Saturday, June 18, 2011

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.


Vega said...

I too am counting the P2 as a WXY combination correction. Same count as yours.

You say wave X might be a combination correction. Wave X would be a single corrective pattern by itself. Usually a zigzag, but we may have an expanded flat here. Did you mean to say P2 would be a combination correction?

I am expecting a deeper retrace for wave X, may be 20%, to about 1100.
And the 1258 low might be Minor 1 of (C).

Trader Craig said...

We're close to being on the same page. The only difference is that I have been of the opinion that the cyclical bull rally is cycle wave x of a flat combination for supercycle wave (a) ever since the Jan 2010 highs were exceeded. The reasons for this are primarily due to my (& others) interpretation of the cycles which suggest that the rally will extend well into 2013, which doesn't fit a P2 interpretation.

Wave x is probably subdividing into a double zz with wave [X] in progress. It's true that wave [X] could end now, but the amount of damage done in the last couple of weeks would seem to imply that the correction could extend as a combination into the fall.

In any case I think we will see new highs in the stock indexes before its over followed by another major leg (or legs) down into 2016.