Friday, February 4, 2011

Possible Scenario Developing

So far, attempts to divine the top of this rally have been futile, but the clear fact remains that the market continues to rally in what appears to be a rising wedge (ending diagonal) at 3 degrees of trend as volume continues to contract.  Oftentimes we will see at least an attempt, if not an outright overthrow that convinces the last stragglers to the party all is well and this really is an ongoing bull market.  However, the market action is so anemic, I doubt we will see much of an overthrow attempt.  If the rising wedge interpretation is correct, the downside will be surprisingly swift.

For the Qs, the MACD short signal is still in force and we now have the Dollar trying to put in a bottom that could lead to a 3rd of a 3rd wave rally.  This should take the wind out of the stock market's sails, as well as precious metals.  Oil's breakout attempt failed today, but I wouldn't call a top yet.  It should still try to grind higher over the coming weeks.

For all of the talk about an improving economy the jobs report today is probably a more accurate gauge of economic reality than the talking heads were willing to admit.  Now that we've had two subpar reports back to back there is all of this talk about an upside surprise in the near future and lots of excuses to explain why the jobs report does not show what is really happening.

The unemployment rate fell because people are giving up - not because they found jobs, and the projections of future hiring expectations are based on increasing growth above the current lackluster level.  Even the slightest decline in demand lead to more layoffs and job losses.  We are on thin ice here, and I think most people feel it.

The stock market has gone up for one reason only:  excess liquidity chasing yield, but that can only last so long, and if investors perceive any loss of upside momentum they will be fighting to get out to protect what little they've made.  Even if the market continues to rally another two weeks, the condition of the market will not change.  All that will change is that the downside risk will be even greater than it is today.

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