Monday, November 9, 2009
Strong Rally Threatens 1101; But Market Fractured
Today's rally is very strong internally (see attached data with red circles) with a lot of buying conviction and a weaker dollar offering it a nice tailwind. So the 1101 level I sighted as solid resistance is now looking very vulnerable. But let me be clear when I say that when a stop is placed, it should sit until the market takes it out. I've seen crazy things happen as a trader, and it would not surprise me if the S&P hits 1099 then sells off 100 points immediately. I'm not predicting that will happen, but it's possible, and it's the reason why when a stop loss is placed, it's there for good unless it's going to be moved closer/tighter.
With that bullishness said, the stock market is very fractured. Check out the attached charts comparing the Dow Industrials, S&P 500, DJ Transports, and Russell 2000. The Dow Industrials made a strong new high today, which is why the Dow was not falling impulsively earlier, it was a clear correction that wanted to make a new high before it topped. However the other major indices did fall impulsively (5 waves), which may possibly mean they will NOT make new highs. Without confirmation and new highs from the other indices, it would be extremely bearish. Especially if the DJ Transports do not make a new daily high with the Industrials, it will issue a Dow Theory sell signal, which is a big deal. As you can see, with the exception of the S&P, the other indices along with the XLF an even the Nasdaq Composite, they still have a ways to go to get to a new daily high; can they make it???
An S&P break of 1101 DOES NOT eliminate the larger bearish scenario for a wave 3 or C. It merely will postpone it. And if these other indices lag and cannot make new highs, it will be a very telling bearish signal for the next attempt at calling a top. The market has not sold off enough to alleviate the exhaustion it's experiencing on many technical levels, and I feel the dollar weakness is really the fuel to this rally. So this may just be a "blow off" top. When the dollar turns, the stock market will do so, and hard.
So let's watch these other indices and see how well they rally as we watch the S&P 1101 level and we'll go from there. Until 1101 is broken, the strategy is the same as it always has been. If 1101 is broken, we will simply stand by and wait for our next bearish opportunity.