Triangle In AAPL

Although it is not textbook, the triangle in AAPL suggests the current advance may be the last before a correction gets underway.  The target is around 361.  It is pretty clear that the Qs will not top until AAPL does.

Breakout Failure But Oil Still In Uptrend

While oil's recent breakout can be deemed a short term failure, it is still holding support above the February 2008 low of 86.25, which was resistance in April 2010.  As long as that level holds, the uptrend should continue to at least the lower target zones.  The trendline for the rally from 2009 is currently around 82, so that would be the lowest legitimate area of support for the uptrend.

The SP500 closed right at the trendline connecting the August and November 2010 highs today.  It is rare for a market to power through such a long established trendline.  The price pattern still looks like it wants to make another high, but that should be it.

Overthrow In Progress

Previously I suggested that we might see an overthrow of the rising wedge patterns.  That overthrow appears to be in progress with perhaps another down-up sequence or two to go to complete.  In reading and listening to various market commentators and analysts the consensus seems to be that a correction may be coming but it will only be 3% to 5%.  Regardless whether or not we retest the July low, the rising wedge patterns imply that the coming correction will definitely be greater than is expected.  Of course, volume continued to decline again today.  I am looking for a close below 1289 to indicate that a correction has started.

Changes Coming?

The front page of this morning's IBD confirmed what I was saying about the unemployment rate with a chart showing labor force participation at a 20 year low of 64.2%.  The 35.8% of people not participating in the workforce are either depending on family and friends for support, using up their life savings, are being supported by the government, or all of the above.  This is not sustainable.

Parket Binion has a presentation on a 14 week cycle in market tops at Terry Laundry's T Theory site - http://www.ttheory.com/.

For those interested in the astrological viewpoint, there is a view that we are in a time band for a market top that could lead to a correction of 10% or more.  See Raymond Merriman's work at http://www.mmacycles.com/.

My own calculations show a potential for a market top around February 11.  However, I haven't nailed a turn in a while so I am not banking on it.

The problem as I see it at the present time is that most trend following strategies are long, but in my opinion market risk is extremely high, so there is just nothing to be done except wait for potential short setups or new long signals after a correction.  I do think there are opportunities in the precious metals and mining stocks on the short side, but at the moment there are not new entry setups, although there could be in the very near future.

We still have a long way to go in 2011.  This should be an exciting year to be in the markets.

Possible Scenario Developing

So far, attempts to divine the top of this rally have been futile, but the clear fact remains that the market continues to rally in what appears to be a rising wedge (ending diagonal) at 3 degrees of trend as volume continues to contract.  Oftentimes we will see at least an attempt, if not an outright overthrow that convinces the last stragglers to the party all is well and this really is an ongoing bull market.  However, the market action is so anemic, I doubt we will see much of an overthrow attempt.  If the rising wedge interpretation is correct, the downside will be surprisingly swift.

For the Qs, the MACD short signal is still in force and we now have the Dollar trying to put in a bottom that could lead to a 3rd of a 3rd wave rally.  This should take the wind out of the stock market's sails, as well as precious metals.  Oil's breakout attempt failed today, but I wouldn't call a top yet.  It should still try to grind higher over the coming weeks.

For all of the talk about an improving economy the jobs report today is probably a more accurate gauge of economic reality than the talking heads were willing to admit.  Now that we've had two subpar reports back to back there is all of this talk about an upside surprise in the near future and lots of excuses to explain why the jobs report does not show what is really happening.

The unemployment rate fell because people are giving up - not because they found jobs, and the projections of future hiring expectations are based on increasing growth above the current lackluster level.  Even the slightest decline in demand lead to more layoffs and job losses.  We are on thin ice here, and I think most people feel it.

The stock market has gone up for one reason only:  excess liquidity chasing yield, but that can only last so long, and if investors perceive any loss of upside momentum they will be fighting to get out to protect what little they've made.  Even if the market continues to rally another two weeks, the condition of the market will not change.  All that will change is that the downside risk will be even greater than it is today.

Squeeze Setting Up In The Qs

The last long squeeze fired off on 1/6/11 when the Bollinger bands moved back outside of the Keltner channels. DI+ was greater than DI- confirming the uptrend.  The rally lasted 9 days before a pullback began.  Now the Bollinger bands are once again moving back inside of the Keltner channels.  While anything is possible, it is not typical to see a breakout when the upper Bollinger band is contracting toward the price moving average.  Also, although there may be additional upside the contracting Bollinger bands tends to keep a lid on a market advance until the contraction is over and the bands begin to expand again.

In the present case, we have DI- trying to cross up DI+ which would indicate the likelihood that a squeeze breakout would be to the downside.  Since it may take a few days for the setup to develop, if the market is in the process of topping, next week may continue the top building process in preparation for a more decisive breakdown.

I have to admit, however, that just looking at price alone the chart looks pretty bullish.

New Highs Don't Change The Outlook

While the SP500 and the Dow made new rally highs today the IWM just managed to make a second retest of its broken trendline. Volume lagged on today's rally as well for most indexes. It may seem that a top will never come, but this rally is getting well beyond the average time and gain for stock market rallies, and there will be a top of some kind.

It is likely the Qs will make at least a token new high, but it is not a certainty.  Friday's low remains the key level for confirming the downtrend.

The MACD remains on a negative divergence sell signal until it rises above its January 18 high.