Short Term Overbought

The market has become short term overbought as indicated by the McClellan Oscillator.  However, the first day of July tends to be bullish so it would not be surprising to see more upside tomorrow morning.  There have been several instances in the past when a selloff was seen after the 4th of July holiday when the market was overbought, so at least a pullback should be expected next week.

The action this week leaves several outcomes on the table including the continuation of the triangle pattern and also a flat combination.  The current trading environment could easily drag on into labor day at the current pace.

Qs Hold Support

Transports Looking Bullish

The Dow Jones Transportation Average has almost completed an impulse up off of the June 13 low while everyone has been worrying about the SP500 and the Nasdaq.  More importantly it is trading above the January high and the May low - both of which are bullish.

Today's action in the SP500 still leaves either the triangle or flat correction potentials on the table, but the Nasdaq indexes are close to surpassing the May low and the Russell 2000 has already passed the May low leaving a variety of possible outcomes on the table.  Since volume has still to show up, I think we must expect some sort of pullback/retest in July before the rally can really get going again.  However, the picture is definitely brightening for the bulls.  The bears have just not been able, once again, to deliver the knock out blow.

No Enthusiasm For Stocks

Markets rose today but the volume was tepid.  There may certainly be an attempt to mark up stocks into the end of the quarter, but another attempt at new lows will probably follow into mid-July.

Reversal Reversed

After yesterday's surge the market sold off today but not in a devastating way.  The SP500 remains above its trendline from the 2009 low, and it looks like a bear trap is being set.  The current action appears to be wave 4 of (C) of [X].  Wave 5 down should break the trendline setting up the bear trap.  This could happen above support at the April and November 2010 highs.

It also seems that bearish sentiment may have peaked at the wave 3 low as the PPO of the equity only put call ratio made an extreme low last week and has since rebounded.  A higher low in the PPO coupled with a lower low in the SP500 would set the stage for an intermediate term low of some importance.

There are a lot of forecasts out there as to what is going to happen next.  The truth is that nobody really knows.  We can only make some educated guesses.  However, the fact is that the monthly trend in the stock indexes is still up for the time being though in a pullback, while the weekly charts are in a correction, and the daily charts are in a downtrend.  Thus, I have not taken any new long trades since the end of May.  Of the long trades I entered in May, I was stopped out of half mostly at around breakeven with a trailing stop, and the other half are either slightly ahead or profitable.  I wasn't expecting those trades to last so long, but they are working so I'm not going to fool around with them.  I will be looking for new long trades over the coming week as it looks like an intermediate term low is imminent.

I exited my short crude position today for a gain of 5.35 points after the breakdown from an apparent triangle on June 15.  I am uncertain at the moment about the pattern in oil, but the lack of downside momentum was disconcerting.  That coupled with the IEA announcement that might have sent oil much lower but didn't, it seemed prudent to take profits early.

One possible pattern for oil is an expanded flat upward correction (wave B or 2).  If this is what is happening, then we might see a surge in oil along with the stock market with price heading back above $105 before another decline.

Stock Market Stages Strong Reversal

Today's reversal in the stock indexes suggests that the rally that began on June 16 has further to go.  While I had given up on the triangle pattern, the SP500 still has a chance.  Is this wave d up?  It will take up to 3 or 4 weeks more to find out, but we are getting closer to some sort of resolution every day.

Oil also staged a comeback in the face of an announcement that oil reserves would be tapped.  Was this a buy the bad news event?  It sure seems that way at the moment.

The only way for the bears to take back control is an immediate and devastating reversal from the open of trade tomorrow.  Otherwise the rally is on  - for now.

Close To A Follow Through

I thought IBD would call a follow-through day after today's action based on the Nasdaq composite's rise of 2.19% on higher volume, but they declined to alter the current outlook from "Market In Correction" due to the lack of leadership today as well as the fact that the SP500 only posted a 1.3% gain.

It's notable that the SP500 stalled at the April 18 low as I had suggested would be resistance.  Also, oil failed to join in the party - another tell.

It appears the Dollar may be tracing out a flat correction in wave 2 down to undercut the June 7 low of 73.52 before wave 3 up begins.  This may provide temporary support, but until the SP500 clears 1311.80 we should assume that wave 4 is in progress and another new low will be seen in early July.  Even so, shorting this market is probably not a good idea.  I see very few good short setups at the moment, and the ones I did like were up nicely today for the most part.

We may be looking at another week of wave 4 action, but it could end sooner if the current rally is completing an upward flat correction.  In that case we may see another quick down up swing before the downtrend resumes.

The main thing is that it is just too early to call the correction over.

Oil Squeeze Short Signal

The Bollinger bands moved from inside to outside the Keltner channels today triggering a squeeze short signal in oil.  It will remain valid as long as DI- remains above DI+ and price remains below the previous swing high of 99.95.

The rally in stocks today was underwhelming to say the least.  However, a rally back to the April 18 low around 1295 would not alter the expectation for a retest of the March low and possible the April 2010 high.  At this point a MACD buy signal off of the 200dema would be suspect since the moving average has turned flat. As long as price remains below 1300 lower prices would be the most probable outcome.

Bearish Sentiment Continues To Rise

It is amazing how rapidly the bearish sentiment has increased over the past two weeks while the SP500 is down only 7.2% from its May 2nd high.  Fear that the cyclical bull market is over is spreading, and this does not support the bearish case.  Those that point to the weak economy as justification for a bearish view are not being rational as the economy has been weak for the last 3 years (ask any small business person).  Minor fluctuations in degrees of weakness should not be used to validate stock market forecasts.

The weekly chart shows that there is a strong zone of support surrounding the April and November 2010 highs with the 50 and 200 week emas providing additional support.  While anything can happen, it is not likely that this zone will be breached substantially on the first attempt.  It is more likely that a significant rally, either a resumption of the bull market or countertrend, will emerge from this zone of support around 1220.

I have labelled the daily chart as a flat correction in wave [X].  The lunar cycle failed to produce a reversal of significance this week with the full moon.  Even though the lunar cycle is not very reliable in general, it often occurs that a failed reversal at a full or new moon when the cycle is active ends up being a continuation or acceleration point.  So we are likely to see sideways to down action over the next two weeks into the end of the quarter.

As labelled, the SP500 is probably in minor wave 4 now as a triangle or flat correction to be followed by wave 5 down into a low around mid-July.  At that point we would like to see some positive momentum divergences develop, which are not present now, to identify the end of wave (C) down.

The biggest concern is here is that wave [X] may extend into a combination correction lasting several more months, but even if it does, the impending low should not be breached substantially.  We would be looking for a triangle or a zigzag for wave (Y).

For now, the best thing to do is be patient and wait for a new uptrend to develop.  Shorting is probably not the best idea except on an intraday basis.

Oil In Wave C Down

Oil is breaking down in wave C from a B wave triangle.  The target ranges from 87.09 to 73.23 representing prior swing highs (not shown).  If wave C = wave A, the target would be 79.75.

One point that should not be lost on this view of oil is that the overall decline is corrective since it is a 3 wave ABC decline (almost a certainty given the B wave triangle).  Several analysts have been interpreting the top in oil as a bearish signal for the stock market with projections for oil below the 2009 low.  We know that the decline in oil from the 2008 top was impulsive and wave c down should also be impulsive, so if the current decline is corrective, oil could very well go to new rally highs.  This is bullish for the stock market and supports the view that the current correction in stocks is just that - a correction and not the resumption of the bear market.  However, we must keep in mind that the correction in oil could become complex and extended along with the correction in stocks.

VIX Sell Signal

The VIX broke out today giving its first valid sell signal since February 22.  The body of today's candle was completely outside the 50d x 2sd Bollinger band closing above the previous swing high.  This type of action usually indicates that the selling is heading into its climax phase with approximately 1 to 3 more weeks of selling to go.  To repeat today's earlier conclusion - this rules out the triangle pattern completely and leaves 3 possible outcomes:  1) the market is nearing the end of a flat correction that began in February which will be followed by a resumption of the cyclical bull market, 2) the market is nearing the end of a flat correction that is the first part of a combination correction that will last several more months, or 3) the market is in the early stages of a resumption of the bear market.  It will probably not be possible to confirm the last option until much more time elapses.

At the moment I am beginning to lean more toward option 2, which means traders should be on guard against overtrading and buying into false rallies.  Traders will also have to guard against aggressive shorting that will most likely be difficult as most of the selling pressure may be realized in the next two weeks and then again later in the year for a brief period with choppy action in between.

There really is not much to do at the present time for intermediate term traders except sell weak positions, protect profits and stand aside for better days.

Heading For A Retest Of The March Low

Clearly the reversal today means yesterday's rally was not a 5 wave impulse even if it did appear so.  It now seems likely that a retest of the March low is underway and any rally will probably be fleeting until that happens. The pattern is probably a flat correction from the February high - the triangle pattern is history.  We will have to assess the subsequent rally to see what the prospects are for this fall (as in autumn).

Oil is breaking down out of a b wave triangle with a target below 90.  If wave c = wave a the target would be 77.49.  I don't think it will go that low as there is support in the 82 to 87 zone.  A break of the May low at 94.63 will confirm the breakdown.

Is The Market About To Crash?

A lot of traders seem to think so, but crashes typically don't happen so close to a top.  The crash in the fall of 2008 occurred almost a year after the top in 2007.  The intense selling in late 2000 occurred almost 6 months after the top earlier that year.  Yes, we did have a mini-crash last year, but that was fully retraced and the market made new highs.  The correction could continue for some time and fall further, but most corrections last 2 months or less, and we are approaching that length now.

The willingness of traders to jump on the crash scenario bandwagon so quickly leads me to believe that it is a false alarm.  One major difference between the current situation and the prior two is that a majority of commentators in the media was advising investors to buy the dips in the summers of 2000 and 2008.  We don't have that plurality of bullish advisors now.  Putting the two factors together it is difficult to see how the bear market is reasserting itself now.  Perhaps toward the end of the year the story will be different.

Short Term Rally Underway

It appears that we have 5 waves up on the 30 minute chart of the SP500 today which targets the 5/25 low of 1312 at a minimum, but possibly as high as 1330, the 61.8% RT of the decline from the May 2 high.  The rally should last 5 to 10 days.

A Sharp Rally Could Begin At Anytime

The % Stocks Above The 50ma indicator has reached a seriously oversold level.  A very sharp rally could begin anytime.  The most likely initial target for the rally would be the 50d ma's.  For the SP500 that would be around 1317 to 1327 which is 45 to 55 points higher.

Oversold Gets More Oversold

Clearly Thursday's bounce attempt failed, but I think we are very close to a rally that will last a couple of weeks.  The McClellan Oscillator has fallen to an even more oversold level as of Friday.  While the monthly trend remains in a clear uptrend on most indexes, the price on the daily charts is at or near the 200demas, which are rising.  A MACD buy signal off of the rising 200dema would be a valid buy signal.

The problem, however, is that the depth of the correction has made the triangle a less likely outcome for this correction.  At the moment a number of possibilities come to mind, but a flat correction appears to be the most likely.  Failing that we may be looking at some sort of extended combination that is far from complete.

ONLY if we see a completed 5 wave decline followed by a 3 wave rally might we consider the possibility of a more severe correction or even a resumption of the bear market, but we are a long way from that point presently.  Even if we do have such a setup it could still be a combination (flat-3-zz or flat-3-triangle, e.g.).

This market remains as tricky as ever, but I am encouraged by the increasing bearishness.

Working On A Bounce Off Of Support

Sentiment Has Reached Bearish Levels

Sentiment as measured by the PPO of the equity only put call ratio has reached a bearish extreme.  That doesn't mean that the market can't go lower, but it does mean that we have probably seen the worst of the selling.  At this point we can expect the triangle to play out as originally anticipated or a full out retest of the March low.  I still think we may see a bounce and another decline to finish wave [c] down, but it may rally from here.

Getting Oversold

The McClellan Oscillator has reached down to its recent low of May 23.  The % stocks above the 50ma has reached oversold levels.  The 5 day average of the Trin hit 2.23 today.  The SP500 almost hit the high of the March low day today.  The range of the March low day would be a common reversal zone.  A bounce to the 50ema is probably not far away.  However, before this correction is over I think the market will touch its 200ema - currently at 1262, but if it continues to rise at the current rate it will be around 1275 to 1280 by the end of June.

Still looking for a low around June 12 to 15 after another bounce.  Then we will see if this is really a triangle.

This Is Lunacy

Clearly today's employment number was the pits and the market, cash and futures, promptly took out yesterday's low.  As frustrating as it is, the fact remains that the large pattern has not really changed.  The only thing is that wave [c] of the triangle now appears to be working on a double zigzag correction with one more up down sequence to go.

During strong trends correlation with the lunar cycle seems to disappear almost completely, but during long consolidation periods like we are in now, the correlation seems to be quite strong.  In fact every high and low since the early March swing high has been within a couple of days of a full moon or a new moon.  Usually lows occur at the full moon and highs at the new moon.  The highs of May 2 and June 1 were one day early and the day of the new moons, respectively.  If the pattern holds, the next significant low should be June 15 +/- 2 days, and the next significant high should be July 1 +/- 2 days.  One thing about it, this triangle is becoming so long that it is way out of proportion as a 4th wave against the August 2010 2nd wave, which raises the odds that this is an (X) wave triangle.

Unfortunately, this week has done a great deal of damage to the charts of most individual stocks.  Where many were holding up reasonably well and building bases most have rolled over now or are showing signs of waning momentum on both the weekly and monthly charts with only a few expections.  I had said in early and mid May that I was looking for a rally into June for short term trades.  I took those trades and few have worked out.  They went from being short term trades to being intermediate term trades that haven't been stopped out for the most part.  I'm not optimistic at this point that they won't be stopped out either.

Overall, the plan was sound but the weight of the broader market prevented them from reaching their expected targets.  I use an initial stop loss and a trailing stop loss, so some will be stopped out at breakeven +/-.  Even so, the performance has been disappointing.  It looks like the next real opportunity for good stock trades will not show up until July.  However, there may be some opportunities at the wave [c] low.

Waiting On The Big Number

The SP500 undercut it's May 25 low today as the Dow did yesterday, but a number of indexes failed to do so creating a bullish non-confirmation of the breakdown.  The Qs, IWM, SOX, and the London FTSE index failed to break below their respective May 25 lows.

There were other bullish tells today.  The SP500 almost touched the April 18 swing low close and also the February 24 swing low close indicating continuing support at that level.  Another very significant non-confirmation occurred as the June SP futures failed to undercut the May 25 low as well.  Also, today's low undercut and then closed above the 50% retracement of wave [b].

Altogether, the weight of the evidence suggests that we will see a rally tomorrow barring a devastating payrolls number.  The rally should be wave [d] of the ongoing triangle which will probably top around the June 1 high, or just above, by mid-June.  Afterward, wave [e] should complete the correction into late June or early July.  Wave [e] may come very close to the wave [c] low, which would go a long way toward cementing bearish sentiment in support of the upcoming rally.

If the overall correction does complete as a triangle, the question arises as to how long the following rally will last.  If the triangle completes in early July, the triangle will be 4 1/2 months long.  The usual rule of thumb is that the following rally lasts about 1/3 the length of the triangle for 4th waves, or about 1 1/2 months in this case, putting the end of the rally in mid-August.  The extent of the rally in this case would be equal to the height of wave [b], or 121.53 points, putting the target around 1435+/-.

There's another possibility and that is the triangle is an (X) wave separating two halves of a double zigzag upward correction in wave x.  In this case, the rally will last far longer and go far higher than most suspect at the moment.  If the rally goes on for more than two months and exceeds the 1435 target substantially, we would begin to lean toward that point of view.

Everything depends on the outcome tomorrow, and the overnight futures holding up before the payrolls report.

TRIN Closes At A Very High Level

The TRIN closed at a very high level today of 4.19.  This has occurred only 7 previous times in the last 3 years according to my count, but 3 of those occurred last summer after the flash crash.  We have two possibilities before us.  Either today represented an acceleration of the short term downtrend, or today was a shakeout day and the uptrend will resume tomorrow.

As deep as the shakeout was in the SP500 today it is hard to believe the latter, but investor and trader sentiment is beginning to get much more bearish by several measures.  A day such as today can oftentimes cement that bearish sentiment and allow for a sustained rally after the remaining weak hands have been shaken out.  At the moment I am on the fence with respect to that question.  I think the evidence points to a bullish resolution, but the chart patterns of individual stocks have actually deteriorated over the past week rather than improved.  This leads me to think that there is much more work to do here before a rally can take off.  I question, however, how a deeper correction can really begin at this point with so many looking for it.