Thursday, October 29, 2009

Bulls Charge Back, But Bigger Bearish Stance Remains Firm

Today was an extremely bullish day on many levels. Four things occured today that were victories for the bulls:


1) the daily S&P trendline I've spoken so much about that was broken and closed beneath yesterday, was not held today as the bulls regained the upper end of the trendline, making yesterday's break a "false breakout".

2) the S&P, Dow and NYSE all made big bullish engulfing daily candlesticks that shadow yesterday's decline. These are known as "reversal candlesticks".

3) NYSE internals were very strong, and when combined with numbers 1 and 2, it is a possible setup for a bottom and reversal to new highs.

4) the S&P, and especially the Dow, sported clean and strong 5 wave impulsive rallies today.

All alone, the above 4 bullish indicators are not that impressive, but when combined together, they make a great bullish case. But let's not give up to the bulls just yet. Not at all. There are several things to consider to this 'just one day' event. Let's look at the bearish case, which I feel is still much stronger:


1) no index has made a new daily high, which is the ultimate guage right now of the bearish potential. As long as 1101 remains intact in the S&P cash index, the market is bearish for the foreseeable future.

2) the US dollar did not make a new low, and although it gave up some ground today like the stock market, it fits well into the larger wave count which has it correcting a 5 wave rally ending yesterday.

3) the Dow and S&P made strong 5 wave rallies today, but the Nadaqs and the Russell 2000 did not (see charts attached).

4) the Nasdaqs and Russell 2000 are risk barometers and tend to lead the overall market and both are making corrective-looking rallies lagging the S&P and Dow and neither made a daily bullish engulfing candlestick either.

5) although volume and internals today were solid, neither matched what the bears accomplished yesterday.

6) the topping action of several indices, to include the Dow Transports, has not been reversed and is extremely bearish for the long term.

7) today may just have been a short covering rally based on government spending inflated GDP. But no real positive fundamentals have changed, and post-earnings stocks are still mostly trading lower than their pre-announcement levels.

8) I've said before that the Russell 2000 has been leading the rest of the market. Well yesterday this index made a new daily intraday and closing low beneath October 2nd's low. In fact, the Russell's rally today only had it closing right on the October 2 closing low, while the other major indices are trading well above their October 2nd lows. If the Russell is leading the way, then today's bullish action will be quickly reversed and October 2nd's lows will be broken in the other indices.

Although today was a very strong day for the bulls, it does not trump several days of bearish activity, and the overriding bearish evidence that makes a top in the stock market the highest probability at this point. Tops are never easy to catch and hold, and the market makes it as difficult as possible to do so.

The bottom line is that the evidence still strongly favors the bears in that a major stock market top is in place and that the market is in "crash mode" right now. The key for this bearish case to remain intact is for the S&P cash to stay below 1101, and that the US dollar does not make a new low beneath this week's. My philosophy is to ignore all the "noise" that will surround this erradic and volatile market in the coming days and focus on what I just said in the previous sentence. The market is bearish until it proves it's not.


doc said...

I have been reading todd's stock charts and analysis for several weeks and feel that he does a great job of sifting thru all the information and highlighting the trends that have the most impact.

Todd S said...

Thanks a lot, Doc! I really appreciate that.


adan said...

nice pros and cons for the bullish and bearish cases - really helps put things in perspective and review

my own take? a lot of big fund managers wanna make sure they get their bonuses locked in for their fiscal year end, tomorrow...

whether they'll want to hang around for possibly a few points more, or cash out and secure their gains (what i would do), well, we'll see ;-)

thanks todd

Todd S said...

Thanks for that, Adan. I'm glad you brought that up, I tend to overlook this stuff and it's good to keep in mind. I've noticed that the day prior to month's end and a few days into a new month tend to bring high volatility. But the fiscal year ending after a monstrous rally from March, that's big to consider and we will probably see an increase in volatility in the coming days.

Thanks for bringing that to light.


Anonymous said...

Really excellent analysis and clean charting my friend. You've become a regular on my stock blog daily scheduled reading. Question: I notice you don't post many indicators (ie momentum gauges, money flow oscillators, etc) in your charts, is this primarily because you don't use indicators or to simplify the charts format? Thanks.

Todd S said...

Thanks for the kind words. I hope the analysis here brings value to your trading. As for your question; you are correct in that I don't usually include indicators in my charts to make them simpler to read. I use them on my own all the time, but usually only post them on the blog if I'm going to talk about the indicator specifically. I try to only chart what I'm going to talk about in a post to keep it all relevant to the discussion at hand and to minimize confusion.

Thanks for chiming in!