Levitating

It seems the end of the month/first of the month bullish bias may be enough to hold the markets up for a couple of more days.  Beyond that and we would have to begin to doubt that a correction is really underway.  However, if the Qs come under today's low of 55.39 then the correction will be confirmed.  I would really like to see a move below the December 31 low of 54.21 as there was a gap up on January 3.  The first of February is notorious for reversals so tomorrow could be it.

Oil continued its surge higher today.  I think we will see the 95 to 96 target zone hit at least if not the 105 to 107 zone.  Gold and silver really did not participate in the rally with oil today, and it is likely the correction in precious metals will continue even as oil moves higher.

Oil Grinds Higher

Oil's imminent demise has been predicted on a regular basis since late 2009 by any number of elliott wave practitioners and other prognosticators.  However, the fact is that oil is an intermediate uptrend.  It is easy to see that the trend is up using the Darvas Boxes that I have drawn.  The boxes are based on the weekly chart, but the chart is a daily chart.  Since the rally in oil began in January 2009, only one box had a lower bottom than a previous box.  That box was labeled as a bear trap on a post at the time it occurred, and that has proven to be correct.  After rising out of the bear trap, oil then found support at the 2006 high (red line) and now at the 2008 low (cyan line) around 86.20.  Having found support at these levels, if oil can break out to new highs, the next objective around 96 is a high probability target, and the following objective around 107 is also probable.  Whether the final target at 118 to 122 will be seen remains to be determined, but the possibility should not be discounted.

It is unfortunate that stock traders attempting to profit from the uptrend in oil don't have better vehicles for doing so as the USO and OIL have lagged considerably due to futures contango.  Stock traders may do better using oil industry related stocks, hedging with options, or trading the futures directly if able to do so.  A move to 122 from current levels equates to a gain of $32,500 per futures contract, or $16,250 for the mini oil contract.

Tom McClellan has shown fairly conclusively that oil lags gold by about 10 to 15 weeks.  Even if the December high in gold turns out to be an important top, the top in oil may not occur until the first of March to the end of April.

The rally in oil is clearly not impulsive, but that doesn't mean that the next move will be a retest of the 2009 lows as the upward correction can continue in more complex forms.

SP500 Still Support Holding (For Now)

The SP500 stopped its decline Friday almost precisely at the convergence of median line and lower channel line support.  See my post http://tradercraig.blogspot.com/2011/01/strong-support-for-sp500.html.  We also have a strong negative divergence sell signal that suggests the support will fail to hold.  If support fails next week as is anticipated, then the SP500 should return to the lower channel line from the July 1 low which is presently around 1150 and just below the 200dema around 1174.  If support does not fail, then the bulls will rout the bears as the major median line may prove to be the path of least resistance in an ongoing uptrend.  It seems hard to believe that could be the case at the moment with overwhelming evidence of diverging breadth and momentum coupled with investor and trader optimism.

Broken Trendline & Pivot Sell

In my previous three posts, I have tried to point out the developing potential for a top, and we finally got the confirmation of the MACD sell signal today with a broken trendline and a break of the fractal sell pivot on almost double the average volume.  There is still some work to do to for a solid downtrend to develop.  First, the Qs must break the 2007 high of 55.07 and the January low of 54.92.  Next, support at the November high of 54.04 will have to fail.  This process may take a few days, or we could very well see the Qs slice right through support because of the long duration of the ending diagonal wedge that developed off of the November low.  After that it should be a quick retracement to the April 2010 high.  We will have to wait and see in a few weeks time how the pattern has developed in order to evaluate whether there is additional downside potential after that.

One problem still exists, but I don't think it will materialize.  Today's decline could be part of a flat correction that will lead to higher highs.  However, the late day move off of the lows has all of the earmarks of a countertrend rally, so I'm not giving it much weight.

I have labelled the downside projected targets based on the January range of 2.43 points.  The 4.236 downside extension is most likely the worst case scenario for the year.  This extension is rarely exceeded.  Note how the 1.618 extension lines up with the April 2010 high providing additional support.  This may prove to be an area that stops the correction or leads to a strong countertrend rally.

It was interesting to see that oil rose sharply today.  I think oil could still have some potential upside since it lags gold by several weeks.  This could facilitate the selloff if oil moves toward $100.  While gold and silver rallied today, I think it is a short lived reaction.  We should see further downside in the precious metals.

I am short the Qs from 55.55 today.

Trendline Breakout Target Has Been Met

According the work of Thomas Bulkowski at thepatternsite.com the most common target for a trendline breakout is 80% of the depth below the trendline before the breakout.  We are now within a couple of points of that target for the SP500.  The most common course of action for a market or stock after a successful breakout is to retest the trendline, which we have yet to do.  Although there are multiple levels of support for the SP500, the most logical expectation is for a retest of the broken trendline.  The longer it takes, the further down the trendline projects, but it is still above the July 2010 low at the moment.

Dangerous Situation

No matter frustrated one is regarding the current market conditions there is not much to do about it but wait for a change in the trend.  This is a dangerous market in my opinion.  It is the kind of market that could keep going for longer than you would expect while the bottom could fall out any day.  Below I'm showing the Wilshire 5000 with Keltner channels.  Note how the market is riding between the 2.5 channel and the 5.0 channel just like it did last March and April.  Similar conditions occured in 2006 and twice in 2007.  Each it was followed by a very sharp and dramatic selloff.  It may not play out that way this time, but I wouldn't bet on it.

Rally To The Broken Trendline For IWM

Strong Support For SP500

While all of the factors (completed wave count, waning breadth and momentum, and cycles) appear to be in place for a top to occur, the one fact that cannot be dismissed is the multiple levels of support for the SP500.  In addition to the April and November 2010 highs, the SP500 is riding above the lower channel line for the rally from July 2010 and the median line from February 2010.  It will take a sustained break of the January 2011 low and then the 2010 highs in order for any significant correction to occur.  This may be easier said than done.

Sell Fractal Pivot In Place

The Qs obliged in forming a sell fractal pivot which is formed by a low with two higher lows on either side of it.  (See the book Trading Chaos by Bill Williams.)  This means that a break of Friday's low would confirm a short term change in the trend.  This would also be accompanied by a break of the trend line for another confirmation of a trend change.

The rally from Friday's low does not appear impulsive, but additional upside cannot be ruled out.  Silver and oil are breaking down which may be leading stocks to the downside, but the key factor here seems to be the Dollar as it has been unable to turn to the upside, an event that should put an end to this rally.

Awaiting Confirmation

The markets rallied today so there was no downside follow-through for the MACD sell signal.  We are waiting for a break of Friday's low, preferably with a close below it to confirm the signal.  Also if tomorrow's range stays above Friday's low (without a new rally high), it would for a perfect chaos theory fractal sell pivot.  It may be Wednesday before we see confirmation, and by then of course, we have the end of the month-first of the month positive bias.  This top building process may last into the middle of next week.

MACD Sell Signal For The Qs

We now have a valid MACD negative divergence sell signal for the Qs, but what was wrong with the last one?  This is where a little observation can keep you out of trouble.  First, on the day of the last signal the Qs closed near the top of the day's range.  Second, the volume was anemic.  And third, there was no downside follow-through to confirm the signal.  And lastly, neither the SP500 nor the Russell 2000 had valid sell signals either.

This time we have the Qs closing at the low of the day on higher volume, and we already have a valid MACD sell signal for the Russell 2000.  The only thing lacking is downside follow-through.  In order to enter a position, we would want to see the Qs break and sustain below the trendline from the November low.  In all likelihood, we will see a defense of the trendline on Monday or an apparent false break with the Qs breaking below and then closing at or back above the trendline.  In that case, it would be prudent to wait for a break of Monday's low to enter a short position.  If, on the other hand, the Qs fall by 1% or more on increasing volume Monday, then it would be acceptable to enter a short position.

Typically, traders will put a stop loss in just above the previous swing high, but using the MACD the rule is that the trade is still in force as long as the MACD doesn't rise above its previous high.  You still need to make sure that your position sizing is within acceptable limits for your account.  What if you took the previous MACD sell signal as a signal to go short.  Then, you should still be in the trade as the MACD has not risen above its previous high.  Of course, you would have had a 4% to 5% drawdown, but that is not extreme.

This seems to go against the usual admonition for traders to NEVER go against the trend, but the fact is that trends do change and the MACD is one good way to observe when that is happening or about to happen.  However, it must be used in conjunction with a good understanding of market behavior and some common sense rules.  Last year, using the rules presented on this blog, the MACD made 16% trading the Qs with only 3 trades (2 winners and 1 loser).  This is why it is one of my favorite tools.

Possible Bullish Pattern In Google

Google appeared to have completed 5 waves down from its January 4, 2010 high on July1, 2010, but this turned out to be false as it broke above the January 2010 highs in November and again this week.  The only reasonable conclusion, in my opinion, is that the August 27 low was a truncated wave C of a double zigzag correction.  The move up from the August 27 low is clearly impulsive, and I have labeled it as wave (1).  GOOG  looks to be working on wave C of (2) in an expanded flat correction.  Closing at the lows of the day and the week supports the near term bearish outlook.  However, once wave (2) is over the outlook for GOOG is very bullish with a target approaching 1000.  We will have to be watching out for the expanded flat morphing into a combination correction that could extend for some time, but even so, this one will remain on my radar screen.

The Qs finished very poorly for the week near the dead low for the day and the week.  While there may be a muted rally attempt Monday morning or perhaps even a retest of today's high, the near term picture continues to develop to the downside.  The length of the initial thrust off of the high to yesterday's low is sufficient to propel the Qs down to the November low and April high should it develop as an impulse at higher degree.  If this were to occur it would probably take about two more weeks.  This would set up a deeper correction toward the 45 level.

However, if the correction finds support at the November high, it will probably not be as deep overall and the November low and April high around 50 would then probably be the final correction target instead of the deeper correction cited above.

The poor showing in AAPL and GOOG suggests that the deeper correction is the more likely outcome.

MACD Sell Signal For IWM

Completed Impulse In The Qs

We now have a completed impulse wave down in the Qs of minute or smaller degree.  A countertrend rally lasting several hours and possibly into tomorrow is expected next, but given that we are dealing with a retracement of ending diagonal triangles at two degrees of trend the countertrend rallies may be shorter than usual.  We should also expect the unexpected, i.e. gaps down and downside extensions.  The Qs have moved under the upper trendline of the ending diagonal from the November low and a retracement back to the that level is likely.

Commodities are rolling over.  Silver, in particular, is breaking down sharply.  As long as silver remains below yesterday's high (28.77 in the SLV) it should continue to accelerate to the downside.

There will certainly be buyers stepping in at the usual support levels.  We will be looking for those support levels to fail as the Qs head toward at least 45+/- over the coming weeks.  A sustained move below 55.07, the 2007 high, in the Qs would confirm a pivot reversal.  So that is the next area to watch.

Correction Likely Underway

While one day doesn't make a trend, I think there is every reason to believe that today's reversal marks the beginning of at least a short term correction, and probably an intermediate term correction in wave C down.  Besides the outside reversal day (yes it closed one tick above yesterday's low, but it is close enough), the Qs reversed almost right at 1.0x5DOR (5 day opening range) above the high of the 5DOR.  The common targets above and below the 5DOR for the month are 0.618, 1.0 and 1.618 times the 5DOR.  We also have a completed ending diagonal triangle and the high/low logic index sell signal.

AAPL closed solidly below its median line and failed to touch 350 during regular hours.  We also have a number of other stocks sold on earnings, IBM being the exception.  All in all, the evidence is stacked in favor of a correction.  We will have to see what the correction brings in its first leg down to determine its possible extent.

I will be looking for opportunities to short the Qs and select stocks in wave C down.  As discussed in previous posts, barring a wholesale market breakdown, I will not be shorting after this leg down as it should be the last shorting opportunity for some time if my big picture view is correct.

AAPL May Start Correction In The Qs

If the Qs sustain under this morning's opening low of 56.50, then a breakdown from the ending diagonal triangle for wave v will be confirmed.  At the least a retracement to the 12/31 low of 54.21 should then follow within the next 4 to 8 trading days.  The time for retracement of ending diagonals is typically 1/3 to 2/3 of the length of the triangle.  In this case wave v was 11 trading days long.

Once the retracement is complete we can evaluate whether or not it was impulsive and the probability for a continuation of the correction.

SELL WARNING!

The High Low Logic Index has issued a sell warning as of today.  The index takes the lesser of the number of new highs or new lows and then divides by the total number of issues traded.  When the index is high (>2.0) it indicates that there are a large number of new lows relative to new highs which is not consistent with the continuation of a rally.  Today the number of NYSE new lows hit 169 - almost as high as at some of the market lows over the past year.  This is a very strong indication that the market is breaking down internally.

The past signals shown above resulted in the following corrections:

Signal Date/Correction Period

4/26/04     3/5/04 to 8/13/04
9/22/05     8/3/05 to 10/13/05
7/18/07     7/16/07 to 8/16/07
10/25/07   10/11/07 to 3/17/08  (first leg down)

Note that while sometimes the sell signal was late, in every case the correction continued for a period of at least 3 to 4 weeks after the signal and in no case did the signal come earlier than the top.  This suggests to me that today was likely the top of the rally, but these are only 5 past cases so it is hard to draw conclusions about that.  Even so, the top is likely very near and a correction at least 3 to 4 weeks is imminent.

Grinding Higher

Nothing has changed.  The Qs still appear to be in an ending diagonal.  I would not be surprised to see a gap higher followed by a reversal or a gap down and sell off.  If this is a 3rd of a 3rd wave as some propose, then the bears are about to be screwed big time as the ending diagonal becomes a leading diagonal or some other pattern as the market explodes higher, but I really doubt such a scenario will occur.

Silver is rolling over and it will probably lead the commodities to the downside.  Oil has lagged and will probably continue higher for a few more weeks before it tops out.  The Dollar looks to be near the end of a 2nd wave correction.  The sideways action in the Dollar is what has allowed the stock market to grind higher, but when the next wave up begins it should spell the end for the stock rally.

Are Commodities At A Top?

The CRB commodity index appears to have completed, or nearly, so a 3 wave rally from its 2009 low.  The index bottomed in February 2009 a few days ahead of the stock market bottom.  Will we see a repeat?  Even if there is a top in commodities here it doesn't mean that a retest of the 2009 lows is coming next.  The rally from 2009 could be part of a double zigzag.  In that case a 38.2% to 61.8% retracement would be expected.

It is interesting to note that silver is now in its longest run without an intermediate term correction in its history.  Would you expect it continue or to be topping now?

AAPL Runs Up Against Resistance

AAPL has reached the upper channel line of the Andrew's Pitchfork from the December 2007 high to the January 2009 low and the previous major swing low.  The correctness of the median line positioning is shown by the two points of resistance in late 2009 and early 2010 and the two points of support in May and August 2010.

It would be surprising to see AAPL advance much further from here without a significant correction, but clearly the next major target of 350 is within reach.  AAPL may ring the bell when it hits 350.  This would also put a dent in the Qs since AAPL is currently weighted at 20% of the Nasdaq 100.

Closing In On At Least A Short Term High

Trying nail down the final subdivisions of the current rally is certainly a difficult undertaking and fraught with dangers.  Yet,  again the potential is here for a top.  The rally from the 12/31 low appears as a series of overlapping 3 wave movements in a narrowing channel that is most likely an ending diagonal at subminuette degree which is also completing a larger ending diagonal from the November low of minuette degree.  The Qs must remain below 57.39 in order for the count to remain valid.  An overshoot of the upper channel line would be expected prior to a top which should be coming in a few hours.

This morning the futures are positive, supposedly on good news out of Spain, but the reaction is tepid at best, consistent with 5th wave action.

Two well known advisory services are calling for tops as of yesterday evening.  First, Robert Prechter of Elliott Wave International has called for an across the board top in stocks and commodities.  In his latest Elliott Wave Theorist he shows completed counts for stocks and commodities including the Qs, but cautions that a few more "pops" may occur at small degrees of trend.  The comments in last night's post aside, one thing I can say about Robert Prechter is that the Elliott Wave Theorist usually does not usually get involved in the short term counts except when he believes an important turn is near, and he has rarely been wrong about these calls, so I take them seriously.  Even in 2007 when he called for a top in June or July, he argued that traders should remain short into the October high and he proved to be right.

Gann Global Financial is calling for an across the board top in commodities based on their understanding of Gann's 60 year commodity cycle.  They have been quite prescient with commodity calls since 2008 when they caught the top in oil.

The weight of the evidence seems to be that a top of significance is near at hand.  We may not all agree on what will follow this top, but as the market pattern unfolds over time, we will get clarification:  is this Primary wave 3 down,  Primary or Intermediate wave B down, or just a second wave at minor or minute degree in Primary or Intermediate wave C up?  It is too early to tell.

Commentary On EWI

I agree with many of the comments by Steven Vincent at BullBear Trading:

http://www.decisionpoint.com/TAC/VINCENT.html

In particular, he is the only other analyst showing the B wave count as I have discussed, although he holds it as a low priority.  I disagree with his count showing the move from March '09 to April '10 as intermediate wave (1) for the reasons I stated in my post on 1/9/11 http://tradercraig.blogspot.com/2011/01/lets-think-about-this-for-minute.html.

His sentiments on EWI's methodologies accurately reflect my own, and as I have commented directly to EWI in the past.  It is unfortunate that EWI does not use elliott wave theory in a more rational way.  Even so, there have been times they have nailed some big moves so I continue to subscribe.

Disregard

The count shown earlier this morning has already been invalidated.  This morning's thrust may be a 5th wave.  We will re-examine when more information becomes available.

Still Bullish Or Bearish?

Either the SP500 is working on a double zigzag correction on the 5 minute chart that will lead to higher prices, or it is subdividing into the first detectable impulse wave down since early November.  We should know by the end of the week and maybe as soon as tomorrow.

On a side note, the NFIB small business confidence survey ticked down for the first time in 4 months.  To me the most interesting thing about the survey is the fact that at the current level it has just retraced back to the level that it was at the bottom of the 1991 recession.  Anyone who has or is involved with a small business knows this is a pretty accurate picture of the small business climate.  While the hosts and guests on CNBC this morning dismissed the survey as being out of touch with the "clearly" improving economic conditions, I think they are missing the point.  Big business may be doing well for the moment because it has access to huge reserves of cash, government support and international sales.  Small business has been left to fend for itself and reflects the other half of the economy that is struggling.  It is the small business climate that truly reflects the state of the average american right now in my opinion.

Let's Think About This For A Minute

I am really trying to get a handle on the apparent success of the consensus view of the markets as compared to my expectations for a still ongoing (B) or [B] wave scenario.  The function of B waves is to bring market sentiment back to and beyond the sentiment seen at the origin of wave A just like with 2nd waves, and that certainly is the case now.  I am truly amazed at how homogeneous the forecasts have become.  Just about everyone I read or listen to has capitulated to the view that the market will only be going up with QE2 coupled with the 3rd year of the presidential cycle.  There are a few elliott wave practitioners that are still holding on to the P3 interpretation, but many have also switched to a more bullish view.  Some, in fact, are calling this a primary bull market.  I have only seen one other, perhaps there are others, that see the current action as part of a much larger intermediate wave (B) or primary wave [B] as I have proposed.

As far as the idea that we are in a primary bull market is concerned, there simply is no real justification for that view.  Even a basic understanding of secular bull and bear market cycles suggests that the current secular bear market has much further to go in time than has transpired so far.  The minimum expectation is for a real (inflation adjusted) or nominal low in 2016/17 and a real low as late as 2026.  Thus, any elliott wave counts showing a primary bull market must be discarded in favor of larger corrective counts.

At the same time, we should not discount the impact of QE2.  The Japan experience shows quite clearly that the equity markets will rise during the QE process and tend to top at its conclusion.  In fact, recent analysis supports the view that the Fed's only real impact on the economy is by manipulating the stock market via bond purchases and sales.  We know full well that the Fed is no where near the completion of QE based on the recent congressional testimony and Fed meeting minutes.  So, we certainly should expect that the equity markets have much further to go on the upside before a top is seen.  This fact rules out the case for a beginning to primary wave 3 down.

Given the above the only question at this point is whether or not we are already in wave (C) or [C] up or whether we are still in wave (B) or [B] down.  You know my view on this is the latter, but either way, traders and investors need to know what actions to take.  One bit of personal experience that I will share with you is that I have tended to be overly aggressive in attempts to short B waves and 2nd waves.  What I have learned from these attempts is that it really is a fruitless endeavor.  One would be much better served sitting on the sidelines and waiting for new long entry opportunities rather than trying to short the market.  The whipsaws and friction offset the potential gains in most cases.  This is in contrast to the excellent potential in shorting C waves such as the decline from the 2007 high to the 2009 low.

Until proven otherwise, I am maintaining the view that we are currently in wave B up of wave (B) down.  So, wave C down is due.  Given this is likely a C wave within a (B) wave of intermediate degree lessens the potential benefits of shorting, but that said, I am looking to be short wave C as the last opportunity to do so prior to the top of wave (C) sometime in late 2012 or early 2013.  After the next leg down is concluded, whether it proves to be wave C of an expanded flat or wave C of a running triangle, in my view, traders would be well served to only be long the market or in cash until the final top of the current cyclical bull market is over.  If we get 3 waves down from the current high, then we cannot know if it is a triangle or wave 2 of (C) until much time has passed, and we should take a bullish stance in either case, which is why this will be my last shorting campaign for some time barring a major change in the outlook.

One thing about expanded flats and running triangles is that we have some reasonable limits on how far wave B can exceed the high of wave A.  It is rare for wave B to longer than 1.618 x wave A, which puts the limit on the Qs around 56.14, the SP500 at 1348.89 and the Dow at 12273.81.  The Qs have pretty much met this objective limit.  We can allow a little wiggle room, but not much.  So, we need to see the Qs begin to rollover soon.  We could allow some more upside for the SP500 and the Dow.  The Russell 2000 actually has some upside room, too.

It won't be long now before we can discard some of the potential outcomes.  Once any potential upcoming shorting opportunity has either been realized or negated, there will be little reason to risk the short side for quite some time unless we see some major changes in the pattern of market behavior.

% SP500 Stocks Above 50MA

The % stocks above the 50ma is a very useful tool for signalling potential market turns.  There are a number of ways to use it but one of the easiest is with the MACD of the % stocks above 50ma indicator.  The chart shows that in every instance when the MACD gave a sell signal AND the indicator was making a lower high (marked with the red circles) a market decline/correction followed.  When the indicator was making a new high sometimes a decline/correction followed (magenta circles) and sometimes it didn't (unmarked).

The current setup indicates a decline/correction is near at hand, unless the signal reverses.

SP500 Holding Above Resistance

While the bulls were able to push the close back up into the top half of the weekly range, the SP500 closed below the open, below the close of 1/3/11, and down for the day.  The action this week is reminiscent of previous tops in January and April where there was little progress for a week and then a sudden downdraft appeared.  Unfortunately for the bears the low for the week was 1257.62 which held above previous resistance at 1256.98.  At the moment there is no indication in the price structure that the top is in, and until there is a solid close below this week's low the path of least resistance remains to the upside.

Regardless of how long the market continues to ride the thin air of this uptrend, it is a market skating on thin ice (to mix metaphors).  It reminds me of the runups into May '06, Jan '07, Jan '10 and Apr '10.  During these final advances it seems that the market just keeps going and going like the energizer bunny, but when it does break, it gives back weeks and months of gains in short order.

In my opinion, the projected cycle high date for the 22 month cycle (1/4 of the 7.25 year cycle) occured 12/30/10 to 1/6/11.  It has been my experience that when the market runs past these important cycle turn dates, the violence of the reversal is all the greater.  At the moment the SP500 could easily run into the 1313 to 1327 zone before turning.  The Qs could easily run to 57+ if this week's highs are exceeded next week.  But if Monday is a down day then I think the selloff will be underway.

The pattern on the 5 min chart of the Qs shows what could be a leading diagonal coming off of the opening high, which had breeched the upper channel of the action from the early November high, followed by a rally of 82%, a common fib retracement for 2nd waves, of the decline to the underside of the same channel line.  Thus, it is possible that the high is in, but if it is the market will have to start down almost from the open on Monday.  If that doesn't happen expect the grind to continue.

Triangles & More Triangles

The market keeps on throwing up triangles.  For true elliott wave triangles, these are always the last corrective pattern before the final impulse at the next highest degree of trend.  Given this, we know there will be an end to this.  My take is that either the market has already topped, and we are just waiting for the inevitable drop, or we will see one more new high before the correction begins in earnest.

Bullish Count For Moody's

As much as it pains me to say it, because I frankly don't think they deserve it, the stock chart for Moody's Corp. (MCO) is showing a very bullish wave count.  It appears that MCO is embarking on wave 3 of (C) up with a minimum target of 40, but a possible target as high as around 55.  However, with the broader market possibly ready to roll over near term, it would be advisable to wait for a pullback.  If the low noted as wave 2 is breeched then a deeper pullback in wave 2 will likely be seen.  Thereafter, wave 3 up should follow.

The Qs did in fact top this morning at 10:45 about 2 hours and 15 min after yesterday's intraday post, and while some markets appear to have topped, the Qs appear to be forming another triangle, so another pop higher will probably be seen tomorrow.   Or course, a powerful thrust higher tomorrow would throw the bears completely on their heels and possibly show the market as being in wave [iii] of 3 of (C) higher instead of wave B.  I don't think it will turn out that way, but we shall see soon enough.

Dow At Long Term Resistance

Unlike the SP500 and the Nasdaq 100 the Dow Industrials are approaching legacy resistance at 11750.28.  I find it somewhat interesting that no one has mentioned it, but the Dow may have difficulty surpassing this level on the first try since the 2009 low.

Very Close To A Top

If my interpretation that the market is completing an ending diagonal triangle at either minute or minor degree, we may be only 30 to 90 minutes from a very important top.  I am showing a closeup of the final squiggles on the 5 minute chart which sports a 4th wave triangle at micro degree.  On the one hand I don't like labeling the chart at this short a time frame, but on the other hand I hate not to point out what may very well be the final movements toward at least a near term if not a intermediate term top.

It is also important to note that the Russell 2000 appears to be completing a 2nd wave retracement against yesterday's decline as the Qs, the Dow and the SP500 are all making new rally highs.  Silver, too, appears to be rallying in a corrective wave pointing to a potential across the board decline in all asset classes except the Dollar.

One Way Or The Other

Today's selloff in gold really got the bears going.  Even commodity bull Dennis Gartman said he believed it could be the beginning of a multiweek correction, BUT today's action in the context of the pattern in the price suggests that it could easily be wave [e] of a 4th wave triangle.  E waves often push the limits and then just as swiftly reverse course to everyone's dismay.  At this point, we need to see gold decline under 1315 to be sure that the uptrend is over.  Otherwise, a move to 1475 to 1500 could be beginning as soon as tomorrow.  The MACD would seem to be saying that the correction is the best bet, but there is really no way to know until gold shows its hand.

Squeeze Setup For The Qs

A squeeze setup had developed in the Qs.  It will trigger when the Bollinger bands move back outside the yellow  Keltner channels.  The direction of the trade is determined by the direction of the price when the trade triggers.  The DI+ & DI- indicators can be an aid to determining which way it will go.  At the moment it would be expected to breakout long, but things can change.

I expect the Qs will remain in a tight range the rest of the week and a breakout will occur next week.  The action today may have been a precursor to a coming selloff.  Commodities were hit the hardest today and this may be signalling what to expect with equities.

Key Levels

The selling today is on light volume so far, but it does show some impulsive qualities.  For the Qs, coming under last week's low of 54.21 and closing under the November high of 54.04 would go a long way toward initiating a correction.  The corresponding levels in the Dow and SP500 are 11518.44/11451.53 and 1251.48/1227.08, respectively.  I particularly like the look of the decline in the Russell 2000 which only needs two more waves to complete an impulse down from yesterday's high on the 5 minute chart.

I would not be surprised to see an initial impulse down followed by a 2nd wave rally into Friday to keep the opening 5 days of the year positive for the bulls.  This would lead to more intense selling next week.

The markets are wedging higher on declining volume from both the November and July lows.  Even if they manage to eke out another high next week, rising wedges almost always end badly.  If my hypothesis about a B wave is correct, and if the rally from the July 1 low is a rising ending diagonal in wave [c] of B, then look out because the July 1 low will be retested by early to mid March.  This is clearly not the consensus view, but it is one that should be appreciated.

Do The Bears Have A Chance?

I must admit that as hard as it is to conceive, I still believe that the current rally is a B wave.  That is just my opinion, and I know many disagree.  But there is a lot of work to do if the bears are going to have a chance in wave C down, whether it is a retest of the July low or just a 62% retracement of wave B.  Forgetting elliott wave for a moment, the two most important things that are needed to confirm a change in trend are:  1) the break of a trendline, and 2) a swing move greater than the largest counterswing in the current trend (Gann's method).  The third and final thing needed to confirm a change in trend is the break of the swing low created by the secondary reaction after the initial decline.

In this case, the decline in August was 89.54 points.  To be certain, we need to see a move below the last swing low, which is the November low of 1173 - a move of almost 100 points.  That would seem to be a tall order at the moment, but anything is possible.

JPM Completes 3 Wave Rally

This morning it seemed there was a lot of buzz about the financials being strong, but if JPM is any indication, it appears the rally in the financials is very near completion.  JPM looks to have completed a 3 wave rally in wave X from the July low.  There is a very clear triangle for wave [b], and wave [c] has reached the parallel trend channel for the move.  It could still move higher of course, but even so, the upside should be limited.  The downside target for wave Y is 30 to 32, which may be an excellent buying opportunity in a few months.

Long Correction In Progress For QCOM

QCOM has been in either a flat combination or a running triangle correction since it topped in May 2006.  The May 2006 top ended an impulsive advance off of the August 2002 low.  The current correction could last another 1 to 3 years, after which another impulse of intermediate degree should follow to the cited targets.

If the correction turns out to be a triangle, it would almost guarantee that a retest of the 2002 lows would follow the coming impulse.  A triangle would probably give the least time to complete the correction.  Whereas, a flat combination could extend for longer with a smaller triangle or double zigzag for Y.

The more bullish outcome would be a 3 to 6 month correction that does not retrace more that 62% of the July to December rally followed by a breakout above the recent highs.  This could indicate that wave (C) up is already underway.  A nice cup and handle base would give an excellent entry in that case for a 3rd of a 3rd wave in (C).

Either way, it appears that there is no reason to chase after QCOM at the moment.

A Look At The IBD 100

Investor's Business Daily has changed its weekly format from the 100 best stocks to the 50 best stocks using a revised stock screening method.  We will see if it improves the results next year.  Using IBD's market calls, I performed a few tests to see how the IBD 100 performed during 2010.  These are as follows:

1. I - Buy the top 10 stocks from the IBD 100 on a "Confirmed Uptrend" and sell them on a "Market In Correction".
2. II - Same as I except use an 8% stop loss.
3. III - Buy breakouts of the top ten stocks from the IBD 100 "boxed" with formed bases as of the first posting after a "Confirmed Uptrend".  If there are less than 10 listed, then only buy those and no others.
4. IV - Same as III except use an 8% stop loss.
5. V - Buy the top 10 relative strength stocks from the Russell 3000 on a "Confirmed Uptrend" and sell them on a "Market In Correction".
6. VI - Same as V except use a 16% stop loss.

The results were:

1. I - 7.08%
2. II - 17.16%
3. III - 9.83%
4. IV - 11.69%
5. V - 31.30%
6. VI - 42.78%

The relative strength approach beat the IBD 100 hands down.  However, it must be said that the volatility was much greater with a 30.02% and 18.64% drawdown for 5 and 6, respectively.  Nevertheless, using a relative strength screen may be a better approach based on total return.  If safety is the primary concern, then using strategy 4 would be the best approach as the drawdown was only 2.82% and the strategy averaged more than 50% cash during the year.  Slippage and commissions were not considered.

 As impressive as some of the results were, the hassle of buying multiple stocks on each buy signal does not seem worth the trouble, but to be fair I have not done the same test for 2009.  Nevertheless, I believe I will concentrate on trading market ETFs with leverage.

It seems to me that the big money in buying individual stocks is made with longer holding periods.  For example BIDU is up more than 500% since the 2009 low for a period of almost 22 months.  Therefore, my current approach is to build positions in stocks that I believe have the potential for outsized gains over the next one to three years while also trading market ETFs and options for shorter term gains.  My goal is to achieve a 60% to 100% average annual return without huge drawdowns.  Presently I am running just under 40% since I began this blog.