McClellan Oscillator Deeply Oversold

I think the chart says it all, but be prepared for a retest of today's low similar to November of 2010.

Selling Exhaustion

The SP500 has touched the 200sma this morning with a low of 1282.86 just below the cited target range for a low and has now reversed higher as the TRIN has been falling since the open.  In spite of all of the negative news this morning the TRIN opened much lower than at yesterday's open, which suggests that the selling may have reached a short term exhaustion point.

I exited swing short trades in individual stocks and the TWM this morning in anticipation of a 2 to 5 day rally. This morning's low may be the low of wave (E) of the triangle or wave (E) may extend in time, but so far this morning's action does not support the idea that a crash is imminent.  Now, if we see repeated tests of the lows throughout August going into September, then perhaps the view would change, but for the time being the outlook is for a resumption of the intermediate uptrend after the wave (E) low is established.

Selling Continues

The morning rally faded in the afternoon to close near the low of the day.  This type of action on Thursdays usually leads to more selling on Friday.  It's hard to say what might happen if the house passes a bill on the budget and debt tonight, but the fact is probably nothing as the senate has already promised to defeat it.  Barring some very positive agreement overnight I think the selling will continue tomorrow followed by a rally beginning either in the last hour of trading tomorrow or sometime Monday.

Caution is advised on short positions as a rally could come out of nowhere with the McClellan Oscillator down at an extreme oversold level and the SP500 nearing a potential target around 1286 to 1288.  The lower trendline from the March 2009 is presently at around 1268 which is the most likely lower limit for the current leg down.  I will be looking to exit short positions tomorrow on any sustained move below the 1288 level.

Renewed VIX Sell Signal

The VIX has triggered a renewed sell signal based on yesterday's breakout above the July 18 high.  Despite the large rally off of the June low there was no intervening buy signal, which would seem to confirm that the rally was a fake based mostly on extreme short term bearish sentiment and short covering.  At this point it could take 4 weeks or more to get a valid buy signal based on the conservative method used on the chart.  In general this method has worked fairly well in confirming intermediate trends, but not so well over the last few months with extremely choppy market conditions.

IBD has called the "Market In Correction" on its Big Picture column as of yesterday's close.  Regardless of the extent of downside follow-through it could take several weeks to setup a new intermediate term rally due to the amount of distribution that has occurred in the last 4 weeks irrespective of any pattern that might be developing.

AAPL Needs To Correct

I am having a little trouble reconciling the idea that the SP500 may be near the end of wave (E) with the fact that AAPL has run up sharply off of its June low and is only now beginning to correct.  At the least a correction in AAPL should last two weeks and maybe much longer.  Will the broader market head higher without it?

Theoretical we could be as few as a couple of days to two weeks from a low in the SP500 that would satisfy the triangle pattern.  However, given the situation with AAPL I am wondering if wave (E) will extend out in some way into September or even October.  It is certainly possible.

The McClellan Oscillator finished in an oversold condition today suggesting that some sort of bounce may be coming in the next day or two.  However, it should be short lived.

August Not Kind To Traders

The month of August has a history of not being so kind to traders.  Either it's very dull or marks the tops of pullbacks, corrections and even crashes.  Following is a list of tops for the last 7 years:

August 4, 2010 - Began retest of July low leading to a
                                    significant bottom
August 7, 2009 - Marked beginning of a pullback
August 11, 2008 - The top for the crash of 2008
August 8, 2007 - Swing high before the final leg down
                                    from the July 2007 correction
August 4, 2006 - Marked beginning of a pullback
August 3, 2005 - Beginning of a significant correction
August 2, 2004 - Beginning of the final leg down of
                                    the 2004 correction

Given that the August 2nd deadline for a debt deal looms ahead and the market has been rising into or toward that date it would seem likely that it will become a sell on the news event for better or worse.  Also, the market has continued to turn very closely with the lunar cycle since I last mentioned it, bottoming only one day after the full moon in June and topping 3 trading days after the new moon in early July.  The pullback low in July occurred 1 trading day after the full moon, and the next new moon falls on Saturday July 30.

Barring a breakdown below the June low it seems that we are headed for a mid-August low after the August 2nd deadline, which will be followed by another substantial rally.

June Low Must Hold For SP500

The drama of the debt negotiations continue, but the pattern in the SP500 seems clearer than ever.  The only requirement for a positive resolution is that the June low not be violated.  I think we will see a positive resolution to the triangle once the debt deal is resolved, however it is resolved, and we will finally be off on the final major leg of the cyclical bull market that began in March 2009.

March 6, 2009 to February 18, 2011 was 23 months and 12 days.  If the numbskulls in Washington take it down to the wire, then wave (E) will end on Monday August 1, 2011.  If the duration of wave [Y] equals wave [W], then the final top will be on or around July 13, 2013, probably +/- 2 months.  If the length of [Y] equals the length of [W], then the final high will be on or around, unbelievably, 1963.72.  At 0.618*[W], the final high will be on or around 1705.00.  This is about 27% to 46% above current levels.

I know this is not the consensus view, and perhaps a retest of the 1500 level is the best that can be expected, but barring a breakdown of the June low I think wave [Y] up to new stock market highs is the most likely outcome.  We will know within 2 to 4 weeks if so.

Another Look At The Qs

The rally off of the June low definitely has the quality of an impulse, but the action in leading stocks has left something to be desired.  A few have done well, but not across the board, which is a type of divergence in the action.  The are a number of negative divergences in breadth indicators which suggests that the current top might be a (B) wave.  Given the slight new high with diverging momentum indicators as well leads me to think that the recent action in the Qs might be a very large flat correction with an intervening upward flat for wave (B).  If so, a top should be seen soon, perhaps in the next couple of days leading to a potential short trade to retest the June low.

The PPO of the CPCE is showing some signs of divergence as well.  If it continues lower, it will be another caution flag.

Even though the Dollar got hammered today it is still above the May low - another divergence.  My hunch is that when a deal gets done on the debt the Dollar will rally and stocks will fall, and the bears will come out in force again just in time to complete the consolidation that's been going on since February.

SP500 Continues Consolidation

After yesterday's surge there was little follow-through today.  It is hard to say if today was just a pause before more upside or whether another leg down is next.  In any case a look at the weekly chart of the SP500 shows fairly convincingly that the current action is just part of a large consolidation similar to what occurred last year but without the drama of a flash crash.  Even if lower prices are seen there are multiple levels of support including the rising 50 week ma.  Notice that the bear market seen in 2008 did not really take hold until there was a breakdown followed by a retest of the falling 50 week ma.  We are a long way from a bear market, but maybe still a few weeks or months from a strong uptrend as well.

Qs Leading The Way

"Goldman's Best Days May Be Over"

This headline just crossed on marketwatch.com  - makes me think GS might be a buy soon.  A weekly close above 141 might indicate a low is in place.  If so, the target would be around 275 to 300.  This also bodes well for the broader market as sentiment on the banking and financial sector has reached an extreme.

Due For A Bounce

The SP500 reached the 62% retracement of the 6/13 to 7/7 rally this morning while the NYMO has reached an oversold level.  A bounce is due, but the pattern of the decline looks incomplete.

It seems that we are retracing the steps from last year in a slightly different form.  Below I show a count of the swings of the NYMO from last year and what I think will play out this year (this is not an elliott wave count).  After a surge off the low to an extreme high indicating a possible uptrend initiation the NYMO has declined to an oversold condition.  Now I expect we will see another updown swing in conjunction with a bounce and a sharper decline in the market before a final low is seen.  The final low should be wave e of the triangle for the SP500.  The count for the Nasdaq is different.  The entire process could take 2 to 4 weeks.

Just A Pullback Or Something Bigger?

Today's close leaves us with a question as to whether the selling was the beginning of another correction or just a pullback.  It looks more like a pullback, but even if it is we are probably closer to a short term top than not.  There aren't many good short setups in my opinion, unless you want to short tops, which I don't.

No more posts until the 18th of July.  Have a great week.

What's Up?

The Nasdaq Composite and Nasdaq 100 indexes as well as the DJ Transports all made new cyclical bull market highs today with the Transports closing at new all time highs.  The bears have been completely routed in the span of 3 weeks.  And yet the calls for an end to the rally continue.

I don't think so.  I also don't think the current rally will stand based on the lackluster volume.  We will probably see another selloff to reinvigorate the bearish sentiment.  As long as the March/June lows are not violated the next selloff will set up the best opportunities of the past year.

I don't think anyone really knows what the pattern or elliott wave count of the market is at the moment.  I see very few bearish looking stocks in the major indexes.  Most stocks have moved impulsively off of the June low.  This suggests that the current upmove is a first wave.  The next selloff or pullback will be a second wave setting up the most powerful move since last September.  Again, as long as the March/June lows are not violated.  And also again, the pattern of the correction since the February high is really anyone's guess at the moment.  I haven't seen a convincing argument.  The only thing that I am not convinced of is that a new bear market is around the corner.

How I Traded EXPE

One stock I bought in May, EXPE, has finally reached its target almost two months later.  I went long on a breakout from an x wave triangle at 25.70 with the old high as a target.  This took a bit longer than I expected but in the end waves w and y were about the same length in time.  Since the broader market is now very overextended and the target has been reached I exited the position shortly after the open today.  Of course it could go higher, but the odds are against it.

Of particular interest is the fact that the market meltdown in June did not cause a break from the expected outcome.  This is a good lesson in that when there is a clear pattern in a stock it should not be ignored.

Dollar May Be Ready To Explode Higher

While there are a number of possible interpretations, I think the 1 2 [i] [ii] count is the best fit for the US Dollar right now.  What is most interesting is gold and the Dollar up today with no real selling in the stock indexes.  Is the inverse relationship with the Dollar beginning to switch to a positive one?  It has happened many times in the past and may be happening now.  If so, a rising Dollar may support rising stocks.

The information is not widely available, but according to EWI sentiment on the Dollar was at an historic low in May.  It could take many months for the sentiment picture to reverse itself.

I am long the Dollar with a stop at the May low.  I think this trade only has a 60/40 chance of working out, but if it does work out the payoff will be huge making it well worth the risk.  A rally back to the 2009 highs could take many months.

IBD Cries Uncle

IBD has changed its outlook to "Uptrend Resumes".  I have been a reader of IBD since 1998 and in all of that time I don't think I recall a previous instance when an uptrend was called without a valid follow-through day.  The argument here is that the market has moved sufficiently off the low to confirm a new uptrend.  That's fine, I suppose, but it is a deviation from their usual approach.

The IWM has moved sharply this past week along with the rest of the market.  Clearly, volume has declined which is not a small concern, but OBV has made a new high, which is bullish.  I suspect we will see some sort of pullback beginning next week back to the moving averages and the January high to correct this advance.  As long as the pullback doesn't exceed 62% of the advance I will be looking to get fully long from that point with the expectation of a market rally into the end of the year, perhaps a choppy rally, but to new rally highs nonetheless.

Rapid Shift In Sentiment

In my post on 6/30 I asked if bearish sentiment had peaked.  I think the answer to that question is an unequivocal yes.  But now we may have a problem.  Sentiment has swung from a bearish extreme on June 17 to an almost bullish extreme in only two weeks.  The same shift took months to occur in 2010.  While it is possible that this could be signalling the kickoff to a powerful rally, the more likely explanation is that we have had a massive short covering rally that is probably finished.  In any case the market has come too far too fast and a sharp pullback is in order.