Correction Will Take A Little Longer - Probably

The intermediate trend is still up in the sense that the April 18 low has not been violated, but the correction still appears to be in progress.  It may take a few more days and a retest of the 5/5 low before it's over.  Thereafter, expect a resurgence of the uptrend.

Wave (ii) Correction In Progress

Well it certainly was an exciting week in the markets with the selloffs in Silver and Oil, and the rally in the Dollar. In my opinion the current pullback in stocks is still most likely wave (ii) down in an abc correction that is still in progress.  We may see a little more upside next week in wave b up and then another decline to complete wave c down.  The SP500 could go as low as 1313.35, the high of the April 18 low day and also exactly 1.382 times wave a down, but there is support at 1320 to 1325.  I think any test of that area with a reversal would be a buying opportunity into a June high.  Watch for the MACD histogram to turn up at least one bar to confirm the reversal unless there is a hammer or bullish engulfing bar, which would provide a good low risk entry against the April 18 low of 1294.70.

As much as I think the market will eventually retest or exceed the October 2007 highs, the fact is that the Dollar may be getting ready to rally.  On a long term basis that is not a problem as John Murphy has pointed out that a rising stock market with a rising Dollar is a positive intermarket relationship.  However, in the short term and intermediate term it is likely to mean a falling stock market.

Even though waves (v) and [v] may follow into the end of June, we have seen how quickly the damage can happen with Oil and Silver, so traders would do well not to overstay their welcome.  It is probably better to think about taking profits early than giving them all back in a week.

I am looking forward to one more solid round of short term long trades into early June, and then I think it will be time to take a break.

Commodities Are Toast

Oil closed down almost $10 today after completing what appears to be an ending diagonal pattern on 5/3.  Based on the ED pattern oil should reach the $84 to $87 range by the end of May if not sooner.  However, shorting now would not be advisable as a sharp retracement could occur at any time.

The CRB continuous commodity index has broken a multi-month trendline and fallen back below the upper channel line of the entire rally from the 2009 low.  This suggests that the ABC rally in commodities including oil is over.  The trend should be down for many months to come and traders should be looking for shorting opportunities after a retracement rally.  The real problem with the breakdown in commodities is that it may also prove to be an achilles heel for the stock market.

Today's action in stocks brought the NYSE McClellan Oscillator down to an oversold level, although it may still have further to go.  Clearly, yesterday's low was not the low of wave (ii).  For wave (ii) to remain valid it must remain above the 4/18 low of 1294.70.  If that level is breached, then we would be left with a 3 - 3 pattern which would suggest that the current correction is minor wave 4 and not wave [ii].

In either case, higher prices will be seen before the rally ends.  The only question is how much higher.  At this point there is no easy answer, but probably just in excess of 1400.

What about the longer term outlook?  The fact is that even if we see the end of the current rally around 1400 it does not mean that primary wave 3 down will follow.  It just means that the overall rally is becoming more complex.  We may see a correction of the entire rally from the 2009 low or just the rally from the July 2010 low followed by more upside in a large double zigzag or other combination correction.  Or the rally may subdivide with an extended wave [C] up.  There are a lot of possibilities, but the one thing to keep in mind is that it is now looking like we will definitely see a top of intermediate degree sometime in June, and probably from lower levels than originally anticipated.  The collapse in oil prices will not help the SP500.

Who Do You Believe?

IBD has called the market in correction based on yesterday's action, but the folks at Cabot say the market's uptrend is still intact despite the recent bought of selling.  I have to admit I was surprised by IBD's call since there has only been 4 distribution days on the NYSE.  It seemed they were basing their decision more on the action of leading stocks, which have definitely taken a beating the past few days, than the distribution count.  The general rule is 5 or more distribution days before a correction is called.

The SP500 really needs to close above 1340 (futures above 1337.50) today or we may see a much deeper pullback, but until the April 18 low of 1294.70 is breached, we will still have a series of higher highs and higher lows.

Pullback May Be Complete

If the [i] [ii] (i) (ii) count is correct, the pullback may have completed at today's low.  If not, then today's low was likely wave a of (ii).  One reason to believe that it may have ended is that the SP500 penetrated and closed above the February high on volume 5% less than the February high.  The High Low Logic index has turned down and could issue a buy signal within the next two days.

One thing is for sure.  If today was the low of wave (ii), then we should see new highs in short order as the market should be in a 3rd of a 3rd wave.  A hesitant move toward the May high would suggest that wave (ii) has more work to do.

Short Term Caution

The High Low Logic Index is flashing a caution sign as it has risen above the 1.00 level into the neutral zone.  This suggests that short term traders should hold off on new long positions until it turns back down in earnest (aggressive) or falls back below 1.00 (conservative).  After the recent buy signal on April 7, which occurred after a brief excursion above 1.00, short term long trades worked extremely well, but now it is time for a pause.

SP500 Pulls Back From Resistance

Friday we did not know what the market would do when it hit the cited resistance level.  Today we found out.  Rather than pushing through, the SP500 turned back from the August 2007 low of 1370.60 after reaching an intraday high of 1370.58.

Wave (ii) down is now underway.  The April correction lasted 6 days.  Although there is no way to know how long wave (ii) will last, more than likely it will be less than 6 days and probably only 2 or 3.  The next push higher should take the market through 1370 and complete the rout of the bears who have been trying to short this market since April 2010.  At this point only a failure of the April 18 low of 1294.70 would change the outlook.

It was interesting to see the mini "flash" crash in silver last night.  Bearish articles on silver have been in the media for the last couple of weeks as silver approached $50.  There was even more bearish sentiment today.  But to put things in perspective, after a correction lasting a little over two months the stock market began a rally that eventually retraced all of its flash crash.  I expect the correction in silver will not last so long and then it will also push to new rally highs.