Tuesday, January 26, 2010

VIX Buy Signal Executes; Stock Market Count Reworked

Another day in Financial Thunderdome with the markets raging to a Dow up over 80 points only to see it reverse sharply into a negative close. There's numerous ways to count this market as you may have already seen some of the options I've laid out here in the past few trading days. But I have to chose one and hold it as my primary count. I'm posting the above S&P cash index count as my top count, despite the fact that the 3rd wave is not perfect looking and appears to actually be a subdivision of smaller waves. This may turn out to be true, but for now I'm leaning toward this count I have above. One of the reasons is that the VIX buy signal executed today:

As you can see on the above chart, the VIX's daily close landed beneath the upper bollinger band after closing above it for a couple trading days. This issues a buy signal for the stock market. That doesn't mean it has to turn higher immediately Wednesday, but it probably means we'll be in for a meaningful rally in the very near future. So with that in the background, it has me looking at wave counts that might support a large rally for a few days. The S&P might fall to a new low tomorrow completing its 5 wave drop from its high this year, and then rallying in a wave 2 for a few days. Also, look at my Russell 2000 chart:

The Russell 2000's subdivision are unfolding a bit differently that the S&P. As you can see it appears to be completing a wave v of (iii), which is a little behind the S&P. So this index can rally for a while as well in the near future, as what's indicated by the VIX buy signal. Lastly, let's look at the XLF:

As you can see, the XLF has lagged the major indices for the past several months and failed to make a new one with them this year. It's now breaking down significantly, and today was no exception as it was down 1.75% with the S&P down only 0.43% and the Dow closing almost flat. The $14 level appears to be an important level for the bulls as it has acted as support for them since September of 2009. Today it closed right on that support at $14.01. A solid break and daily close beneath $14 should result in accelerated declines to at least the $12-$13 area in quick fashion. However, oftentimes such tough and long lasting support levels take a while to break down and result in a test and rally before falling again to break through it. So it's possible that today's close on that support will result in a big bounce tomorrow off this meaningful support line. This too would coincide with the S&P, Rusell 2000 and VIX data I mentioned earlier.

Tomorrow is the Fed announcement so the market may have a wild day tomorrow, especially after the announcement later in the day. Since financials are so tied into what the Fed does, it's possible that this may be a definitive moment for the XLF. So watch the $14 level in the coming days/weeks.

To sum up, the larger trend is clearly down as the major indices are having trouble mounting a sustained rally. Counting the very short term waves can be tricky, but I'll do the best I can. The evidence right now suggests that a short term bottom might be building but that is no certainty. If we are in fact in a wave 3 or C as I suspect we are, then the selling forces will be so strong that rallies can be very hard to come by, and when they do come they can be very short in both price and time.


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