Wednesday, September 1, 2010

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.

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