Wednesday, October 21, 2009

Divergences Posted in S&P vs. the Russell 2000 and XLF

Today we had a nice reversal day which was "impressive" to say the least. This is the kind of movement we should come to expect for a long time, many months, when the collapse does in fact begin. We don't have confirmation of that collapse beginning quite yet though so I don't want to get ahead of myself. We must wait for much more to occur than just a 1 1/2 hour decline. I am in the process of developing a reliable trendline for the rally with exact point targets to where if there's a solid close beneath it, we can confirm the collapse is underway. I'll have that shortly.

NYSE breadth was solidly strong throughout the day, unfortunately I didn't get a snapshot of it at the time so I don't have the exact numbers, but I know that at one point advancers were over 2000 and decliners were under 1000, and up volume represented about 60%-65% of total volume. But, in the last 1 1/2 hours of trading this quickly reversed to end the session with NYSE advancers at 995 and decliners at 2031, and total down volume of 71% of total volume, on a pretty strong volume day overall. So the move was not a fluke, done on light volume manipulation, or any of that. THE MOVE DOWN TODAY WAS DONE WITH CONVICTION.

The S&P, Dow, and Nasdaqs all made new highs that confirmed each other today, however the Russell 2000 and the XLF (financial ETF) did not with the XLF not even coming close. The XLF has led this market lower and higher the past couple years, so it may lead us down again. So far it has. I posted the XLF weakness and 5 wave decline count in an earlier post, and as blog reader, Doc Steve, pointed out today, Goldman Sachs was very weak today which was a big warning sign apparently of what was to come later in the session. Goldman ended up closing down over 3% on the day. GS is a big leader in the financial sector, so their weakness lately is a big warning sign for the bulls, and encouraging for the bears.

The coming days will be very important. We need to see follow through and weakening NYSE volume, breadth, and overall internals accompanied by constant 5 wave declines. Without that, it opens the door to this just being another selloff and then bottom and reversal to new highs, again. I'm also waiting for confirmation of a US dollar bottom to confirm the top in the stock market as well. But that has not occurred yet.

So we wait, patiently, for the market to play out and let us know where we're at.

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