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.

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