Saturday, October 31, 2009

MARKET NOW LONG TERM BEARISH: But Possbily Short Term Bullish Though

What a nice reversal of that bullish move on Thursday. Thursday I listed 4 bullish things that occurred and needed to be reversed in the coming days to eliminate the potential of the bulls regaining control, and Friday that's exactly what it did in the just the first few hours of trading. Friday: 1) the S&P recaptured the underside of the daily ascending trendline from the March lows, 2) dwarfed the bullish engulfing daily candle from Thursday with a bigger daily bearish engulfing candle Friday, 3) exceeded the NYSE internals data with it being more heavy to the downside Friday than Thursday, and 4) with new lows in all the major indices it negates any 5 wave interpretation of Thursday's rally being an impulsive rally. So all 4 bullish indicators from Thursday were erased within the first few hours of trading on Friday......amazing. (see my post on Thursday that listed the 4 bullish elements I just mentioned:

So the bearish evidence continues to pile up now: today's action left a big daily bearish engulfing candle with a lower close than yesterday in all the major indices, they are all declining impulsively (5 waves) signaling the trend is now down for the foreseeable future, NYSE internals continue to be weak and suggest the bears have control now, rallies are not having follow through and are being met with more selling to new lows, and on and on and on.

The momentum of this decline should be heavy, and rallies can be sharp and brief, so I am in no position to try and get in and out to catch every top tick. I will eventually miss out on big selloffs and have a hard time re-entering, waiting for a rally that never materializes. So I'm heavily short, as I have been, and will not budge on that as long as the S&P cash stays below 1101, period.

With that said, there are some bullish implications in the short term here. Here are the main 3 bullish implications that may result in a short term corrective rally:

1) most indices completed 5 waves down, which means a correction is due. But they may end up subdividing lower though, so again, I'm not trading this, I'm just keeping myself aware a corrective rally MIGHT happen as I hold my short positions.

2) the Russell 2000 has been a valuable tool to forecast where the other indices are headed. Well at the end of the day today it showed more strength than the other major indices as you can see in the attached chart (bottom two charts) where it shows that the S&P made a new low on the 5 minute chart while the Russell did not and was showing more strength. This mild strength shown in the Russell compared to the other indices MAY be signal that a correction is coming.

3) the VIX exploded today, causing it to close above the top of the bollinger band as shown in the big top chart attached. When the VIX closes above the bollinger band and then closes beneath that bollinger band, it usually results in some type of bottom in the stock market, as you can see from the last 3 times the VIX did this, the S&P made a bottom and rallied to a new high. Although I doubt this time it will rally to a new high, it is very possible it will bottom and rally for a few days.

So there it is, the market is overwhelmingly bearish in the big picture and I'm heavily short with my breaking point being the 1101 S&P cash level, but I'm also aware that some short term bullish potential lies ahead of us next week that should fall way short of getting to 1101.


adan said...

very nice overview, cautionary note on a possible bounce, and the info on the russell 2000's eod (friday) behavior (with contrasting s&p / rut charts) -

and the vix chart is really helpful illustrating it's past patterns with the bollinger bands -

much appreciated, thanks todd -

Todd S said...

Thanks Adan. I's shaping up to be a very interesting week. It's unclear right now if the market completed 5 waves down and will correct, or if it will subdivide lower. The dollar should tell help us with that, and right now it's rallying against the euro impulsively in the asian session. If it continues to rally into the US session, then the stock market may subdivide lower and lower this week.

Monday morning should tell us a lot.