Hindsight is 20/20, but I now regret not sticking to the double zigzag upward correction interpretation, but regrets don't make you any money in the markets. Now we see corrective patterns coming to completion, negative divergences and the Qs printed a doji today on September 21, the Autumnal Equinox. The rapidity with which the crowd swung from pessimism to optimism over the last 3 months and particularly since September 1 fits the character of a B wave to a tee. If this were really the beginning of a new multi-month rally leg, I think that skepticism would have been maintained in the face of the rally, but it wasn't.

There are a number of markets sporting 3 wave rallies. It is interesting that the Russell 2000, IWM, has been one of the weaker markets. It has only managed to trace out a flat and did not break out with the others. We would have expected the small caps to be showing relative strength if a new longer term rally was underway. The IWM fell 49 trading days from April 26 to July 6. If the next leg down lasts as long, we should see a bottom around November 30 to December 3. There is an important cycle low on December 6. Of course, the next leg down does not have to be equal in time, but can contract or extend, so we will have to monitor it as it develops and make adjustments accordingly.

My suspicion is that the stock market topped today, or will do so after one more down-up swing without much more upside, perhaps just a retest of today's high. If my expectation of a cycle inversion proves to be correct, we will see several months of downside action. We will know soon enough. If markets do not make new correction lows in October, then we will be looking to go long sooner. Let's see what happens tomorrow.

Divergences Developing

Among the divergences developing is the NYSE McClellan Oscillator vs the SP500. Notice that the oscillator is making lower highs against the highs in the SP500. The Trin closing today at 0.34, which is the lowest reading since September 1, coupled with multiple low readings over the last two weeks is another warning sign.

The pattern in the SP500 is still well within the parameters of a 3 wave upward correction. It appears that one more down up sequence is needed to complete the pattern, probably around 1150 to 1160. Note that it is still well below the Decadal pivot of 1160.75.

RIMM fell today and closed below the low of yesterday's downside reversal. It looks like RIMM is definitely out of favor. Oil also failed to confirm today's action.

At this point the powers that be seem to be pushing for a positive quarter with everything they've got, but is there anything to really support this move once the quarter ends? For all the talk of an end to the recession (are these guys for real?), business in my area has come virtually to a standstill. I know there is activity in other areas of the country, but frankly, I am just not seeing it. Is everyone waiting until after the election? Maybe, but if so, is there a reason for the market to rally into the election? I think we are going to get some resolution of this picture pretty soon and it may not be what most are expecting.

A Look At The Big Picture

It has been a while since I showed the SP500 Big Picture chart. Anyone who has followed the financial media in the past week has probably heard how great everything is. By all accounts, the worst is over with the markets, if not the economy. It is amazing how much positive sentiment can be generated by a 3 week rally that has yet to close above the previous swing high, which is why it is so important that we look at it in the context of the entire secular bear market.

So far this cyclical bull market rally has only managed to close above the Decadal Pivot of 1160.75 for about 3 weeks. The rest of the time it has traded decisively below that level including during the rally that began August 27. The mid-point of the decline from October 2007 to March 2009 is 1121.44. Friday the SP500 closed at 1125.59. In other words, the market is trading in a tight range around this mid-point and below the Decadal Pivot.

I have marked the 11 month congestion period when the market traded sideways after breaking above 1160.75 in 2004. Based on my latest cycle and pattern analysis, it is beginning to look like we are repeating an 11 month corrective period, but instead of trading sideways, the market looks to be heading downward in a zigzag type of pattern. If this proves to be the case, then the market can be expected to bottom sometime between January and March 2011. This viewpoint fits with a possible presidential cycle inversion that could occur in the next one to two weeks.

As frustrating as the corrective market action can be, we should not lose sight of the fact that if the market does trade down into this time period, it will likely move back down toward if not test the longer term trendline breakout in the zone I have labeled as the "Buy Zone". This would be the setup for the next leg up in the cyclical bull market. Being a [C] or [Y] wave, this next leg has the potential to be even stronger than the first leg up, but such an expectation should be tempered with the understanding that we are still in a long term secular bear market, and bearish forces will probably temper the strength of the rally. A measured move target for this next leg up based on the above interpretation is around 1485, in the middle of the "Sell Zone".

In conclusion, it appears that we are still a few months away from a more tradable market bottom. Traders need to be cautious as whipsaws will continue to be the rule and shorter term trading tactics with reduced exposure or staying in cash may be the best approach.

Weekly Squeezes Abound

AAPL has now setup in a weekly squeeze with the Bollinger bands inside of the Keltner channels. A trade signal is not generated until the bands move back outside the channels, so at this point the squeeze could fire off either way - long or short. However, what we also see is that every major US stock index is in a weekly squeeze setup as are gold, silver and oil. Silver has fired off long, but gold and oil have not. The real question is the one we have been asking all summer: which way is this thing going to go when it finally gets going? We are now at the point that the market will not be able to delay answering the question much longer. It can certainly tease us by faking us out either way one or more times, but when it does take off it will probably be a strong trend that lasts several weeks - a trend that exceeds the swings that we have seen this summer.

It is hard to know what the catalyst will be, but it is hard for me to see how the breakout will be to the upside when we have low volume, the VIX wedging down, a potential reversal to the upside in the Dollar and oil breaking down. There are also major inter-market divergences with the small caps and the NYSE composite failing to take out the August 9 high so far.

The 8 period RSI of the Qs hit 100 today. In a downtrend this is a sell signal. In an uptrend this would indicate a strong trend. Since, in my opinion, the recent rally is wave [c] or [y] of B or X, I think it is a sell signal. The Qs also tagged the upper parallel channel line today.

One thing that is of serious concern for the cyclical bull case is the possibility of a seasonal cycle inversion. This occured in 2008 and was a big clue that the market was headed for a crash instead of recovering to new highs as would have normally been expected in the presidential election year cycle. That year the market rallied into May/June when usually it would have made a low.

This year is a midterm year in the presidential cycle. We would normally expect a fall selloff into late September to mid-October followed by a rally into year end. However, this has not happened. Instead we have rallied into late September. A reversal to the downside here could mean that the cycle is inverting which could mean that we will be headed down the rest of the year. The typical pattern would then likely resume after a January/March low, however, that is not a guarantee and the cyclical bull case could be derailed if it didn't revert to the typical pattern after an inversion. If the market sells off for the rest of the year, this would certainly be signalling major concerns about the economy for 2011.

I will be looking to re-enter a short position in the Qs early next week and will add to that position on additional sell signals. I am now long and short this market. Some of my longs are doing well, others are languishing. Most of my shorts are either doing well (i.e. have gone down) or have not rallied with the broader market, so I am feeling pretty good right now about the rest of the year.

QQQQ Tee Complete

On the above chart I have drawn two momentum based Tees. To draw a Tee the MACD must break out above it's trendline, preferably from a rising bottoms pattern. The Tee is formed by drawing a vertical line at the higher momentum low and a hortizontal line from the previous price high symmetically about the vertical line. In some cases there may not be a higher momentum low, but a definite low in price is formed. In those cases, just draw the Tee from the momentum low.

We have fulfilled the time projection from the July low based on the above Tee. I suspect that the market will continue higher into next Tuesday, 9/21 before some sort of top forms. It may be a short term top or an intermediate term top. The Qs have reached significant resistance at the Keltner channel and the parallel channel for the rally. We are at another crossroads. A strong breakout above the currently for parallel channel would create a bullish base channel that would project significantly higher prices. On the other hand, if the market tops in the next few days and falls to the lower channel line, then a lower correction low would be probable. I believe that will be the case.

I've also shown a larger potential momentum Tee. It could fail or project a lower high after an intermediate top. It's significance will not become evident for some time.

The McClellan Oscillator is already forming a negative divergence, and the small caps continue to lag. Volume has remained muted, which is surprising during the month of September and it suggests that this is a B wave rally as has been suggested since July. It would have been nice if the triangle pattern had played out, but we have to take what the market gives us, and for now, it looks like a double zigzag.

RIMM beat its lowered earnings estimates handily, but after a sharp $4+ pop after the earnings report, the afterhours price is now only up $1.31. The pattern suggests at least a retest of the August low will be seen, and if the market does top out, the March 2009 lows will be next.

MA popped as expected based on the wave count. It should hold its recent low after a pullback and then rally into the end of the year. Thereafter, I expect more selling.

Oil looks ready to extend its decline. A move below 72.63 should accelerate the selloff.

Negative divergences have formed in gold. However, we will either see a sharp pullback or a strong breakout to much higher prices. It really could go either way here. The key will be the Dollar. It looks as though it may make another low for the recent decline, but then turn higher. This should put the breaks on gold, silver and stocks.

Clear Pattern In Master Card

Master Card has announced a huge stock buyback program, but don't be fooled. The pattern in the stock is very clear with a 5 wave impulsive decline. Waves 2 and 4 alternate in form with a double zigzag and a triangle. A rally is likely for now. However, lower prices will be seen after the rally is over.

Weekly Squeeze Setup

The above chart shows the 20 week, 2.0 SD Bollinger bands in cyan with the 20 week, 1.5 ATR Keltner channels in yellow. When the Bollinger bands contract inside the Keltner channels, the market is said to be in a squeeze as price volatility is less than the average range of price movement. Typically, when the Bollinger bands move back outside of the Keltner channels it signals the initiation of a strong trend.

I have compared two weekly squeeze setups on the chart, one from 2007 and the current one. The 2007 squeeze had a bullish resolution with a 9% gain before a sharp pullback. At that time the ADX was high with the DI+ > DI- indicating a strong positive trend. The lower Keltner channel was pointed up. Currently, we have the opposite situation, except for the ADX which is currently also high. The DI- > DI+ indicating a strong negative trend and the upper Keltner channel is pointing down.

This squeeze setup could resolve either way, but the coincident indicators suggest it will be to the downside. While we should be prepared for a pullback and another rally attempt, the market has become significantly overbought and it is possible that the current move will be enough to complete wave B or X. I would not be surprised to see a continued push into next Tuesday, 9/21. If that should be the case, I will have no problem taking another half short position with a 1.5 to 2 ATR stop in the Qs. If it turns out to be the top, I will add on the way down.

The Market Has Spoken

The Qs have exceeded the August 9 high and even though several other major indexes have not, we can be fairly sure at this point that the pattern from the July 1 low is a double zigzag upward correction that appears to need one more down up swing to complete. This swing should move well into October before finishing, but need not do so.

Unfortunately for market technicians all of the easy solutions have been invalidated. We could now be at the mercy of the markets for weeks and months to come before a new uptrend or downtrend materializes. While not likely, the current pattern could play out as a flat correction, expanded flat correction, triangle, or a combination double zigzag. The triangle would be the worst outcome for traders to endure, in my opinion.

For those who have had the ability and the foresight to trade this rangebound market (not me, I admit), the swings have been remarkable. For those who have stuck with trend following methods (yeah, that's me, unfortunately), it has been horrible. At this point, I am inclined to trade the swings with targets assuming weeks and months of a continuing trading range from this point forward until a more discernable pattern develops. One reason that I have traded with the expectation of a strong trend occuring sooner rather than later is the flash crash itself. Usually, after such an event, the market will either be washed out and resume its uptrend, or another selloff matching the initial one will occur after a brief rally attempt. It now appears that the market will work off the excessive bullish sentiment from the first leg of this cyclical bull market by trading sideways in a range.

I don't really like changing my style, but hopefully, the market will give us enough clues to let us know when a new trend is about to begin so that we can jump on board.

Oil Is Leading The Stock Market - Down?

Oil is now approaching trendline resistance, retesting the broken trendline from the August selloff. It's pretty clear that the rally from the May low in oil was a 3 wave rally and the August decline appears to be impulsive. Now we seem to have a smaller degree 3 wave rally with a triangle that suggests the next big move in oil will be down. Turns in oil have been leading the stock market since April. Will that be the case today?

The Qs, currently at 46.92 premarket, are approaching the critical price level of the August high of 47.19. This kind of thing is not at all uncommon for [e] waves. As long as the August high is not exceeded, we should continue to expect wave C down to begin. If the August high is exceeded, then we will know that wave C down has been delayed for 1 to 4 weeks. The action in oil today should be a strong indication of what is to come. If oil can break above trendline resistance, I would expect the stock market to do the same.

XRT Pointing The Way - Down

A large head and shoulders top is nearing completion in the XRT. There is nothing about the action in the XRT since the 7/1 low that indicates a bullish outcome - at the moment. Of course, there are other patterns that could lead to more upside in the near to intermediate term, but we should keep these possibilities on the back burner for now. For the moment, it looks as though the XRT is working to complete either a double zigzag upward correction from the 7/1 low or is in the middle of a triangle that will take another week or so to complete. Unfortunately for the bears the double zigzag is the most likely outcome barring an immediate selloff beginning Monday morning.

Anything can happen, though, and for all of the frustration (At least I know I am frustrated, and I suspect many traders are as well.) it appears that resolution is at most a week away. I suspect that we will either see an initial selloff into the Autumnal Equinox on 9/21 followed by a weak rally into early October and then more powerful selling to complete wave Y of (X) down, or we will see the rally continue to 9/21 and then the selling will begin. Reversals are quite common around the equinox and solstice dates. For two examples, the market topped this summer on June 21 and bottomed on September 21, 2001 after the events of 9/11. Either way, I will be maintaining my short bias on an intermediate term basis until there is strong evidence to the contrary. Wave W down took 47 trading days. If wave Y is equal in duration, then we can expect a market bottom between November 11 and November 29.

On this anniversary of September 11, let us pray for peace in the world.

Small Caps Still Lagging

While the pattern is unclear in most stock indexes, it seems pretty straightforward for the IWM, Russell 2000 ETF. If the market is going to go down, it must do so tomorrow or Monday without exceeding today's high, which will leave a 3 wave rally from the August low after reversing at trendline resistance. If the IWM falls below 61.80, the 8/27 high, we can be almost certain that a more serious decline is underway.

Most indexes were up today, but on much lighter volume, i.e. there was not much conviction after the supposedly positive drop in unemployment claims this morning.

The Qs have fulfilled the requirements for the triangle by coming all the up to trendline resistance in wave [e] up, and, by the way, topping only 0.06 above the January high of 46.64. It is just truly amazing how much impact the January range has on the trading action for the rest of the year. Now that we are in the month of September, all of the major US stock indexes are below the high of their respective January ranges, except for the transports. If the indexes were trading above that level, our overall perspective would be much different.

Notice that the August low for the Qs was 42.97, while the January low was 42.63. My hunch is that when we finally begin selling off in wave C down that the most likely target for the Qs will be the difference between the April and January highs subtracted from the January low, or 42.63 - (50.65 - 46.64) = 38.62. Thereafter, a return to the January high by the end of the year would be the next likely move.

Market Holds On

The Qs are approaching resistance at the upper trendline of the triangle. In order for the triangle pattern to be valid, we really must see a strong selloff that at least approaches the August low by September 21, the Autumnal Equinox. If the markets just trade sideways to down over the next two weeks, then the double zigzag upward correction will become the favored view.

Unfortunately, should the double zigzag play out it will still not remove the uncertainty because as much as I like drawing that red line down to new correction lows, a double zigzag could simply be completing wave B of a much larger triangle. Ugggh!

From a cyclical point of view, the low of the correction is not likely to be much later than October 26, so if we do not see new correction lows by then, we should lean toward more bullish interpretations.

At least we know the longer this thing drags on the more likely a strong bullish outcome will be. But as a reminder, my overall view that we will see another powerful upleg in this cyclical bull market is one reason I have maintained several longer term stock positions. Drawdowns can be brutal, but for the most part these longer term positions have held up well. QCOR is one example that continues to show positive upside potential.

Looking For The Selloff To Begin

Well the Qs broke down out of the triangle shown yesterday and rallied to a new high for the current move as expected. At this point we are near a crossroads. Wave [e] should be topping now. If it doesn't, then we will have to be on guard for the development of the double zigzag alternate. My hunch is that we will see the selling come in this afternoon, but that's all it is - a hunch. I am short the Qs from 46.25 against the August 9 high of 47.19.

A Triangle On Intraday Chart

A clear triangle has formed on the intraday chart of the Qs. The same is not the case for the other indexes, which seem ready to rollover. A downside breakout of this triangle would not really be near term bearish as it could culminate in a 3 wave pullback to be followed by another move up above last week's high. We may see a pop higher in the Qs this afternoon or tomorrow before selling begins in earnest. It is often the case that the Qs are the last to top.

The disparity between the IWM and the Qs today is quite revealing. The IWM is currently down 1% vs 0.25% for the Qs.

Wave [e] Approaching Resistance

Elliott Wave International is having another free week. Check out the Asian Short Term Update. The Australia ASX is shown with the exact same wave count as shown above for the Qs. I am pleased that someone is seeing what I've been seeing. Chris Carolan points out that triangles can breakout either way and that's something we will have to be on guard for, but I think it will not be that hard to figure out. Assuming that the August 9 high is not exceeded next week, if we do not see an impulse down from the wave [e] high that breaks the wave [d] low, preferably before the end of September, then we would conclude that either wave [X] is complete and wave [Y] up is beginning, or another leg up in wave B is in progress in a large flat correction that will require another leg down in wave C early in 2011. (That was a mouth full.)

Until proven otherwise, however, we should assume the bearish case. For all the talk of bearish sentiment in the media, the bearish sentiment just isn't that extreme by many measures. On the other hand, wave [e] up is doing a great job or restoring bullish sentiment just in time for wave C down. The Trin has closed below 0.5 for the last 3 days. Two more days of that should just about do it.

Again, I want to repeat what I have said in several earlier posts. If we get confirmation of the triangle above in the next week or two, we can start getting prepared for another multi-month rally. This rally should be the last really good opportunity for the bulls for the next 4 to 6 years as the market will be working it's way back down to the 2009 low. There are several legitimate ways it can get there. The most likely being a long drawn out double zigzag. The least likely being a 5 wave impulse. The most bullish would be a long frustratingly drawn out triangle. As frustrating as this summer's triangle has been, imagine a triangle two orders of magnitude larger zigging and zagging month after month. I don't even want to think about it.

It looks like we are about to get some resolution next week as the Qs approach the January high for the 3rd this summer and trendline resistance. Whatever happens it will help us trade the rest of the year. I was stopped out of my short position this week using the Weekly Daily strategy as the Qs moved strongly above last week's high. I will be looking to go short against the August 9 high in wave [e] next week and I will add to the position on a break of the 9/1 low and last week's low.

Enjoy your Labor Day weekend.

A Double Top In Checkpoint

CHKP is wedging up to its April high and looks ready to roll over with negative divergences showing up. The most likely target is the July low at 28.82 or below. CHKP broke out of a muli-year trading range in August last year. I was fortunate to be able to sell on this B wave rally near the April high for a gain of 25+%. Given the length of the trading range I was holding this position with a wide stop below breakeven as I expect it has much more to run, but the pattern clearly shows that it will likely retest that trading range breakout level this fall in the 27 to 29 where I will be looking to buy it again. The next upside targets are 44 and 64.

Waiting Patiently

All eyes are on the employment report tomorrow morning, but it may not matter too much. Wave [e] of B up still appears to have more upside potential. There's not much to do here except wait for it to end - probably early next week.

There are other valid technical interpretations of the market's action this summer. The problem is that none of them really fit with the cycles and the current breadth and sentiment indicators. The cycles are pointing down this fall, and various breadth and sentiment measures have not reached oversold levels. So, until proven otherwise we should continue to expect another move down to complete the correction.

The Setup

Wave [e] up in the Qs and wave [b], I think, up in the SP500 is now underway, a whipsaw to be sure as a number of indicators will turn bullish today if the rally holds into the close. Yet, do not be fooled. I think this is a sucker's rally - a setup for the smart money to dump their shares ahead of the fall selloff. The key level for SP500 is the August 9 high of 1129.24 and for the Qs it is 47.19. These levels are 4 to 5% above current prices so if you are overpositioned on the short side it may be difficult to hold on, but the fact remains that as long markets stay below those levels, the intermediate term bearish case will remain in force.

For the Qs with the possible [e] wave up, we have to be prepared for a sharp rally that could come close to the 47.19 level. As long as it doesn't exceed that level then the B wave triangle intepretation will continue to be my top view of the market action. What a sharp rally will do is subdue the bearish sentiment and probably push sentiment back to a bullish extreme.

We should see the McClellan Oscillator move back to overbought levels very quickly. If the NYSE McClellan Oscillator moves back above 80 and turns down while the markets stay below the August 9 high, it will be a sell signal. Also, the current rally will setup a MACD sell signal as long as the 50dema does not turn up for 2 consecutive days.

I am 50% short at the moment and I plan to ignore any buy signals that occur this week or next barring some extraordinary change in market character. I think patience in this regard will be rewarded.