Sunday, October 31, 2010

Monster Up Day

Monster Worldwide had a huge 25% pop on Friday after posting better than expected earnings and revenue. However, the big picture is a little scarier. There is only the slightest chance that MWW is in a 3rd of a 3rd wave move as the August 2010 low did not go below the July 09 low, but the more likely scenario is a large double zigzag upward correction that may be approaching its final stages. The pattern could extend with a triangle, but even so, it points to the looming return of economic contraction that should be upon us by mid to late 2012 if not sooner. MWW peaked in May 2006 well ahead of the rest of the market. We should be watching to see when it tops in this cycle as a good leading indicator that a broader market top lies ahead.

Saturday, October 30, 2010

Pop & Drop Or Just Drop

The buildup to the election on Tuesday and the Fed meeting on Wednesday has been exceptional. It is rare that the market reaction to such huge expectations is positive regardless of the outcome because the expectations are typically priced in, and it becomes a sell-on-the-news event. One thing that I agree on with Robert Prechter is that news does not affect the longer term trend, rather it is a representation of the same effects that can be seen in market behavior. That is not to say that there aren't brief reactions to the news, but these do not affect the big picture. So, whether the market pushes higher after the election and Fed meeting or not, the market looks ready to sell off.

Looking at the pattern in the IWM, it looks like it could go either way. The IWM either topped on Monday or it will rally into Tuesday or Wednesday and then roll over. If the top is in, however, the selling should begin fairly quickly on Monday. One thing is clear, the action since mid-September in the IWM is not impulsive. It doesn't look anything like an impulse wave, so once the selling begins, the gains should be given back quickly.

Friday, October 29, 2010

Rare BB Setup Led To Extended Rally

Many years ago I ran across a book on technical analysis written by a french analyst that worked for Credit Suisse. In the book he described a setup with the 12 period 2 SD bollinger bands that occured when the bands were flat and tight for 6+ periods. I devised a way to screen for this setup and found that it did in fact lead to powerful moves, but it was also rare, expecially on the weekly charts.

When it occurs on the daily chart of a stock, you can typically expect a move of 12% to 15%. You can just bracket the high and low of the tight range period and go with the breakout long or short. The breakout will be a fakeout about 30% to 40% of the time, but the risk/reward is excellent. Another aspect that occurs frequently with this setup is that after the rally or selloff ends, the stock tends to reverse sharply the other way. It's like all of the explosive force that was pent up has been expended, and there is no energy left to keep the trend going.

The breakout from the flat and tight bands on the weekly chart of the Qs led to an 11% rally from the high of the range, but now we are probably approaching the end of the rally, and the reversal could be dramatic. (Of course, the darn thing could just keep going, too.)

QCOR Breaks Out From A Triangle

QCOR broke out from a 4th wave triangle today as its earnings report and guidance exceeded expectations. However, the triangle price objective was also met today so it's not clear whether a correction will follow next week or whether the amount of time spent consolidating in the triangle will allow for additional upside.

Currently, the wave count would have QCOR completing either wave ((3)) or wave (1) of ((3)). The latter would obviously be a more bullish count, but another correction to the $10 zone is possible. My long term target is $17.50 using the more conservative count.

FTSE Has Topped

I believe the London FTSE index has put in a top. We have the break of a short term trendline, a negative divergence MACD sell signal, the RSI breaking down, and a completed ending diagonal triangle pattern at the October 25 high.

There is support at the rising trendline and at least a sharp bounce would be expected from that level if not an attempt at new highs. There is also support at the August high. One thing that stands out is the near equality of the price rise in the July/August rally versus the September/October rally. If the September/October rally were a 3rd wave, we would expect a greater price advance. The FTSE has led the US markets by a few days this year, so I think we can look to the action in that index to help us discern what to expect as the support levels are approached.

Thursday, October 28, 2010

Absolute Breadth Pointing To A Top

The absolute breadth index measures the absolute value of the difference between advancing and declining issues. In theory, high readings tend to be associated with bottoms with many stocks making new lows in a selling climax, and low readings tend to be associated with tops as momentum fades and there are few new highs or new lows. It is my experience that this is generally true, however, during a climax top it is possible to see high readings and at the retest of a climatic low it is possible to see low readings. Turning points associated with extreme readings of the indicator tend to be significant. One drawback is that sometimes the indicator precedes the actual turning point by two to four weeks, but that can be an excellent warning.

At the moment the index is reaching the zone associated with market tops. While the market could hold up a while longer, the fact that the wave count, volume and other measures of market breadth are now pointing to a top should be warning enough not to be taking on new long positions. The structure of the current market action is so strikingly similar to that of April, it would not be surprising to see a more powerful selloff than most are expecting.

Wednesday, October 27, 2010

Still Working Higher

Another added distribution day in several markets, but at the smallest degree of trend we do not see an impulsive move down. Yet, the action is not impulsive to the upside either as it appears that either the ending diagonal or some sort of triangle is coming to a conclusion. It seems that the money managers have been successful at keeping the rally going into the fiscal year-end for most funds, the end of October, but unless we see a blow out GDP report on Friday, one must assume that it will be a sell the news event, particularly as election day looms just ahead.

The NYMO closed lower and below the cited pivot level from yesterday indicating the rally is over for all intents and purposes. Anything they are able to do from here is window dressing.

We can't know what the extent of the decline will be ahead of time, but we do know that it will most certainly fit into one of three possible outcomes: 1) a large selloff to retest the July low to conclude a [B] wave flat correction, 2) a 4th wave correction to set up the completion of intermediate wave (1) from the July low, or 3) a 3 wave decline that sets up some sort or combination correction or triangle that extends well into 2011. Given the extent of the rally and the new highs by the Nasdaq 100, the likelihood of primary wave 3 down is very low at the moment. Only if we were to see a 5 wave decline to the July low followed by a 3 wave rally might we suspect otherwise.

Well, the monied interests have made a good run of it for a B wave, but I am looking forward to a better opportunity in early January.

Tuesday, October 26, 2010

NYMO Setting Up Like April

I think the NYSE McClellan Oscillator is telling the real story here as it is diverging strongly against the trend of the SP500. Of course it could just break out on a surge in the rally, but with the MACD of the NYMO on a sell and below the zero line, it sure looks like it is going to break down. If it does and IF this is an expanded flat correction since the April high, then the selloff should be even more intense than in May, but without the "FLASH".

I am still looking for an eventual retest of the July low. If it doesn't happen, I will be watching for a true 5 wave advance from the July low or a triangle that extends out into next year. I am now looking for shorting opportunities.

Another Way To Look At It

Ascending Triangle Becomes Ending Diagonal

The ascending triangle pattern was invalidated and has morphed into an ending diagonal triangle. I have relabeled the critical levels. The Qs cannot exceed 52.86 or the EDT as I have shown it is extending. I think we have reached the edge of the chart for the bears. Either this thing reverses tomorrow or Thursday and starts to sell off in a meaningful way, or the bears might as well throw in the towel and get long at the first opportunity.

In August, I posted some comments on silver, where I laid out the case that silver had to fall almost immediately or the silver bears would be in trouble. I think we are at the same place with stocks. The count is different and the reasons are different, but when we have a nearly completed count that should lead to a selloff that doesn't happen, we have to be prepared for the opposite to occur. In this case, it would be a strengthening rally in stocks that lasts the rest of the year.

No Confirmation Yet

Markets gapped down at the open this morning and the Qs came under the first critical level of 51.55, but have since rebounded in what appears to be a very impulsive move. It could be a sharp 2nd wave pullback, but the odds are that the Qs have begun the next wave up in an ending diagonal triangle. Rising above 52.12 will confirm this view.

Until we see a true confirmation by breaking of the critical levels and a larger degree impulsive decline, we must assume the rally will continue, although the number of divergences is building which may lead to a more dramatic decline when the market does turn.

Monday, October 25, 2010

Wave Count Satisfied

Today the Qs came within 0.16 of the lower cited target for the ascending triangle pattern. We can also see a clear 5 wave impulse down from the morning high followed by an upward correction. That is no guarantee that a top is in, but the pattern can be counted as complete at this point. We will need to see a move below 51.55 to rule out an extension of the move from the wave e low of the triangle, and a move below 50.52 to feel confident that the pattern isn't morphing into another ending diagonal.

Given the close near the low of the day after the strong morning gap, I suspect that today was a least a short term top. If it is we should see a fairly quick acceleration to the downside. Coming under 48.98 the low of the April high week should greatly increase the selling pressure.

Saturday, October 23, 2010

Oil May Be Forming A Triangle

The VIX & The TRIN Are Neutral

There has been a lot of commentary in the media recently about investor and trader sentiment. Some soft measures of sentiment based on polling data suggest traders may have become overly optimistic. The media headlines offer a mixed picture as pundits are saying that everyone's bearish, and therefore investors should be buying. This rarely works out. It seems to be an attempt to rally the troops - a thinly veiled one at that.

An example is recent articles arguing that the VIX has reached an extremely low reading suggesting complacency. We did have a VIX sell signal on October 11 when the VIX closed below its 20 day x 2.0 SD bollinger band. The SP500 has basically treaded water since then, but that type of sell signal need not indicate a major top.

Using the 20,5 PPO when can see how the VIX is doing on a relative rather than an absolute basis. The extreme low readings of the oscillator came in May after the flash crash. Since then the VIX has traded in the "neutral zone" though it has reached the upper end of the neutral zone range. A touch or pop above the red line may indicate a near term top, but unless we see a falling tops pattern, we cannot draw any further conclusions. Extreme low readings do in fact appear to precede important market lows, and extreme high readings appear to occur at the swing high before the final low. We'll keep watching this indicator, but for now it is not telling us much.

The 5,20 PPO of the TRIN is harder to interpret. It is certainly neutral at the moment, but what is interesting is the fact that the oscillator has not moved higher with the rally. This indicates a lack of true buying interest. Notice how the indicator remained low in the range during most of the March to August period of 2008. Even though the market made two rally attempts that summer, the TRIN did not confirm the rallies. Compare that with February 2009 to April 2010 and note the frequent spikes to the red line indicating strong buying interest.

The fact that the Nasdaq 100 has broken out to new rally highs while most other indexes have lagged considerably coupled with the clear lack of buying interest as shown by the TRIN oscillator supports the view that we are currently in a false rally. Until we see spikes in the TRIN oscillator, we should assume that a significant correction will follow once the current rally from the July low is finished.

Friday, October 22, 2010

More Rally To Come - But Closer To A Top

The declining tops in the NYSE McClellan Oscillator point to an impending top. All of the significant tops since the rally began in March 2009 have been preceded by the declining tops pattern. This doesn't mean that the market has to decline substantially. A short term correction or sideways consolidation could bring the Oscillator to an oversold condition.

That said, we have a very clear ascending triangle on the 30 minute chart of the Qs. This is most likely a 4th wave triangle of minute or minuette degree. The probability of a upside resolution is almost guaranteed as the Qs are already trading above the triangle highs afterhours tonight, and it is rare to see a failure of this type of triangle. The triangle target range is 52.39 to 53.31 which should conclude the rally by Wednesday at the latest.

The XLF is still lagging the overall market, which should not be if this rally were for real, and the IWM may have already topped. One of the biggest "tells" is the complete lack of confirmation by On Balance Volume of the breakout in the Qs. One of the reasons that the wave count has been difficult is that (i) of [c] of X appears to be an extended wave, which is not typical for the stock market, but as long as wave (v) is shorter than wave (iii), this count will remain valid.

Until we see a 5 wave count of minor degree, I think the expanded flat correction interpretation has to remain the top count. If we do not see an impulsive move down by mid-November, then we will have to reconsider this count.

Wednesday, October 20, 2010

Still Working Toward A High

There is certainly a remote chance that the IWM has topped, but the general form of the action since last Friday is that of a 3 wave decline that dropped briefly below, underthrew, the lower trendline. We should expect the opposite to occur now, an overthrow, of the upper trendline. At that point, at least a one to two week correction should follow, if not a more serious decline.

All other trend following indicators remain on a long signal with negative divergences continuing to develop. There really is nothing to do at this point. The market is too overbought to consider new long positions. It seems premature to consider new short positions, although some stocks are setting up. The one fly in the ointment that I see right now is the financials. They just haven't broken down. The XLF remains above its 9/23 and 10/15 pivot lows. Until those lows are broken and the Dollar reverses above today's high, the rally will continue.

Tuesday, October 19, 2010

Building A Top

Today's action was the first real bearish action we have seen since 9/30, and it is too early to be certain that the top is in. I still think we will see another high in the Qs, but the other indexes may have seen their highs as of yesterday. After the post about triangles yesterday, it appears that the IWM may have put in a truncated 5th wave. At the moment, however, we only have 3 overlapping waves down from yesterday's high, so there is a lot more downside work to do before we can be sure of a top.

Then, we will be looking for a breech of the August high to invalidate the bullish count, or a pullback that stays above the August high and a 5th wave of minor degree to confirm the bullish count. Either way, it is finally starting to get interesting.

Monday, October 18, 2010

QQQQ Momentum Tee

A few weeks ago I presented a price Tee using the MACD to determine the centerpost. Here I show the Tee based on the MACD momentum peak. The Tees don't always point to intermediate term tops, but it not, they usually indicate at least a short term top in the making.

Some recommend using the mid-point between the two MACD bottoms as the centerpost, but I don't find that this works too well. The second higher low works best if there is one. If there is only a single low, then use that.

The third higher low with another momentum breakout in September could be pointing to another high in the making after the upcoming correction is over. We will have to wait and see if the MACD breaks down below the red trendline first.

Triangle Gives A Clue

A triangle has formed in the IWM, and this is a very important clue. First, it means we most likely have not completed the rally because a triangle always precedes the final impulsive move of the next higher degree of trend. Thus, if the IWM goes down tomorrow, it will then move higher to complete wave (v) since the down move will only be an abc correction. On the other hand, if it moves higher tomorrow, that move will be the last at the current degree of trend. Either way, we are looking at either a short term or intermediate term top by tomorrow or Wednesday.

The reaction to AAPL's earnings afterhours has not been positive, but unless it falls below 290, the 9/30 wave i high, we have to expect wave iv and v to follow to complete the current impulse. At that point, it will require a correction below the 9/28 low of 275 to confirm an intermediate term correction. If AAPL holds above 275 during the expected November/December correction, then watch out because a 3rd of a 3rd wave blowoff top will follow. If it does not, then expect several weeks, or perhaps months, for AAPL to build a new base before moving higher.

Whatever happens with AAPL will probably happen with the Qs, so we should expect new rally highs in the Qs before the correction begins. Then it should be down until well in December. Otherwise, we will be in a runaway market.

Saturday, October 16, 2010

Waiting For Direction In The XLF

With the market action in the broader indexes confusing so many traders, it may prove helpful to take a look at the financials. The XLF sports a clear 5 wave advance from the March 2009 low. I originally was looking for a double zigzag upward correction, but when the July low undercut the February low, it eliminated that view.

Now, we can see that the XLF is in a 3 wave correction that has probably just completed wave B up and is beginning wave C down. Once wave C down is complete, wave (C) up will follow. Of course, wave (B) could morph into a more complex correction, but either way, it supports the view that another powerful leg up in stocks will be seen next year, if it is not underway already.

At the moment, there are a couple of alternates to be aware of. First, wave B up may not be complete. The rally in the broader indexes could pull the financials up with a retest of the August 25 low to follow before wave (C) up begins. Or second, wave (B) could already be complete as wave C down could have bottomed on August 25 and wave (C) up is underway now. Neither of these alternates seem to fit the recent action in individual stocks. BAC has already broken down below the summer lows, JPM and WFC appear ready to break their lows next week. And we have an unresolved issue with the foreclosure moratorium.

The decline from April to July was 2-1/2 months. If the XLF topped on 10/13, then it would bottom near the end of the year if wave C = wave A in time. This should coincide with a low in the broader markets and an opportunity to catch the next big move, but if the XLF breaks out to the upside next week, the bulls will be in complete control and a deeper correction in the broader markets will be much less likely.

Friday, October 15, 2010

The Qs Break Out

The Qs broke out solidly above the April high today with almost the entire bar above the April high. This must be respected. Even so, there are at least four probable interpretations for the current market behavior: 1) This is a bona fide breakout in a 3rd of a 3rd wave from the July 1 low. 3rd waves are not restricted in length except that they can't be the shortest wave, so this rally could last for months; 2) This is a bona fide 3rd wave breakout, but wave [iii] is near completion and a wave [iv] pullback is due any day, which will be followed by wave [v] up into the end of the year; 3) This is still wave [c] of B in an expanded flat correction or a triangle and a 62% retracement of the rally from July 1 is imminent; and 4) As usual the money is flowing into the most speculative stocks last, and just as occured in October and November of 2007, a significant bear market top is nearing completion.

My vote is for either 2) or 3), but I am seeing arguments for 1) and 4) as well. As I said earlier this week, AAPL is a big driver of the Qs with a 20% weighting. Today, AAPL advanced solidly above its median line (see 10/13 post), and it could very well continue to power ahead. However, I show a different view of AAPL using Keltner channels below. The last two times AAPL traded outside the upper 5.0 Keltner channel a pullback followed. This leads me to believe that unlike GOOG's action today, AAPL may pullback after it reports earnings Monday AMC. Should this occur, wave [iv] in the Qs would probably be underway. On the other hand, if AAPL powers ahead then we may be in scenario 1) in a 3rd of a 3rd wave.

From a trading perspective, even if we are in a 3rd of a 3rd wave scenario, we can see from the chart below of the Qs, that pullbacks to the 50dema tend to follow after the 5.0 Keltner channel is hit, and we are near that point now. Just like we saw last year, pullbacks to the 50dema should give excellent buying opportunities as long as the Qs continue to make higher lows. We should not let wave interpretations keep us from taking those trades if they show up.

There's a very good chance that wave [C] of x of the cyclical bull market is already underway. If so, there's no need to be anxious about missing it, as it should last several months, and there will be corrections along the way for new entry points. But there is still a better than even chance that a more significant correction back toward the July low could be around the corner. We may just have to wait for the giddiness about QE2 and the election to get behind us before it shows up.

Thursday, October 14, 2010

A Few Cracks Showing

Today was the first day in quite a while that the market began to show a few cracks in its bullish armor. The financials in particular were quite weak. However, it is hard to know how GOOG's afterhours pop will affect tomorrow's trading. The Qs are already trading near 51. Patterns are completing now in a number of stocks, but today's 3 wave pullback in the indexes means at least another high for the rally. The IWM is still in the ending diagonal pattern, but as so often happens in these patterns, it is extending.

The VIX and the QQV turned up today, which is pointing the way toward a top after the VIX sell warning. An upward acceleration in the volatility indexes will likely coincide with a top. Tomorrow is expiration day and it will probably be volatile.

AAPL posts earnings after the bell on Monday. The results will set the tone for the rest of October. A disappointment, i.e. coming in under the whisper number, will be enough to end the rally. A beat will push the rally well into November.

Wednesday, October 13, 2010

Trading The Qs Or Trading AAPL?

Betting against the Qs this year has been the same as betting against AAPL. AAPL carries a 20% weighting in the Nasdaq 100 and 43% of the gains in the Qs this year are due to the rise in AAPL. But what AAPL has given, AAPL can take away, and AAPL is showing a number of negative divergences. It has also run up against median line and round number resistance.

The Qs bested the April high today as expected by the recent price action, but it failed to close above that level. Volume was only about 6% higher than at the April high, which is well below the 10% minimum to confirm a breakout. The weekly volume run rate is well below the volume for the high week in April. New highs are running well below the April high level.

Regardless of the price level, there is still nothing that convinces me that the entire rally from the July low is anything other than a B wave, which is what has been proposed all along. The only fly in the ointment has been the greater than expected retracement of wave A down. But B waves can extend above the origins of A waves, and it doesn't change the final outcome, which is wave C down. Wave B in the SP500 in 2004 lasted from 3/24/04 to 6/24/04. The Qs topped on 6/30/04. Wave C down bottomed on 8/13/04. The current B wave rally is only a little longer in time than its 2004 counterpart.

If wave C down is to happen, it will be soon. If there is no downturn by early November, then something completely different is probably going on.

Tuesday, October 12, 2010

VIX Sell Warning

First things first. My proposed 5 wave impulse count for the Qs appears to be toast as the Qs moved higher today in a continuing pattern of overlapping 3 wave movements. This means that the Qs are probably working on an ending diagonal pattern (EDT) like the other stock indexes. The IWM is still the index that is closest to completion. The Qs will probably top later than the others.

We now have a VIX sell warning as the VIX has closed below the lower 20 day x 2 SD Bollinger Band. The last two occurences of this condition were 1/11/10 and 4/12/10. The SP500 topped on 1/19/10 and 4/26/10. It would be surprising to see the indexes hold for another two weeks at this point given how far advanced the EDT patterns are.

Unlike the other indexes, the Qs clearly have another down-up sequence to go before topping and will very likely make a new high above the April high, which is now only 54c away from today's close. The interesting thing about this outcome is that it keeps the longer term bullish view intact, as we are now back to a flat, expanded flat or triangle correction for wave [B] of the larger [A], [B], [C] cyclical bull market upward correction. There is no way to know which it will be, but a retest of the July low would be a great opportunity. We may just be looking at wave C of a triangle, however, that retraces 62% of wave B up.

The only thing that would derail these interpretations at this point would be a powerful and explosive up day that we would have to view as a 3rd of a 3rd wave. If we see that, then the bears will be crushed, but such a move does not seem consistent with the action in the VIX.

Monday, October 11, 2010

Clearly, Bullishness Is Not At An Extreme - Really?

Here are some headlines from Marketwatch and CNBC this evening:

Stocks ready repeat of 1990s
The real opportunity is in those "boring parts of
the world" of U.S. and Europe, says Fisher Investments' Ken Fisher. In fact, it's like 1991 for stocks all over again.

Is he serious?

Market's unrealistically giddy about Fed

For sure!

Feeding off weak U.S. dollar
Investors flock to ETFs indexed to commodities such as gold and to emerging markets.

But there's not a bubble here.

Market Pros: The S&P Rally Just Beginning

Well, the Pros must know.

Fed Certain to Act in November In a Big Way: Survey

Yeah, they probably will since the labor market is in the toilet, and they know it.

Is Fed Anticipation Setting Up a Sell-the-News Event?

How could it not be?

And yet the Dollar was higher today. A close above 78.45 should get the ball rolling. I really don't know why the Dollar would move higher now, only that the technicals and sentiment say it should. The market, stocks and commodities, will respond appropriately to a rising Dollar, by falling.

IWM Pattern Complete

The ending diagonal pattern in the IWM appears to be complete as of today. It managed to eke out a new high, but on much lower volume. I believe today's date, October 11, may prove to be significant as discussed previously.

On the 5 minute time frame we can see a clear 5 wave impulse to the downside from today's high. While it is too early to extrapolate from the 5 minute time frame to the daily, given the clear pattern completion on the daily chart, it seems probable that the IWM has completed wave B up.

The Qs, on the other hand, also made a new high for the August/September rally today and appear to have completed wave b of a 4th wave flat correction that will eventually lead to a retest of the April high in November.

The FXE continued lower today,and we may have seen a bottom in the Dollar. Silver is testing the high of last Thursday's reversal bar, but in all likelihood, it should continue rollover over with a rally in the Dollar. We should know in short order if wave C down is underway in the most stock indexes, with the Nasdaq being an exception.

Saturday, October 9, 2010

A Bullish Scenario

If the Qs do manage to hold up above the August high and put in a 5th wave by early November, I expect things to play out something like this:

Either we will see the above or the markets must fall pretty much from the open on Monday, and the Qs will have to breach the August high in short order. Time is bringing things to a resolution.

Friday, October 8, 2010

Bulls In Control

The first chart I want to show tonight really puts a dent in the bearish case. I owe this interpretation of the SP500 % Above 50DMA to Parker at You can see his video on this indicator on YouTube. The main point is that when the % of stocks in the SP500 makes a sustained move above 80% it usually indicates the initiation of a new longterm uptrend. When the % of stocks in the SP500 makes a sustained move below 20%, it usually indicates the initiation of a longterm downtrend. This worked very well in 2008 and 2009. However, since April we have seen a swing in both directions with a move below 20% in May and now a move above 80% in September. This is one of the reasons this market has been so difficult to trade.

What does this mean? In my opinion, it means that a new uptrend in the still ongoing cyclical bull market has been initiated after the crash we experienced earlier this summer. Unfortunately, various markets are not yet in sync with the new uptrend and are still in correction mode.

Below is a 30 minute chart of the QQQQ. It is very clear that the Qs are not about to top any time soon. The pattern appears to be either a flat or triangle in progress that will lead to new rally highs by early November.

The daily chart shows a 5 wave impulse in intermediate wave (1) up of wave [C] up. It is not insignificant that we are now seeing parallels between the current topping action and that of 2007. The SP500 and Dow topped on October 11, 2007 while the Qs and the Nasdaq Composite topped on October 31, 2007. The same type of divergence seems to be playing out now, but unlike 2007, it should not lead to a long term top as many are expecting. At present, only a move from today's close in the Qs to below the August high of 47.19 will derail this interpretation. I realize that others will be drawing the same comparision between now and 2007 and reaching a completely different conclusion, but I have been saying since the rally began in March of 2009 that those who have been tenaciously clinging to the expectation of a devastating decline in primary wave 3 down would probably be disappointed. The evidence is now beginning to bear that out.

While the Qs may already be in wave (1) of [C] up, other sectors are lagging as was the case in 2007. The IWM, Russell 2000 small cap ETF, is sporting a very clear ending diagonal triangle. It is rare that we see one as perfect as this, so it would be surprising if it is invalidated. As the IWM and the XLF are preparing to decline ahead of the Qs, we expect that the SP500 and the Dow will not be far behind. The XLF topped well before other markets in 2007. The IWM topped next, then the SP500 and Dow on October 11, 2007, and later the Qs on October 31, 2007. I take it as more than a coincidence that the IWM has completed a pattern on the day before the 3 year anniversary of the top in the SP500 and the Dow.

In conclusion, I am expecting new correction lows in the IWM, XLF, SP500 and possibly the Dow. I am expecting the Qs to move higher in a 5th wave to complete wave (1) of [C] up by early November and then begin correcting in wave (2) down while other sectors complete wave [B] down. All of these corrections should be finished by early January to early March, after which, a very powerful rally that will continue well into 2012 will begin. Only a crash into late December will alter this view.

For me this has been a difficult trading year as the crosscurrents of varying views and sentiment along with extreme moves in stocks has made it difficult to follow the trend. It can be hard to pull the trigger long when half the trading community believes we are headed into financial armageddon tomorrow even if you know it is the right thing to do. This is why I have maintained several core long term stocks positions that I have not traded. One of these is Krispy Kreme, which now appears ready to blast higher after closing at a 2 year high today. Another one is QCOR, which is basing around $10. I also have positions in a few large cap stocks.

Shorting has been overall a losing proposition except for the very short term and day trading since March 2009. I suspect this will continue to be the case going forward even with declines on the horizon. For those who are short this market, be prepared to take profits and/or exit by late December unless the conditions change dramatically.

Thursday, October 7, 2010

Outside Reversal Day For Gold & Silver

Silver and the SLV put in an outside reversal day, which at the very least should lead to 2 to 4 weeks of weakness. We will be looking for an impulse wave down to confirm that wave C down in silver is underway to below $8.00. A 3 wave pullback to the 50dema would be very bullish and offer an opportunity to get long for a runup to $30.00. It could really go either way at this point, but traders may want to take profits and wait for a new trade to develop.

Possible Ending Diagonal In The IWM

Follow To Older Post: It looks as though the IWM is going to make one more attempt at a new rally high. This is quite common with ending diagonals and an overthrow that looks like a breakout is entirely possible, but the end result should be the same. The action in the precious metals really tells the story. It is only a matter of time before stocks follow. If this interpretation is not right, we are on the verge of a rip-roaring rally in stocks, and all asset classes for that matter.


The IWM appears to be completing wave [c] of B up in an ending diagonal triangle. Confirmation will come on a move below wave (iv). The continuing decline in the precious metals coincident with selling in stocks points to the likelihood that we have seen the top of wave B up in stocks. If this proves to be the case, the market should continue down in 3 waves until the end of the year.

As I have mentioned several times in the past, when the market closes at the high or low of the day on Thursdays, the tendency is for selling on Friday. If we close at the low of the day today, then the selling could be all the more severe tomorrow.

Precious Metals Reverse As Euro Slides

Gold and silver are working on outside reversal days as the Euro is coming off its early morning peak. We may have just witnessed a top in these markets. Stocks are moving lower as well. I am looking for the Qs to come under yesterday's low of 48.91 for the downtrend to accelerate. The SP500 and the Dow both popped to new rally highs and are declining impulsively. While it is way too early to be certain, it appears that wave C down may be underway.

Wednesday, October 6, 2010

October's 5 Day Opening Range

The range of the first 5 trading days of each month establishes the month's potential price range as breakouts from the 5DOR tend to move from 0.618 to 1.618 times the 5DOR. For example, in September the 5DOR was 44.07 to 46.45 = 2.38. The rest of the month was 46.45 to 49.84 = 3.39. 3.39/2.38 = 1.42 ~ 1.38.

So far, the range for October is 1.56. 1.56 x 1.618 = 2.52, which gives us upside and downside targets for October of 52.28 and 45.68. Trading the 5DOR is not easy as there are frequent failed breakouts, but it is rare that moves will exceed 1.618 x the 5DOR. Should the Qs break below 48.20, the rest of October should be down. An upside breakout would likely produce a new 52 week high.

It is interesting to note that the entire rally from the May low has occured within May's 5DOR demonstrating the importance of this period when funds and institutions are putting money to work ( or are trying to protect it ).

Sell On The News

After the less than upbeat ADP employment number this morning, I would not be surprised to see a better than expected payroll report on Friday - not that I would believe the numbers, but just that it may be better than expected. As has often been the case this may very well prove to be a sell on the news event regardless of the number.

All I heard today was that the economy is better than people realize and we are in a slowly rising trend of economic activity. I really don't know what planet these economists appearing in the financial media are living on, but where I live there is nothing happening. It is dead, dead, dead - unless you want to speculate on foreclosures. I don't think the recent rally in the market has anything whatsoever to do with improving fundamentals in the economy, and everything to do with a falling dollar which is now approaching trendline support. A turn up in the dollar will change everyone's perspective very quickly.

Tuesday, October 5, 2010

A Show Day

Markets put on a real show today spanking the bears good in the process. The flat pattern I posted earlier today was violated so we are still looking for the top of wave B up. Notice how the SP500 remains within its base channel and the declining median line channel is just ahead. Volume was only slightly above average, while the TRIN closed at 0.28, an extremely low reading, and the McClellan Oscillator did not advance above the 10/1 swing high. The Qs failed to best the 9/30 high, so we have numerous divergences in place. All of these factors are pointing to some sort of top in the making. This is what B waves feel like - better than the previous high, even though we are well below it.

The 10 & 20 month cycles are due to bottom on January 6, 2011. The fact that the market is showing this kind of strength 3 months from a cycle low supports my position that we will see rising markets next year after the current correction ends. Sometimes cycles expand as the current one has to 22 months. It is fairly simple to calculate. We have the bottom on March 6, 2009. The 10 month cycle low on February 5, 2010 - 11 months almost to the day. Another 11 months brings us to January 6, 2011 +/- 2-3 days. The reason I am bringing this up now is that we will see some sort of decline, whether it is a powerful wave C down or just a pullback. So even if you are in the bull camp, you would probably do well to lighten up and look for opportunities later in the year.

Critical Juncture For The Bears

We are at a critical juncture in the markets for the near-term bearish case. I have shown the bearish interpretation in the 5 min chart of the Dow below with this morning's impulsive move higher as wave (c) of ii of an expanded flat correction. This view will remain valid as long as the Dow remains below the 9/30 high of 10948.88. But in addition to that, we should expect that markets will begin to selloff sharply by the end of the day with a possible 3rd wave gap down opening tomorrow. If these latter elements do not materialize, then markets will most likely move considerably higher over the coming week before a top is seen.

Oil has continued to move higher as expected and is approaching the August high. It appears that gold and silver will top whenever stocks top coincident with a bottom in the Dollar.

Monday, October 4, 2010

Weak Rebound In New Highs

For such a strong price move during September, we would expect NYSE new highs to have approached the levels seen earlier in the year. The weak rebound in new highs points to a narrow rally, and now we have a negative divergence that suggests the rally has topped or will do so soon.

So far, we do not have enough evidence in the price action to confirm the top is in. In fact, the decline does not yet look impulsive. It may take a few more days before we can determine whether we have truly seen the top of wave B up.

Sunday, October 3, 2010

Oil May Retest Its May High

As Tom McClellan has demonstrated in his work on Liquidity Waves, the price of gold leads the price of oil. The chart below shows that over the past two years highs in gold preceded highs in oil. This does not mean that new highs in oil must follow, but as can be seen below by the current purple bar, the upward correction in oil has more time to run in October. If the August high is exceeded, then in all likelihood oil will retest the May high around $87 before another pullback or decline begins. If oil is able to push back up to the May high, then a clear trading range will have been confirmed with oil trading between the May high and the May low.

The recent new high in gold points to another rally after the current one is complete. My hunch is that oil may be developing an ascending triangle that could take several more months to complete. This is long term bullish for oil (and stocks) as it would negate the bearish pattern and increase the probability that oil will rally to new highs next year with a measured move target of at least $121.60.

Friday, October 1, 2010

Reversal To Accelerate

The Euro, as charted using the FXE, has completed a clear 3 wave rally and is now at resistance at the upper channel line. While a pop above the channel line may occur, the Euro is ready to fall and consequently the Dollar to rise. The stock market as shown in yesterday's post has likely already topped and a rising Dollar will only accelerate the decline.

Three of the most speculative Nasdaq stocks put in reversal bars this week. If the most speculative names fall, the rest will too.

The reversal in BIDU is about as powerful as it gets. Note the strong negative divergence in the weekly RSI.

Ditto for NFLX.

Here we are, finally, after a long and difficult summer at the end of a historic September rally about to find out who is going to be right. Will it be Robert Prechter and the P3 crowd? Will I and a few others that are pointing to a cyclical bull market correction to be followed by another leg up next year be right? Or will all of the bears be proven wrong as the market breaks out to rally highs into the end of the year? The last question will be answered in just a few weeks. The first two may take several months. But it is interesting to note that one long time bear is throwing in the towel according to Marketwatch: Peter Eliades. Such a public admission right at the top of the rally supports the bearish case, which is unfortunate for Mr. Eliades. October is setting up to be as memorable as September - just not what most are expecting.

But the most important point is that being right is not what trading is about. Trading is about making money by following a systematic plan with discipline. Sometimes it helps to have a heads up on what the market is likely to do, but the trading plan should not depend on it.