Tuesday, September 21, 2010

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.

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