Monster Up Day

Monster Worldwide had a huge 25% pop on Friday after posting better than expected earnings and revenue. However, the big picture is a little scarier. There is only the slightest chance that MWW is in a 3rd of a 3rd wave move as the August 2010 low did not go below the July 09 low, but the more likely scenario is a large double zigzag upward correction that may be approaching its final stages. The pattern could extend with a triangle, but even so, it points to the looming return of economic contraction that should be upon us by mid to late 2012 if not sooner. MWW peaked in May 2006 well ahead of the rest of the market. We should be watching to see when it tops in this cycle as a good leading indicator that a broader market top lies ahead.

Pop & Drop Or Just Drop

The buildup to the election on Tuesday and the Fed meeting on Wednesday has been exceptional. It is rare that the market reaction to such huge expectations is positive regardless of the outcome because the expectations are typically priced in, and it becomes a sell-on-the-news event. One thing that I agree on with Robert Prechter is that news does not affect the longer term trend, rather it is a representation of the same effects that can be seen in market behavior. That is not to say that there aren't brief reactions to the news, but these do not affect the big picture. So, whether the market pushes higher after the election and Fed meeting or not, the market looks ready to sell off.

Looking at the pattern in the IWM, it looks like it could go either way. The IWM either topped on Monday or it will rally into Tuesday or Wednesday and then roll over. If the top is in, however, the selling should begin fairly quickly on Monday. One thing is clear, the action since mid-September in the IWM is not impulsive. It doesn't look anything like an impulse wave, so once the selling begins, the gains should be given back quickly.

Rare BB Setup Led To Extended Rally

Many years ago I ran across a book on technical analysis written by a french analyst that worked for Credit Suisse. In the book he described a setup with the 12 period 2 SD bollinger bands that occured when the bands were flat and tight for 6+ periods. I devised a way to screen for this setup and found that it did in fact lead to powerful moves, but it was also rare, expecially on the weekly charts.

When it occurs on the daily chart of a stock, you can typically expect a move of 12% to 15%. You can just bracket the high and low of the tight range period and go with the breakout long or short. The breakout will be a fakeout about 30% to 40% of the time, but the risk/reward is excellent. Another aspect that occurs frequently with this setup is that after the rally or selloff ends, the stock tends to reverse sharply the other way. It's like all of the explosive force that was pent up has been expended, and there is no energy left to keep the trend going.

The breakout from the flat and tight bands on the weekly chart of the Qs led to an 11% rally from the high of the range, but now we are probably approaching the end of the rally, and the reversal could be dramatic. (Of course, the darn thing could just keep going, too.)

QCOR Breaks Out From A Triangle

QCOR broke out from a 4th wave triangle today as its earnings report and guidance exceeded expectations. However, the triangle price objective was also met today so it's not clear whether a correction will follow next week or whether the amount of time spent consolidating in the triangle will allow for additional upside.

Currently, the wave count would have QCOR completing either wave ((3)) or wave (1) of ((3)). The latter would obviously be a more bullish count, but another correction to the $10 zone is possible. My long term target is $17.50 using the more conservative count.

FTSE Has Topped

I believe the London FTSE index has put in a top. We have the break of a short term trendline, a negative divergence MACD sell signal, the RSI breaking down, and a completed ending diagonal triangle pattern at the October 25 high.

There is support at the rising trendline and at least a sharp bounce would be expected from that level if not an attempt at new highs. There is also support at the August high. One thing that stands out is the near equality of the price rise in the July/August rally versus the September/October rally. If the September/October rally were a 3rd wave, we would expect a greater price advance. The FTSE has led the US markets by a few days this year, so I think we can look to the action in that index to help us discern what to expect as the support levels are approached.

Absolute Breadth Pointing To A Top

The absolute breadth index measures the absolute value of the difference between advancing and declining issues. In theory, high readings tend to be associated with bottoms with many stocks making new lows in a selling climax, and low readings tend to be associated with tops as momentum fades and there are few new highs or new lows. It is my experience that this is generally true, however, during a climax top it is possible to see high readings and at the retest of a climatic low it is possible to see low readings. Turning points associated with extreme readings of the indicator tend to be significant. One drawback is that sometimes the indicator precedes the actual turning point by two to four weeks, but that can be an excellent warning.

At the moment the index is reaching the zone associated with market tops. While the market could hold up a while longer, the fact that the wave count, volume and other measures of market breadth are now pointing to a top should be warning enough not to be taking on new long positions. The structure of the current market action is so strikingly similar to that of April, it would not be surprising to see a more powerful selloff than most are expecting.

Still Working Higher

Another added distribution day in several markets, but at the smallest degree of trend we do not see an impulsive move down. Yet, the action is not impulsive to the upside either as it appears that either the ending diagonal or some sort of triangle is coming to a conclusion. It seems that the money managers have been successful at keeping the rally going into the fiscal year-end for most funds, the end of October, but unless we see a blow out GDP report on Friday, one must assume that it will be a sell the news event, particularly as election day looms just ahead.

The NYMO closed lower and below the cited pivot level from yesterday indicating the rally is over for all intents and purposes. Anything they are able to do from here is window dressing.

We can't know what the extent of the decline will be ahead of time, but we do know that it will most certainly fit into one of three possible outcomes: 1) a large selloff to retest the July low to conclude a [B] wave flat correction, 2) a 4th wave correction to set up the completion of intermediate wave (1) from the July low, or 3) a 3 wave decline that sets up some sort or combination correction or triangle that extends well into 2011. Given the extent of the rally and the new highs by the Nasdaq 100, the likelihood of primary wave 3 down is very low at the moment. Only if we were to see a 5 wave decline to the July low followed by a 3 wave rally might we suspect otherwise.

Well, the monied interests have made a good run of it for a B wave, but I am looking forward to a better opportunity in early January.