The Breakout No One Is Talking About

The Qs have now broken out twice in this rally. The first time was the breakout from the downtrend channel of the 2007 to 2009 selloff. The second breakout occurred around September 14 and is above the downtrend line from the 2007 high. This trendline will likely be support for any correction that follows later this fall. The most likely support zone is around the 40 area. Be cognizant of this before you get overzealous trying to short this market.

I'll have more to say in the coming weeks on the timing of the 10 month cycle and my expectations for the coming correction, some of which may be surprising.

Why Trading In Individual Stocks Is Always Risky

SQNM down 46% after hours. CEO and other executives fired after mishandling test data.

This is also a good reason to keep positions in individual stocks small and use wide stops. Personally, I am gravitating toward only trading index and commodity related vehicles for this very reason. The allure of a ten bagger is not sufficient to offset the craziness.

MACD Sell Signal For Qs

I may have forgotten to mention that there was a negative divergence MACD sell signal for the Qs as of Friday 9/25/09. While I suspect that this may prove to be a false signal, for those using the MACD, it is a valid signal. The long trade has yielded a return of 13.50%. The MACD system as I have described it based on Gerald Appel's work is up 31.19% YTD, in second place behind IBD's market calls. In addition, being a negative divergence sell signal, it is also a potential signal to sell short. I am not advocating taking it as a short signal, but should the Qs fail to make a new high and form a sell pivot, it would be a good setup to consider.

According to a couple of websites, the median hedge fund return YTD is 9.95%. While this doesn't tell us anything about the best performing funds, it makes it clear that mastering the MACD would be a valuable skill for every trader to have in their arsenal.

The Dollar Is Key To Gold And Stocks

It is fairly clear that the action in the US Dollar will be the greatest determinant of the direction of gold and stocks over the next few weeks. As the above chart shows, there is a positive divergence buy signal for the dollar index as 9/24, but the question is whether or not wave 5 down is complete. Wave 4 completed as a symmetrical running triangle in my view. A running triangle indicates the strength of the downtrend, and suggests that the current low is insufficient to dissipate the energy that coiled up over a 3 month period. So far, wave i of 5 has only lasted 3 weeks, which is not even 1/3 of the triangle's length, making it too short. Of course, wave 5 doesn't have to go any lower, but we can extrapolate a couple of lower targets as follows:

Wave 5 = Measure of expanded triangle trendlines @ 73.81

Wave 5 = Wave 1 @ 71.95

Wave 5 = 0.618x(Origin to Wave 3) @ 71.96

Should the dollar index break out above both the upper channel line and the December 08 low at 77.69, we would conclude that wave 5 was indeed complete. We would expect declines in gold and stocks to continue if that were to occur.

On the other hand, if the macd signal proves to be false and the dollar index breaks down further, then we would expect one or both of the lower targets to be hit. This would most likely coincide with a top in stocks and gold in October or November. This may be the best timing tool we have at our disposal at the moment.

"The Top Is In" - They Say

Elliott Wave International has called the top of primary wave 2. This means that under their interpretation, primary wave 3 down is underway and will be a devastating decline lasting more than a year that will bring the major indexes down far below the 2009 low. They may be right, and if so, it will be the first time that they have had three successful market calls in a row since I have been following them.

However, while there may be myriad reasons why one could justify calling a top here, there are equally as many reasons why it isn't the top of the rally. The foremost reason being that from a simple price perspective the markets are still in strong uptrends. The second reason is that breadth has continued to expand with the rally. Finally, while overall sentiment is mixed, the small speculator is quite bearish.

As I stated earlier in September it may be prudent to take some profits and reduce long exposure as we move into October. This is a decision each trader will have to make. These are the times when significant realized profits can go up in a puff of smoke if you're not careful. It would not be surprising to see a bounce during the first part of next week. That may be a good time to take profits if you are planning to do so.

My view is that this is simply a minor correction in a still ongoing rally. It could easily last until the first week of October and end up being 8% to 10% in magnitude, although it will probably be more like 5% to 6%. Thereafter, markets should make new rally highs going into the end of October or early November. There are many stocks that are still showing bullish patterns, which doesn't fit with a top at the current juncture.

My opinion is just that - an opinion. Traders should follow their predetermined rules for exiting trades and not opinions.

Not A 5 Wave Decline

The 5 wave pattern did not complete in the Qs. Instead, the Qs rallied in 3 waves into the close. The Dow and the SP500 did appear to complete 5 waves down. This leaves us with differing wave counts for the Qs and the Dow and SP500. With RIMM disappointing after hours, lower prices are likely. The question is whether or not one more 5 wave move down in the broader indexes will complete the pullback. The Qs may require at least another 3 wave move down. After those moves complete we can look at the subsequent rally to get a handle on whether or not the correction will extend.

If you are long RIMM tonight, the question is how to handle it tomorrow morning. You could just sell on the opening and be done with it, but oftentimes it pays to give a stock like RIMM 15 to 30 minutes to settle out. Then a stop can be placed below the opening range low. Sometimes the stock will recover and you will have avoided being unnecessarily stopped out. The most important point to decide ahead of time what your are going to do and stick with it.

Working On 5 Waves Down

A clear 5 wave impulse pattern down is nearing completion on the hourly chart of the Qs. This should lead to a reversal by late this afternoon or tomorrow morning. Either this is the first leg or a larger pullback that began yesterday of the completion of a flat correction that began 9/17. The former would mean that the correction would extend into next week. The latter would mean that the uptrend would resume as early as tomorrow.

The most bearish interpretation is that the Qs are in a 3rd of a 3rd down on the hourly chart. This would necessarily lead to much lower prices, but the same two interpretions above would still apply.

Perhaps the outcome will depend alot on the RIMM report after hours today.

At the moment, I am remaining long in expectation that the uptrend will resume. I would only consider the possibility that the rally is over if there is a sustained move below 41.05, which does not appear to be in the cards yet.