Thursday, October 22, 2009

Stocks Must Decline First Thing Friday to Remain Short Term Bearish

Today the Dow held the market hope with it's stocks Travelers, AT&T, and McDonalds posting good earnings, and a few other stocks related to earnings. Early this morning, the Dow was the only one charging higher, up about 80 points, but NYSE breadth was flat. So the Dow was moving alone, hoisted by just a small handful of earnings related stocks, and the dollar was stable, so I thought the market could roll over any time. But later in the day the Dow pulled the other indices up for a major afternoon rally, severely weakening the short term bearish call yesterday. In response to the big decline yesterday, I posted yesterday that in order for this decline to have legs and open the door to the crash starting now, "We need to see follow through and weakening NYSE volume, breadth, and overall internals accompanied by constant 5 wave declines." We had none of that today, and the US dollar started to weaken later in the trading day, further fueling the stock rally. All-in-all, not a good day for the bears following yesterday.

But more important is the wave count. Above are two 5min S&P cash charts, one with a bearish count (left) and one with a bullish count (right). The bullish count is the most likely structure from a strictly EWP standpoint because the decline yesterday counts best as a 3 wave decline, which is a correction, and therefore new highs must be achieved. However yesterday's decline was so strong and convincing that it can't just be swept aside. But in order for this to remain in contention, the market needs to sell off immediately Friday morning. Otherwise, the indices will be charging to new highs. If that does happen, I will be watching all indices, and the XLF, looking for failures to make news highs with their counterparts. Since major divergences occur at major tops, I'll be set on watching for that.

There is no question the stock rally since March of 2009 is in its last throws, and is severely weakening, being held up by a few select stocks and their earnings reports for a day or two. Soon, the market will run out of gas and top. The further this market goes like this without a real sustained break, the more likely it is that the next top that's confirmed will be "The Crash".

Again, the US dollar seems to be key. It seems that the wave count has to subdivide a few more times to new lows before it bottoms. So we again, we wait.

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