Overbought On Light Volume

The McClellan Oscillator has reached an extreme level and the market is vulnerable for a pullback after this rally on light volume.  However, the first day of September is typically a strong day, so any pullback may begin Friday or next week.  If the market manages to consolidate in a sideways pattern, then expect much higher prices.

When the M.O. reaches this extreme, it usually means that at least a retest of the high will be seen after a pullback if not higher prices.  It may be prudent to lighten up on short term longs tomorrow or Friday, but it may be too early to think about shorting.

What's Up (Or Down) With The Dollar?

Becoming Overbought

While the market is becoming overbought in the short term, it appears that a move back to resistance at the March and June lows will be seen before the rally loses steam.  However, this process could take several more days.

The McClellan Oscillator has reached overbought levels, but the market can work its way higher as the Oscillator falls.  Other measures have room to move such as the RSI, etc.  So, although we may see a pause or down day, higher prices are still expected near term.

Big Picture Points Up Near Term

The elliott wave pundits would have us believe that we are now near the beginning of a major market crash in primary wave 3 down to new lows, possibly at unimaginable levels for most people.  But the monthly chart of the SP500 does not suggests that such a conclusion can be made at the present time.

Below I am showing the SP500 on a monthly chart with 12 (1.5SD) and 50 (2.5 & 5.0 SD) period keltner channels.  All that has happened up to his point is the market has pulled back to the 50 month ma, and the 12x1.5SD keltner channel.  Looking back at previous instances over the past 10 years, it would seem that at a minimum, the most likely next move is a return to the 12 month ma around 1250 before before there is any more downside.  After the retracement, the question will be:  is this period more like 2001 and 2008, or more like 2004.  The guideline of alternation would suggests it will probably be more like 2004, but perhaps with a different look.  At the moment, the decline appears to be following the pattern of 2007-2008, but that similarity could break down at any time.

Terry Laundry has a calculated short term low around October 3rd.  I think the current retracement will make it back to the 1250 zone by early to mid-September followed by a decline into the October 3rd low, which may or may not retest the August 9 low.  In my opinion, I think the market is currently in wave (X) of [X], and wave (X) could extend well into 2012 before wave (Y) down begins.  This choppy action will make it difficult for everyone, but if this is the case, it would be prudent to temper any expectations of huge gains on the short side, as were possible in 2008.  Following market swings with reduced profit targets for the next several months may be the best course of action.

MA Forms A Triangle

Mastercard, MA, is trading above its July high and appears to have formed a wide and loose symmetrical triangle.  Today's action in the markets points to higher prices and a breakout of the triangle targets 360+.  However, triangles always precede the last motive wave at a given degree of trend, so if you choose to trade this one be ready to exit quickly.  The short duration of this triangle suggests a thrust higher would only last 4 to 6 days.

Summation Index Points To Higher Prices

The MACD of the NYSE Summation Index does a pretty good job of confirming new uptrends.  The MACD has now turned positive as of today.  The signal is usually a little late, and in late 2008 and mid 2010 there was a lower low after the first signal.  Even so, it is more likely than not that higher prices will be seen near term.  The sell signals tend to be too late to be useful.

As a side note IBD has called the market in an uptrend as of the close on 8/23.  Not all follow-throughs work, and there are very few leading stocks setting up to launch new uptrends, so this follow-through should probably be taken with some skepticism,  i.e. be prepared to exit any new longs quickly.

AAPL closed off of its low today after the Jobs news.  I suspect we can gauge the market's trend by another sell signal in AAPL.  It looks like AAPL is working on a b wave triangle in an abc rally that may approach the previous high around 400 to form a double top.

No True Retest

To come so close to an actual retest of the 8/9 low, but not actual do it creates doubt about today's rally. The Qs have clearly completed a flat correction from the 2/18 high, but the pattern in the other indexes was not completed.  This divergence indicates that more corrective action will most likely be seen in September and October.

Assuming today's rally is not completely wiped out tomorrow, the upside target is somewhere between 55 and 56 for wave C of (X).  I suspect that wave (X) may extend into a double zigzag to make things more complicated.  If that happens we will see a high in early September, a wave B or X of (X) low in early October and then another rally to complete wave (X) into early December.  The exact pattern cannot be known without more information, but the point is not to get drawn into potentially false rallies until there is more certainty.

If the Qs make it into the 55 to 56 zone (at a minimum above the recent swing high), I will be looking for shorting opportunities.

Swing longs at this point may feel like a good bet, but probably aren't.  Even so, I tried to catch the breakout in HANS today, but did not get filled.  Somehow intraday, it jumped over my stop limit price.  I am not going to go after it now or on a pullback - it's just too risky.  That's the way it goes sometimes.

IWM Has The Clearest Structure

The IWM seems to have the clearest wave structure for the major indexes.  It shows positive divergences in momentum and volume developing as it moves down in a 5th wave from the July high to complete a very deep ABC correction, or more likely the first leg or a more complex correction.  While a move down to 60 is not out of the question, a retest of last week's low on lighter volume would be expected.

I am continually amazed at how the markets repeat structures and cycles on multiple time frames.  The current decline is matching the decline in form from the October 2007 high almost swing for swing.  I just don't expect the continuation of the action from 2008 to follow.  Then, we have the swings from last year.  The IWM formed a bottom on 7/6 last year, but a high on 7/7 this year.  It is now headed down to a low that may turn on the same date as last year - 8/24.

If the current correction continues to follow the form from 2007, then we can expect a high around the middle of September and another low around the first of October.  From there a two month or longer rally should ensue.

I wouldn't get too aggressive on the long side with the first follow-through day that comes.  Wait for the second one.

Moody's Headed To New Lows

In January I presented the following chart for Moody's Corp, ticker MCO, showing a potentially large wave (C) rally underway with a target of 40 to 44.

The actual high of wave (C) was 41.93, so even though many say "elliott wave analysis doesn't work", this type of result indicates that it can work very well at times.  Since falling away from it's high, MCO has now fallen below the wave (A) high confirming that the entire rally was mostly a 3 wave countertrend move.  The downside target for MCO is below its IPO low of 11.31, but more probably below 5.00.

This final move down in wave [Y] could take 1 to 2 years or more.  There are likely to be definite attempts to defend the 2009 low vigorously.  However, the best trading opportunity should be to short a retracement back to the 30 to 32 zone with a target of 15.  A sustained move back above 32 would negate this analysis.

New Lows Diminish

As the SP500 approaches a new correction low, which will probably happen Monday, the number of new NYSE 52 week lows has diminished.  This strongly suggests that another rally will ensue.  The next rally may last longer than the last one did since it appears that 5 waves down are nearly complete.  The most bullish outcome would be for a rally back above the June low, which would make the total correction a 3 wave affair.

But traders should keep in mind that even if the outcome is more bullish, new index lows should follow this fall as the correction extends as has been previously explained.  The spike in new 52 week lows at the 8/9 swing low is enough to convince us of that fact.

STX Nears A Bottom

There are quite a few stocks like STX that have completed 5 waves down.  This suggests that a market is in a bottoming process - not a crash setup.

A Little More Than Expected

Today's sharp selloff was more than would have been expected for a b wave pullback, but not outside the possibility for it.  Even so, a retest of the 8/9 low is the more likely outcome at this point.  But a retest of the 8/9 low would probably be a 5th wave down from the July 7 high completing an ABC correction.  So, a substantial rally should follow any retest.  The rally should last at least 2 to 3 weeks either way.

There are some positives as any retest would setup positive divergences in most indexes.  Patience is key during this time while waiting for the market to come to you with good setups.

Still Just A Pullback

Index futures are sharply lower this morning, but this does not change the expectation that a retest of the 50ma will be seen before new lows are seen.  Even if the August 9 low were to be retested, it would be probably be a a double bottom of some sort.  However, the most likely outcome is a 50% to 62% retracement of the recent rally followed by another leg up.

One interesting fact that is truly amazing is the complacency among investment advisors who have remained stubbornly bullish throughout this selloff.  This certainly tells us which side of the tape we should be looking to trade come the end of August.

Just A Pullback

There was some selling today, but the indexes closed well off the lows and above support.  The McClellan Oscillator remains above zero, the Absolute Breadth index remains well above 60 (a level often associated with market turns), and the High Low Logic index only closed above 1.00 one day and has since fallen hard suggesting that as severe as the selloff has been it may have just been a very sharp correction in a still ongoing cyclical bull market.  The foregoing statement aside, I suspect the correction will extend well into the fall.

At this point it is too early to determine what form it may take, but the pattern for the Qs, an expanded flat correction, suggests a flat combination.  If that turns out to be the case, the current rally should advance to at least the 62% retracement of the decline, which for the Qs is 56.05.  The 50sma is currently at 56.16, so for practical purposes, a retracement to the 50sma or 50ema is the most likely outcome.

Once complete, we would expect either a long drawn out triangle or a zigzag to follow lasting the same length of time as the flat.  The flat was one week shy of 6 months long.  If the current rally ends at the end of August, around the full moon on August 26/29 e.g., then the entire correction would end somewhere around mid- February.  In other words, we may have a long time to go in this correction, so don't get your hopes up on the long side.

Alternatively, if the Qs manage to sustain above the 50ma, then all of the above may be irrelevant.

McClellan Oscillator Back Above Zero

The McClellan Oscillator made it decidedly back above the zero line today as was expected.  This was the first prerequisite for a retracement top.  However, today's action was strong enough that a top should not be expected right away.

The SP500 closed up more than 2% on declining volume but well above resistance at 1173.  There is minor resistance at 1227 and strong resistance at 1149 to 1258.  Also the now declining 50ma will provide resistance if it is reached.  Altogether, it looks like the rally may continue, perhaps with a small pullback, up to resistance before rolling over again at the end of August or first of September.  I wouldn't get too anxious to short this market for a little while.

Pause Day

The market paused today after a wild week, which is to be expected, while the McClellan Oscillator has yet to make it back above the zero line.  I don't think the rally will be over until that happens.  Given the depth of the decline a choppy rally may last until the end of August.  If so, I would be very cautious going into September as the first days of September tend to be a time for selling in this type of market environment.

While stocks have taken a beating, the GDX has held up well and finished the week with a weekly MACD buy signal.  The recent parabolic move in gold appears to be providing support.  However, caution is advised as any rally in the GDX is likely to fade if stocks take another beating this fall.

Watching The McClellan Oscillator

We got that Dow close above 11000 today and the March low at 11555 is the next target.  The SP500 touched but closed below equivalent resistance at 1173. The Qs touched but closed below the March and June lows.  The Qs will have to break through 54 and the SP500 through 1173 for this rally to continue.  However, the Dow's successful close will probably lead the way.

Expecting a pullback in the upward retracement tomorrow, but the rally should continue onward until the McClellan Oscillator makes it back above the zero line, which could take 3 to 5 more days.  A turn down from above the line would mark another selling opportunity.

One sure sign that we have not reached a longer lasting bottom in spite of the short term bearishness among options traders is that investment advisors have remained stubbornly bullishness during this decline.  The last two crashes were followed by strong rallies, 2008 and 2010, so now they may have developed a false sense of confidence that the current mini-crash will resolve itself quickly.  This is not a good sign and will have to be rectified before a new uptrend can begin in earnest.

Dow At Support - For Now

The Dow has found support at the previously untested August 2010 swing high.  This may prove to be a level that holds for the time being.  At the same time we now have two levels of strong resistance above at the March and June lows, 11555 and 11863, respectively.  Any rally is most surely to fail on the first test of those levels from below.  Another close above 11000 should propel the market toward the March low in short order.

A Few Positives Beginning To Emerge

While today's volatility and low close were disappointing signs for a bottom, there were several positive developments.  The TRIN closed around 5.80, another high reading.  The McClellan Oscillator held up.  Absolute Breadth reached its third highest reading since the crash of 1987.  Volume today was slightly lower than on yesterday's rebound.  The Qs closed above Monday's close and above the April 2010 high.

Of course there's nothing saying the market can't go lower, but the signs are beginning to build indicating that at least a short term bottom is at hand that could last for a few weeks.  One thing is for sure,  I would not be taking any new short positions right now.  Even if the market fell much further, the risk of another day like yesterday are just too great.

Absolute Breadth Index Warns Of A Bottom

Extremes in the Absolute Breadth indicator do a great job of nailing bottoms.  It has now reached the extreme level for a bottom and a turn down would indicate a bottom is in place, but just like in October and November 2008, lower lows are possible after a retracement rally.  Even so, this is strong indication that a meaningful bottom may not be that far away.

Relief Rally Underway

The SP500 opened below and then closed solidly above strong support at the August 2010 swing high of 1129.24 with a low today of 1101.54 just 10.04 points above the 2010 S1 pivot of 1091.50.  The conclusion is that wave 3 of (C) is done and wave 4 of (C) is in progress.

One "fly in the ointment" for this view is that after building the potential for an upside breakout over several months, the Dollar turned down sharply this afternoon and looks ready to retest the May 2011 low.  The market has gyrated over the last 4 weeks almost perfectly in an inverse manner to the Dollar.  Thus, a retest of the low in the Dollar may provide significant support to the market and prevent a retest of today's stock market low near term.

If the SP500 can move back and sustain above 1200, we may conclude that the decline is over, but we won't know for several days and perhaps weeks.  One thing is for sure, I would be very cautious about a follow-through day that occurs 3 days from now.

One Measure Of Sentiment Has Reached An Extreme

The PPO of the equity only put/call ratio has reached an extreme level similar to May of 2010 and June of this year.  Unfortunately other measures of sentiment have not.  For example, investment advisors have remained complacent throughout this decline.  It remains to be seen if they have changed their attitude this week.

Note also that a pattern of declining tops in the PPO is developing, which could be a long term accumulation pattern.  It will probably take several weeks if not months to break through the downsloping trendline, but if and when it is broken, it could point to a T in the manner of Terry Laundry's work that would portend a rally of commensurate length once the decline is over.

More Downside To Come

The world is coming to an end.  Well, probably not.  It's just that we are getting a supersized version of last years selloff.  I am sure the P3 crowd are in hog heaven right now, but as bad as it seems there are reasons to believe that it might be closer to ending than beginning.  For one, the NYMO is more oversold than at anytime in the last 3 years, perhaps the last decade.  However, when this situation occurs it usually means lower lows as the NYMO builds an accumulation bottom.

Secondly, the SP500 has probably completed wave 3 of (C) down with waves 4 and 5 to come.  The bottom is likely to be in the cited support levels from the previous post.  Should this turn out to be only wave 3 of (1) down as the P3 proponents argue, then the next most likely support is around 950 to 960.  I think the latter is less likely but should it occur, then a massive wave (2) rally to back above the April 2010 highs would probably follow offering traders a potential 40% rally (not the worst of news) and time to prepare for the end of the world.

The Qs touched the April 2010 high today and should find support at this level down to 47+/-.  If wave (C) = 2.618*wave (A), then the target would be 46.03, which is probably the worst case scenario for the near term.  At the moment I am still of the opinion that the Qs are in wave (C) of [X] of a flat correction and nothing that has happened so far alters that point of view.

Traders should keep their heads about them during this extreme volatility.  If you were holding long positions, you should have long since been stopped out and sitting on a pile of cash even if with a drawdown.  While I am disappointed that I covered short positions a week too soon, the fact is this is not the type of thing that one can predict reliably.  If we have seen the top of primary wave [2], then there will be many months and perhaps years of shorting opportunities ahead of us, so there is nothing to get worked up about.  On the other hand, a rally may be coming in the next few weeks, so it's time to be thinking for oneself and not just following the herd.

Market Just Pulling Back To Its Pivot

While the recent market action seems to be severe, from the big picture point of view all that's happening is that the market is pulling back to its monthly moving averages and its decadal pivot.  The mid-point of the range from the 2007 high to the 2009 low is 1121.44.  If we count the end of the decade as the end of 2010, then the traditional pivot point would be 1166.84.  I expect the low of the current correction to be somewhere in the range from 1100 to 1160.  That doesn't mean that the market can't go lower, but the probability is that it will find some sort of bottom that lasts at least a few weeks before it would do so.

The pivot for 2010 is 1177.05 which will provide additional support.  Also, we have the following for 2010:

R2 - 1428.74
R1 - 1343.19
P   - 1177.05
S1 - 1091.50
S2 -   925.36

Note:  the February 18, 2011 high was 1344.07 and the July 21, 2011 high was 1347.00, both of which were right at R1 (coincidence?).  We've seen failure at that level 5 times this year.  I guess that shows how important it is.  If 1345 is regained, then 1428.74 would be the next.

For 2001 to 2010 we have:

R1  - 1666.89
MP - 1416.87
P    - 1166.84
MP - 962.22
S1   -757.59

It may take another week or so to test the 1091.50 to 1177.05 zone, but a move back to 1343 or at least 1260 would not be out of the question.

We now have a deeply oversold market similar to 1998 and 2001.  While new highs are not a given, the rally off of the September 2001 low was almost 25%.  I suspect we may see something like that soon.  What happens afterward will depend on what kind of rally it is.

I plan to be a buyer on any solid advance back above 1180 from below.

Market Is Oversold

I think we can say that the market is "officially" oversold, so expect a bounce, but also expect lower prices.  The damage is so severe that it could take weeks to months to build a bottom, if a bottom is in fact built.

The Qs took out the June low today, but still needs another up down swing to complete wave (C) down.  I will continue to view it as wave (C) down until there is a clear 3 wave rally retracing 50% to 62% of the decline from the July high followed by a break of the B wave low in the 3 wave rally.  Until then I am regarding this as a correction in a cyclical bull market.

I know all of the P3 crowd are believing this is the big one, and maybe it is, but it is still too early to say, in my opinion.  All that we can really say is that some sort of low will be put in soon followed by a rally.  How the market behaves on that rally will really tell us all we need to know.

Waiting For A Pullback In The Downtrend

The NYMO has reached a very extreme oversold level - deeper than is typical for a bull market pullback.  Previous times when it reached this level the market headed to lower levels after a retracement.  I would expect that to be the case this time.

I keep reading and hearing predictions of a market crash.  I suppose anything is possible, but the current setup just does not lend itself to that outcome regardless of how bleak it looks.  The Qs have multiple levels of support to breach before anything like a crash could commence.  We are nowhere near that situation yet.  What makes it seem so bad is that the Qs are in wave (C) of an expanded flat correction and C waves are usually the strongest as are 3rd waves.  The minimum objective for the Qs is below the June low, but the April 2010 high around 51 could be seen.  If the SP500 appears to be finishing a 5th wave at that time (wave (C) of [X]), I would be a buyer at that support level.

The SP500 has breached support at the April 2010 high and a pullback to that area could setup a shorting opportunity with a target from 1149 to 1191, but most likely somewhere between 1156 and 1175 based on fib extensions of the decline into June and the assuming we are near the end of wave 3 of (C) down.

The damage has been severe to be sure, but it is too soon to call an end to the cyclical bull market.  Once the current selloff comes to an end - probably sometime toward the end of next week - we will be looking to see how sentiment looks and how strongly price is able to recover.  It may take several seeks to put in a buyable bottom.

I will be looking for pullbacks to short over the coming days as lower lows are expected before this selloff runs its course.

Qs Still Well Above Support

QQQ Flat Correction

I showed this chart on July 21 as a possible outcome for the current correction.  It shows the Qs (Nasdaq 100) in a large flat correction with an intervening upward flat correction for wave (B).  I believe this is the operative pattern for the correction.

The speed of the decline to date suggests that the correction may be over sooner than later, but in any case sometime between mid-August and early September.  As the decline below the June low for the Qs will most likely occur as a 5 wave impulse, the subsequent rally must swiftly regain the midpoint of the correction or we will have to give more weight to the possibility of a larger correction or the resumption of the bear market.

Since the current decline is wave 3 of (C) there may not be good low-risk entry points for new short positions.  It may be best to wait this one out unless there is a pause in the decline for a 2 to 5 days.

Surprise Surprise

Well I must admit I was trading for the bounce this morning as the SP500 moved into the zone of the June low and below the long term trendline and 200ma, but there was no bounce.  The longer term pattern is now in question as the SP500 closed decisively below the trendline and the 200ema.  However, there is significant support only a few points lower at the April and November 2010 highs and the 400ema.  It is unlikely that those levels will be substantially violated on the first attempt.

However, today's decline occurred with the NYMO reaching a severely oversold level, so a bounce back to retest the trendline and 200ema should be forthcoming in a probable 4th wave that lasts 2 to 5 days before continuation down to the cited support.  Only if the broken trendline is regained almost immediately could we believe that this might be a bear trap.

Traders should keep in mind that until we see a completed 5 wave structure down from the 5/2 high, it is more likely that the current action is part of an [X] wave as opposed to a resumption of the bear market.  At the moment we are still a long way from that outcome.

Enough Already!

It looks like the SP500 futures have completed 5 waves down from yesterday's pre-market high against a rising McClellan Oscillator on positive divergences on the hourly MACD suggesting a near term low may be at hand.  The futures and cash indexes have declined into the zone of the June low, which also suggests the market may be close to a near term low.  A bounce from current levels, though short lived, may be the next move.  However, continued testing of the lower levels of the trading range in August would argue for a downside breakout in the fall.  A move back toward the recent highs soon should reduce that possibilty.

At this point the triangle pattern going on since February remains the top view with a possible continuation of the sideways action into September as wave (E) extends or we retest the June low making the current decline wave (C).

Trading the short term swings seems to be traders' only alternative until this thing resolves itself one way or the other.