Finishing On A Good Note

Markets finished the month of May on a high note.  While there is still some work to do as the action remains within the trading range between the May 2 high and the May 25 low, the key point to take away is that the SP500 held support at the top of the January range for the 4th time since the March correction.  This is bullish action.  The drum beat for a larger correction continues, but so far we've seen nothing but a pullback in the monthly trend.  Maybe there's a surprise around the corner, but for now the market looks higher.

IBD called the market in a confirmed uptrend after the close based on today's action.

Dollar Divergences

We have a definite positive divergence in the macdh for the US Dollar Index.  A similar situation occurred in 2009 leading to a multi-month dollar rally.  Even if we see a retest of the recent May low, the positive divergence is likely to remain, and the outcome will also likely be the same.

For those who might assume this means the stock market will necessarily decline, the argument is not so clear.  While a negative correlation with the stock market has existed for some time, that has not always been the case.  In fact,  according to John Murphy, the normal relationship between the Dollar and stocks is a positive correlation.  It may be that we will see an inversion of the recent negative correlation with a rise in the Dollar supporting a rise in stocks.

The Long Wait

There is really not much else to say right now as we wait the long wait for a resolution to the current consolidation.  It does appear that sentiment is turning more bearish which is a positive sign.  Some are still calling for a long term top sometime in June or July.  I don't see it.  Maybe they're right, but the odds are against them.  So few are ever right calling tops - myself included.  Bottoms are not as difficult, but tops are ever so elusive.  At the moment the trend remains up and that is the direction we should be looking until it changes.

Have a great, long Memorial Day weekend.

As Expected

We got the reversal this morning after futures were down big overnight with the cash indexes not following this morning.  It looks like we will have another leg down to complete wave [c] unless the 5/19 high of 1346.82 is exceeded on this rally.  If it is, then wave [d] up is probably underway.

There is a good chance that wave [d] is in fact underway as the decline from the 5/2 high has taken 17 trading days so far, which exactly matches wave [a].  Wave [b] lasted 32 trading days, almost 2 times wave [a].  If the usual relationships hold, then wave [d] will last either 11, 17, or 28 trading days, and wave [e] will take 7, 11, or 17 trading days.  This puts the potential end dates for the correction at June 21, July 5, July 22 and August 1.  June 21 or July 5 appear to be the most probable.

One reason to be encouraged is that leading stocks continue to break out.  NFLX is a good example. I am long from 250.  Also, the previous swing lows have yet to be broken.  The next few weeks are likely to feel dull and unproductive, but remember the old adage to never short a dull market.

Oil likely completed wave c up of a bearish [b] wave triangle today or will do so tomorrow.  After the sharp drop from 5/2 to 5/6, we should expect another round of selling to complete the correction in oil.  On the other hand, if the triangle breaks out to the upside, it would probably be more bearish for oil in the long run.

A Rare Setup In The SP500 & Qs

I wanted to share this rare setup with you that is occurring in the SP500 and the QQQ right now.  The chart is a weekly chart with the 12 week 2 SD Bollinger bands in cyan.  In the past year there have been two instances of this setup in the SP500, which occurs when the Bollinger bands go completely flat and tight for at least 6 weeks.

Looking back at the SP500 over the last 30 years this setup has occurred very few times, but almost always leads to a powerful move.  The RSI and MACD can both be used to confirm the trend when the market breaks out.  At the moment both are in a neutral condition.

The longest period that I found for this condition was 12 weeks, although another case with some variance lasted 14 weeks.  The current setup is now 5 weeks long, so we may have as many as 7 to 9 weeks more to go, but I doubt it will be more than 3 or 4 weeks.  The breakout is typically in the direction of the trend on the next higher time frame.  The monthly trend is currently a strong uptrend, so the most likely breakout direction is to the upside.

I wanted to bring this to your attention as there is increasing talk on trading blogs and sites about the beginning of a protracted decline.  Even on CNBC, Bob Pisani was airing his concerns that traders are apathetic as opposed to fearful, which might be a setup for a selloff.  The fact is, as I pointed out in my last post, that while trader talk might be complacent, traders are becoming increasingly bearish with their positioning according to the ECPR.  As the consolidation continues I expect the sentiment to become even more bearish which will support a powerful rally for the rest of the year.  This is a change from my earlier view that we would see a top in June.

In this type of environment leading stocks will tread sideways or edge higher as laggard stocks correct.  The simplest thing to do here is to replace positions that are stopped out with new high relative strength stocks.  When the breakout comes it might be difficult to get on board.

Trader Sentiment Has Reached Bearish Levels

It looks like the market may need to test lower levels before a short term bottom is seen as squeeze short signals fired yesterday.  However, the tenor of the decline so far is corrective.  A rally with another low would complete 7 waves down from the May high.  The correction may extend well into June at this point if a triangle is underway.  This may allow sentiment to reach even more bearish levels, which would support a strong rally once the triangle terminates.  A sharp decline that does not breach the wave [c] low would be a strong clue that the pattern is a triangle and that it is finished.

Below is one possible interpretation of the pattern. A typical end of the month/first of the month rally should begin any day.

KKD Explodes 25.78% Higher

KKD reported earnings this morning that beat estimates by 4c and double that of a year ago on higher than estimated revenue as well.  My personal opinion is that the KKD has rallied in a series of first and second waves since it bottomed in February 2009 and is now beginning a powerful 3rd wave advance that should carry it to at least 26.42, the February 2003 low.  However, there is resistance ahead at 9.65 and 13.93.  If, and it is a big if, KKD can hurdle 26.42 over the next year or so, then I think it will retest if not exceed its all time high.  I have been a buyer of this stock from $1.50 and am now fully positioned to ride this trend.

The market continues to whipsaw traders, but while buyers are standing aside, selling volume has failed to materialize.  The most likely explanation is that the current decline is wave [c] of a 4th wave triangle with waves [d] and [e] yet to come.  The upside target would be at least 1431+/- and probably higher.  Unfortunately, there is no way to know if this really is a 4th wave or wave [X] of a complex double zigzag that targets even higher prices.  It may be the end of June before an upside breakout is seen.  Only a break of the March 2011 low would invalidate this viewpoint.

GDX May Be Near A Bottom

The GDX may have found support around 54 against a rising 50wema.  The weekly MACD is approaching the zero line and setting up a possible buy signal, which may take another 2 to 3 weeks to develop. This is occurring with the backdrop of a huge selloff in gold and silver, which many believe has confirmed a top in the metals.  Perhaps silver has topped and gold needs another stab at a new high.  In any case, as long as support holds in the GDX, the prospect for gold mining stocks is looking brighter.

RGLD has broken out to new highs and pulled back to test its old high.  It may be a trading candidate.

Not Yet

On Tuesday the SP500 bounced off of trendline support and is pushing up against trendline resistance.  Today's action was not sufficient to confirm the resumption of the uptrend, but while there is resistance to overcome, the subtle point not to be missed is that the close today was above the low of the February high day and above the March high.

Perhaps it all hinges on the Dollar, but if that is the case, the options remain open either way until the Dollar either rolls back over in earnest or moves past resistance at 76.88.  At the moment, I am leaning toward another retest of the recent low in the Dollar, which should support stocks and commodities, but we may need a couple of more days to find out.

The sentiment picture as measured by the PPO of the equity only put/call ratio has definitely reached a more bearish level as traders are hunkering down in anticipation of a much telegraphed top in the stock market.  This would seem to contradict a near term top.  It also shows that what people say and what they do are often very different things as the chart below contrasts the sentiment surveys.  I think this chart will tell a different story when we actual approach the top.

Finally, the seasonal pattern for pre-election years suggests this week's low may be an important one, at least in the near term, as it portends a rally in stocks until at least the first of July and maybe even into August. The 12 year annual average of the SP500 shows a rally into at least the first of June is imminent.

All of the above taken together suggests a rally in stocks for another two weeks is more likely than the alternative.  Yet, we will have to keep an eye on the Dollar.

We Still Need Confirmation

I think today's action makes it likely that yesterday's low was the bottom for the correction, but we still need to see follow-through by the end of the week without a break of yesterday's low to confirm that the correction is over.

Looking For A Bottom For The Correction

The action today was positive as markets rebounded off of the 50ma to close above the open.  For all of the fear created from the HP memo, Intel and Dell presented a different picture.  While it may take a few days to complete a reversal I think today may have been the bottom.

The PPO of the equity only put/call ratio reached levels associated with pullback lows since the beginning of 2010 today, and the McClellan Oscillator also came very close to its April low.

In the Dow the sideways movement over the last two weeks looks very much like a b wave triangle, which suggests the decline is a 3 wave pullback which may have ended today.

I am preparing for one more push to new highs.  Depending on its character, that may be it for a while.

Testing Support At The 50sma

The SP500 and the QQQs are testing support at the 50sma.  As frustrating as this correction has been the fact remains that the April 18 low has yet to be violated, which means the intermediate trend remains up.  Wave a = wave c for the SP500 at 1318.  We may see more selling into that zone as the NYMO heads into the oversold level.  I will be looking for a reversal tomorrow or Wednesday to finish this correction.  However, a break of the April 18 low would suggest that a retest of the March low is underway in a flat correction.

Consolidating Before The Next Move Higher

This was an interesting week in the markets.  To me the most outstanding feature was the fact that even though the Dollar rallied strongly off of its almost 3 year low and broke above a downsloping trendline, stocks did not break down but continued to move mostly sideways.

It is beginning to look as though the [i] [ii] (i) (ii) count that I have presented is not going to hold up.  It now appears that the March low was a 4th wave with stock markets developing various forms of triangles in preparation for the final leg up from the July 2010 low.  I suspect we will be fortunate if the SP500 makes to 1400 before it tops out.  Below is one possible scenario for the IWM.

After the June high the expected correction should take the market down to the primary trendline for the entire rally with the SP500 targeting 1220+/-.  I do not think that most intermediate term trades will hold up to that deep of a correction so it may be prudent to go mostly to cash by mid June.  The only exception would be if we saw a sudden explosive move higher to above 1440.

As far as the Dollar is concerned, the rally so far may only be a sharp 4th wave rally with a retest of the low yet to be seen in a 5th wave down.  This would be the most likely scenario that fits the possibility of a continued rally in stocks.  Later this year we may see a positive correlation between stocks and the Dollar develop.

It may be worthwhile to pursue short term long trades as the market breaks out in the next leg up, but it may also be prudent to take profits early.

Wave c Of (ii) Down Underway

Wave c of (ii) down is underway as the selling started almost right from the open.  However, the damage to leading stocks does not appear to be severe.  It may only take one more day to complete this move down, but it should finish at the latest by Friday.  Thereafter, a powerful 3rd of a 3rd wave up should follow.  However, if the SP500 should sustain below 1323, then we would have to reconsider that viewpoint.

Still Looking For Another Pullback

I think today's rally was probably most or all of wave b of (ii) up.  Wave c of (ii) down should follow by the end of the week if not tomorrow.  But overall the action is bullish as the Qs closed within 0.15 of the recent high and the SP500 closed solidly back above the February high.  A number of leading stocks performed well today but the action was not enthusiastic, but not many stocks declined on heavy volume either.

I continue to look for short term setups with an eye toward a high in mid to late June.  As an example, WCRX broke out today, unfortunately it was on light volume.  We will see if it follows through.

Correction Will Take A Little Longer - Probably

The intermediate trend is still up in the sense that the April 18 low has not been violated, but the correction still appears to be in progress.  It may take a few more days and a retest of the 5/5 low before it's over.  Thereafter, expect a resurgence of the uptrend.

Wave (ii) Correction In Progress

Well it certainly was an exciting week in the markets with the selloffs in Silver and Oil, and the rally in the Dollar. In my opinion the current pullback in stocks is still most likely wave (ii) down in an abc correction that is still in progress.  We may see a little more upside next week in wave b up and then another decline to complete wave c down.  The SP500 could go as low as 1313.35, the high of the April 18 low day and also exactly 1.382 times wave a down, but there is support at 1320 to 1325.  I think any test of that area with a reversal would be a buying opportunity into a June high.  Watch for the MACD histogram to turn up at least one bar to confirm the reversal unless there is a hammer or bullish engulfing bar, which would provide a good low risk entry against the April 18 low of 1294.70.

As much as I think the market will eventually retest or exceed the October 2007 highs, the fact is that the Dollar may be getting ready to rally.  On a long term basis that is not a problem as John Murphy has pointed out that a rising stock market with a rising Dollar is a positive intermarket relationship.  However, in the short term and intermediate term it is likely to mean a falling stock market.

Even though waves (v) and [v] may follow into the end of June, we have seen how quickly the damage can happen with Oil and Silver, so traders would do well not to overstay their welcome.  It is probably better to think about taking profits early than giving them all back in a week.

I am looking forward to one more solid round of short term long trades into early June, and then I think it will be time to take a break.

Commodities Are Toast

Oil closed down almost $10 today after completing what appears to be an ending diagonal pattern on 5/3.  Based on the ED pattern oil should reach the $84 to $87 range by the end of May if not sooner.  However, shorting now would not be advisable as a sharp retracement could occur at any time.

The CRB continuous commodity index has broken a multi-month trendline and fallen back below the upper channel line of the entire rally from the 2009 low.  This suggests that the ABC rally in commodities including oil is over.  The trend should be down for many months to come and traders should be looking for shorting opportunities after a retracement rally.  The real problem with the breakdown in commodities is that it may also prove to be an achilles heel for the stock market.

Today's action in stocks brought the NYSE McClellan Oscillator down to an oversold level, although it may still have further to go.  Clearly, yesterday's low was not the low of wave (ii).  For wave (ii) to remain valid it must remain above the 4/18 low of 1294.70.  If that level is breached, then we would be left with a 3 - 3 pattern which would suggest that the current correction is minor wave 4 and not wave [ii].

In either case, higher prices will be seen before the rally ends.  The only question is how much higher.  At this point there is no easy answer, but probably just in excess of 1400.

What about the longer term outlook?  The fact is that even if we see the end of the current rally around 1400 it does not mean that primary wave 3 down will follow.  It just means that the overall rally is becoming more complex.  We may see a correction of the entire rally from the 2009 low or just the rally from the July 2010 low followed by more upside in a large double zigzag or other combination correction.  Or the rally may subdivide with an extended wave [C] up.  There are a lot of possibilities, but the one thing to keep in mind is that it is now looking like we will definitely see a top of intermediate degree sometime in June, and probably from lower levels than originally anticipated.  The collapse in oil prices will not help the SP500.

Who Do You Believe?

IBD has called the market in correction based on yesterday's action, but the folks at Cabot say the market's uptrend is still intact despite the recent bought of selling.  I have to admit I was surprised by IBD's call since there has only been 4 distribution days on the NYSE.  It seemed they were basing their decision more on the action of leading stocks, which have definitely taken a beating the past few days, than the distribution count.  The general rule is 5 or more distribution days before a correction is called.

The SP500 really needs to close above 1340 (futures above 1337.50) today or we may see a much deeper pullback, but until the April 18 low of 1294.70 is breached, we will still have a series of higher highs and higher lows.

Pullback May Be Complete

If the [i] [ii] (i) (ii) count is correct, the pullback may have completed at today's low.  If not, then today's low was likely wave a of (ii).  One reason to believe that it may have ended is that the SP500 penetrated and closed above the February high on volume 5% less than the February high.  The High Low Logic index has turned down and could issue a buy signal within the next two days.

One thing is for sure.  If today was the low of wave (ii), then we should see new highs in short order as the market should be in a 3rd of a 3rd wave.  A hesitant move toward the May high would suggest that wave (ii) has more work to do.

Short Term Caution

The High Low Logic Index is flashing a caution sign as it has risen above the 1.00 level into the neutral zone.  This suggests that short term traders should hold off on new long positions until it turns back down in earnest (aggressive) or falls back below 1.00 (conservative).  After the recent buy signal on April 7, which occurred after a brief excursion above 1.00, short term long trades worked extremely well, but now it is time for a pause.

SP500 Pulls Back From Resistance

Friday we did not know what the market would do when it hit the cited resistance level.  Today we found out.  Rather than pushing through, the SP500 turned back from the August 2007 low of 1370.60 after reaching an intraday high of 1370.58.

Wave (ii) down is now underway.  The April correction lasted 6 days.  Although there is no way to know how long wave (ii) will last, more than likely it will be less than 6 days and probably only 2 or 3.  The next push higher should take the market through 1370 and complete the rout of the bears who have been trying to short this market since April 2010.  At this point only a failure of the April 18 low of 1294.70 would change the outlook.

It was interesting to see the mini "flash" crash in silver last night.  Bearish articles on silver have been in the media for the last couple of weeks as silver approached $50.  There was even more bearish sentiment today.  But to put things in perspective, after a correction lasting a little over two months the stock market began a rally that eventually retraced all of its flash crash.  I expect the correction in silver will not last so long and then it will also push to new rally highs.