Low Volume Is A Problem

Since the August bottom, rally tops have been marked by very low volume with a top following in 0 to 2 days.  Given that the IWM remains below its previous high and is now approaching resistance at the 50ma with today's volume being the lowest since last week's low, a short term top is probably imminent.  We also have the 5ma of the TRIN at 0.65 with today's reading at 0.47, and the McClellan Oscillator in overbought territory.  A wave ii or b pullback into Friday's close is the most likely scenario.

I had to leave for a meeting at 2pm today.  With the low volume and an approaching top I decided to take profits in my ES position at 1186 just one point below the R3 pivot for a gain of 111.25 points in 5 days.  Instead of trying to short the upcoming pullback I will be looking for another chance to get long for a move to the 200ma probably around 1250 to 1260.  A 3 to 4 day pullback should do the trick.

How I Traded WYNN

WYNN provided a rare oversold long entry with two closes outside both the 12 and 50 x 2 SD Bollinger bands followed by a "doji" inside the 12 x 2 SD band.  With the market showing a desire to reverse Tuesday morning I went long WYNN at 110.00 and exited this morning at 134.72 when it became evident that the run-up was over.  When people say you can't buy bottoms they don't know what they are talking about.  This is a perfect example of how to buy a bottom in a stock.  The key is to buy when both the broader market AND the stock are both deeply oversold AND showing slowing momentum to the downside.

It looks like the expected pullback may be underway, but it is a little early to tell.  There may be another rally high before the pullback begins in earnest.  The 38.2% retracement target was not hit today for my ES position, so I am holding until either the target is hit, or there is a pullback with an opportunity to add to the position next week.  Currently my stop is at breakeven in the position.

Have a great weekend!

Approaching Resistance

On Monday I said, "The question is not if a sharp rally will occur, but when will it occur?"  We got the answer by Tuesday morning after the Qs came within 0.17 of the 8/9 low.  I bought the ES at 1074.75 Tuesday morning.  If it hits the 38.2% retracement tomorrow, I may sell for a gain of around 100 points.  If not, I may hold and add on a pullback.  The risk is that given the declining volume a pullback may be sharp.  But the main thing to understand is that this rally should last well into December at least and maybe even January, so keep your eye on the prize.  It will probably be choppy, and this could make things difficult.

So far the timing of the current market correction has followed the pattern from the 10/11/2007 top extremely closely.  The initial decline into the March 2008 low lasted 107 trading days, which would have equated to October 3, 2011 in the current correction, so it was off by one day.  If the pattern continues to hold, the market will continue up one or two more days, and then pullback for 3 to 4 days followed by another surge.  This may be a good time to look for intermediate term long entries lasting 6 to 12 weeks as well as short term trade setups.

Putting In A Low

I think a strong case can be made that with the market's reversal today and close back above the August closing low that an intermediate low is now in place.  There are outcomes that would allow for another retest, but it looks as though the monthly pattern I showed on Friday, Familiar Pattern, has been fulfilled, and a 4th quarter rally is now probably underway.  At a minimum the Qs should exceed the September high by year end.  An immediate reversal that takes out today's low would invalidate this view.

Two Scenarios

I see two scenarios for the a potential intermediate term bottom based on this morning's market action.  The Qs are within a few cents of undercutting the 8/9 low.  The decline could end there, or it could fall to 47.45, which would make the decline from the 9/20 high equal to the decline from the 7/26 high.

The first scenario would make the declines equal in time, the latter would make them equal in length.  Unfortunately, the latter might alter the flat combination interpretation, but it will take a long time before we know that.  Again, although things look bleak right now, there is light at the end of this tunnel.

Qs Near Support

The Qs are very near support at the lower 50 week 2 sd BB, and at the same time the 5ma of the TRIN has reached an extreme level.  The question is not if a sharp rally will occur, but when will it occur.  It could happen at any time.  The SP500 closed below the 8/9 low on substantially lower volume than on 8/9 - another bullish divergence.  

Outlook For October

The opinions about the market's direction vary across the board from the most bearish to quite bullish.  This is not surprising given the fact that the SP500 has been trading in a range now for over 6 weeks, and no one really knows when it breakout in either direction or form an intermediate term low.

I have seen comparisons made with a number of past markets.  Tom McClellan has shown a strong correlation to 1946 (65 year cycle).  I think there is a strong correlation to late 2007 and early 2008 (4 year cycle).  Both correlations seem to be saying the same thing:  there will likely be some type of bottom by the end of October.  I suspect probably around October 13, if not, then probably by October 28.  Others disagree and suggest that the downtrend will continue until the end of the year.  I don't think that is likely given the severity of the recent decline, but anything is possible.

The key is not to fall into the trap of believing that any one particular view must be the right one.  Let the market lead and only take high probability setups.  The current market environment is not conducive to trend following.  That will change at some point, but we will have to be patient.

Perhaps the best approach would be to use an indicator like the MACD to enter on a positive divergence buy signal.