Thursday, December 10, 2009

Market Remains Range Bound; Gains From Here Should be Hard Faught, and Short Lived

The market shot higher out of the gate this morning, fell back a little bit, then traded sideways the rest of the day. It rallied shortly after my post yesterday (click here for yesterday's chart) which pointed out the weakening momentum behind the downtrend, and then continued to rally higher this morning. The Dow actually created an inverse head and shoulders pattern on the 5min chart as well. This rally occurred at the bottom portion of the range, telling us the market isn't ready to break out of it in a decisive manner yet. Usually consolidations, or triangles, occur as a pause in the previous trend before spiking one last time in line in the previous trend's direction. In this case, that direction would be up. So it would not be surprising at all if we see some follow-through with this rally in the coming days, and probably get a spike to a new high on the year in the S&P cash index above 1119.

However with so many divergences in other indices and sectors, and the fact that even the euro didn't rally with the stock market today and precious metals continue to weaken, it tells me that any further rallying to new highs will probably be by the S&P, Dow and maybe the Nasdaqs all by themselves. The amount of indices, sectors and markets, charging higher to new highs is getting smaller and smaller. So any spike above 1119 in the S&P should be short lived, and worse case for the bears would be that it does a "blow off top" like gold did. But the reversal from that top will be just as fierce as the climb higher was.

So I remain short term neutral on the stock market and long term bearish. A solid close beneath 1085 will open the door to possibly a major top being in place, while a break above 1119 should be short lived and reversed shortly after.


Triple B said...

Hey Todd,
I have a question about your "Blow off top" comment. I'm pretty new to this EW stuff, so please bear with me. I know that it is common for a motive wave "2" to retrace .618% to near 100% of a motive wave "1". I also know that the S&P has retraced approximately 50% of its corrective wave "1" or "A" which is also a common level of resistance for a "B" wave.

My question is: Since a "B" is basically an inverse motive "2" wave, In your experience, is it common for a "B" wave to break the 50% retracement and if it does, is it likely to retrace to possibly .618 or .786 (approximately 1200 and 1400 on the S&P respectively)?

Sorry, that was more than one question. Since you mentioned a "Blow off top" it got me thinking a little bit. I follow your work every day and deeply appreciate your time, effort and perspective. I completly understand the frustration behind calling a "Top", so I'm with on that.

My problem is I want to tell my friends and family about the upcomming demise of the American economy, however I don't want to be premature, if in fact a "Blow off" happens, we could be months away from the inevitable demise. So the conundrum is, do I tell them now and look like a fool if it doesn't happen for another six months, or do I let them lose a ton of money if it does? I know it's my personal decision, I wish my crystal ball wasn't broken!

Thanks for your time.

Todd said...

Hi Bob thanks for the good questions. Wave B's are the most difficult waves to predict and trade in EWP. All we can be certain on is that because wave A is five waves, then the entire A-B-C correction cannot be a flat correction, so wave B cannot exceed the start of wave A. Also, it's a guideline that B waves retrace 50%-78.6% of wave A which puts us right in that range right now. With that said, with all the other evidence in place with the dollar appearing to have bottomed, commodities topping, the divergence and lack of new highs in the secondary Russell 2000 and XLF financial sector ETF, the market will be hard pressed to get to the upper end of that range. 1200 - possibly, 1400 - doubtful.

The second part of your question is a tough one and I struggle with it too. What I do is tell my friends and family what I feel is most likely to happen, and that investing is all about probabilities, and risk/reward ratios. Right now, the risk far outweighs the rewards in my opinion, and the probabilities that I see suggest a major top and reversal in the stock market that will dwarf the Great Depression's collapse. I have a position right now to protect money and not lose any, and the worst thing that will happen if I'm wrong is that some of the rally will be missed. But if I'm right, it may save 50%-80% of investment capital in losses over a 1-2 year period in my opinion. I told my family that safe assets are similar to what Bob Prechter recommends: spread the money out in short term 3 month T-Bills, savings accounts, gold, and in a safe under the bed. This is only my opinion though, not any financial or investment advice, as personal financial and investment decisions are up to the individual.

The way I see it, all I can do is tell people what I know without pushing them to take any action. I know if I push them, then I will take full responsibility for what happens with little reward if I'm right and complete and utter guilt if I'm wrong. It has to be done by them and their own initiative. I just let them know what I think will happen and let them make the choices and ask the questions from there. If they ignore me, which many do, and the market crashes, at least I'll have a clear conscience knowing I did what I could to let people know what I knew, and that they made the choice not to listen.

With that said, a blow off top at this degree of trend should be short lived. It would probably result in a charge towards S&P 1200 or so, and last a couple weeks or so, then violently reverse. It's my opinion that long term investors should not be trying to catch a top, that should be left to the aggressive short term traders.

Hope that helps, and good luck!


Triple B said...


Thanks very much for the reply. Glad to know I'm not the only one struggling with some of these decisions.