Finishing On A Good Note

Markets finished the month of May on a high note.  While there is still some work to do as the action remains within the trading range between the May 2 high and the May 25 low, the key point to take away is that the SP500 held support at the top of the January range for the 4th time since the March correction.  This is bullish action.  The drum beat for a larger correction continues, but so far we've seen nothing but a pullback in the monthly trend.  Maybe there's a surprise around the corner, but for now the market looks higher.

IBD called the market in a confirmed uptrend after the close based on today's action.

Dollar Divergences

We have a definite positive divergence in the macdh for the US Dollar Index.  A similar situation occurred in 2009 leading to a multi-month dollar rally.  Even if we see a retest of the recent May low, the positive divergence is likely to remain, and the outcome will also likely be the same.

For those who might assume this means the stock market will necessarily decline, the argument is not so clear.  While a negative correlation with the stock market has existed for some time, that has not always been the case.  In fact,  according to John Murphy, the normal relationship between the Dollar and stocks is a positive correlation.  It may be that we will see an inversion of the recent negative correlation with a rise in the Dollar supporting a rise in stocks.

The Long Wait

There is really not much else to say right now as we wait the long wait for a resolution to the current consolidation.  It does appear that sentiment is turning more bearish which is a positive sign.  Some are still calling for a long term top sometime in June or July.  I don't see it.  Maybe they're right, but the odds are against them.  So few are ever right calling tops - myself included.  Bottoms are not as difficult, but tops are ever so elusive.  At the moment the trend remains up and that is the direction we should be looking until it changes.

Have a great, long Memorial Day weekend.

As Expected

We got the reversal this morning after futures were down big overnight with the cash indexes not following this morning.  It looks like we will have another leg down to complete wave [c] unless the 5/19 high of 1346.82 is exceeded on this rally.  If it is, then wave [d] up is probably underway.

There is a good chance that wave [d] is in fact underway as the decline from the 5/2 high has taken 17 trading days so far, which exactly matches wave [a].  Wave [b] lasted 32 trading days, almost 2 times wave [a].  If the usual relationships hold, then wave [d] will last either 11, 17, or 28 trading days, and wave [e] will take 7, 11, or 17 trading days.  This puts the potential end dates for the correction at June 21, July 5, July 22 and August 1.  June 21 or July 5 appear to be the most probable.

One reason to be encouraged is that leading stocks continue to break out.  NFLX is a good example. I am long from 250.  Also, the previous swing lows have yet to be broken.  The next few weeks are likely to feel dull and unproductive, but remember the old adage to never short a dull market.

Oil likely completed wave c up of a bearish [b] wave triangle today or will do so tomorrow.  After the sharp drop from 5/2 to 5/6, we should expect another round of selling to complete the correction in oil.  On the other hand, if the triangle breaks out to the upside, it would probably be more bearish for oil in the long run.

A Rare Setup In The SP500 & Qs

I wanted to share this rare setup with you that is occurring in the SP500 and the QQQ right now.  The chart is a weekly chart with the 12 week 2 SD Bollinger bands in cyan.  In the past year there have been two instances of this setup in the SP500, which occurs when the Bollinger bands go completely flat and tight for at least 6 weeks.

Looking back at the SP500 over the last 30 years this setup has occurred very few times, but almost always leads to a powerful move.  The RSI and MACD can both be used to confirm the trend when the market breaks out.  At the moment both are in a neutral condition.

The longest period that I found for this condition was 12 weeks, although another case with some variance lasted 14 weeks.  The current setup is now 5 weeks long, so we may have as many as 7 to 9 weeks more to go, but I doubt it will be more than 3 or 4 weeks.  The breakout is typically in the direction of the trend on the next higher time frame.  The monthly trend is currently a strong uptrend, so the most likely breakout direction is to the upside.

I wanted to bring this to your attention as there is increasing talk on trading blogs and sites about the beginning of a protracted decline.  Even on CNBC, Bob Pisani was airing his concerns that traders are apathetic as opposed to fearful, which might be a setup for a selloff.  The fact is, as I pointed out in my last post, that while trader talk might be complacent, traders are becoming increasingly bearish with their positioning according to the ECPR.  As the consolidation continues I expect the sentiment to become even more bearish which will support a powerful rally for the rest of the year.  This is a change from my earlier view that we would see a top in June.

In this type of environment leading stocks will tread sideways or edge higher as laggard stocks correct.  The simplest thing to do here is to replace positions that are stopped out with new high relative strength stocks.  When the breakout comes it might be difficult to get on board.

Trader Sentiment Has Reached Bearish Levels

It looks like the market may need to test lower levels before a short term bottom is seen as squeeze short signals fired yesterday.  However, the tenor of the decline so far is corrective.  A rally with another low would complete 7 waves down from the May high.  The correction may extend well into June at this point if a triangle is underway.  This may allow sentiment to reach even more bearish levels, which would support a strong rally once the triangle terminates.  A sharp decline that does not breach the wave [c] low would be a strong clue that the pattern is a triangle and that it is finished.

Below is one possible interpretation of the pattern. A typical end of the month/first of the month rally should begin any day.

KKD Explodes 25.78% Higher

KKD reported earnings this morning that beat estimates by 4c and double that of a year ago on higher than estimated revenue as well.  My personal opinion is that the KKD has rallied in a series of first and second waves since it bottomed in February 2009 and is now beginning a powerful 3rd wave advance that should carry it to at least 26.42, the February 2003 low.  However, there is resistance ahead at 9.65 and 13.93.  If, and it is a big if, KKD can hurdle 26.42 over the next year or so, then I think it will retest if not exceed its all time high.  I have been a buyer of this stock from $1.50 and am now fully positioned to ride this trend.

The market continues to whipsaw traders, but while buyers are standing aside, selling volume has failed to materialize.  The most likely explanation is that the current decline is wave [c] of a 4th wave triangle with waves [d] and [e] yet to come.  The upside target would be at least 1431+/- and probably higher.  Unfortunately, there is no way to know if this really is a 4th wave or wave [X] of a complex double zigzag that targets even higher prices.  It may be the end of June before an upside breakout is seen.  Only a break of the March 2011 low would invalidate this viewpoint.