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.


infinitus said...

Hello Todd,

good analysis. This whole run up is hard to swallow. PE for SP500 now around 138.

Thanks again for your effort,


Todd S said...

Hi Markus, thanks for the note. I'll be on top of this whole rally and topping process the best I can.

I'm always open to suggestions on what to cover and analyze if anyone has them.


NEO!@# said...

Disregard previous post.

I'm looking at pulling my puts on Wednesday if the rally continues higher. Not sure what is going on.

Tomorrow could have a 2% down day.

Never know,



Todd S said...

Hi Neo,

Just an FYI on my position, I have several different put options that expire Dec 2010, and Jan 2011. I am holding those indefinitely, however this morning I bought a very small amount of calls on the DIA and SPY with an expiration of Dec 2009. The reason is that if the market keeps rallying, it will help offset the time erosion to my long dated put options before the collapse occurs.

Good luck,

Dave427 in Texas said...

Todd - A new EWer here. . . when S&P took out 1037 on Sep 11, thereby overlapping the top of wave 1 (Aug 25), did that invalidate the entire wave 1 thru 5 structure that seemed to be forming since 25 August? Before Sep 11 it looked like a final wave 5 would happen somewhere above 1101. Now with 1037 taken out, what does that mean for wave 4 that looked like it was done on Oct 2?

Todd S said...

Hi Dave, thanks for the question.

For the 5 wave rally in the time frame you're talking about I'm counting it as an "Expanding Diagonal". In Expanding and Contracting Diagonals, the waves are allowed to overlap, and also have other rules and guidelines that differ from other 5 wave moves. These diagonals signal the weakening and ending of the previous trend that usually results in large and strong reversals. For more info on diagonals, you can also check out the EWI tutorial pages with the link located on the right lower side of my blog if you're interested.

As for the entire rally from the March 2009 lows, check out my "Long Term S&P Futures Chart" on the right side of the blog for a better detailed view of my count on this rally. If you, or anyone, would like a larger picture of this chart please just let me know and I'll send it.

I hope I addressed your question. If not, perhaps if you can email me a chart that also describes the count you're talking about I can better answer your question.