Friday, September 24, 2010

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.

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