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.

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