Tuesday, May 4, 2010

Market Fulfilling Yesterday's Forecast; Look for 1150 in the S&P Soon

Well the market finally listened to what I had to say finally, lol. The market sold off sharply today, fulfilling yesterday's forecast for a sharp selloff composing a wave iii of (iii). Internally, the market was extremely bearish with only sellers showing up for today's trading. The NYSE had 6.09 declining stock for every 1 advancing stock, and 93.5% of NYSE volume was to the downside. So the bears woke up from their slumber, crawled out of their caves, and kicked some bull butt today. Normally when such a heavy sell off occurs like this, the market will spend a day or so snapping back from the losses. Probably because everyone who wanted to sell already sold today. So the following day or so might have the market float higher on light volume. We'll see if this holds true tomorrow and the rest of the week. I wouldn't bank on it, and I definitely wouldn't get long here. The mere magnitude and internal composition of the selloff tells me that the bears are now in control as long as 1209, but preferably 1205, remain intact. So any rally that stays below 1205/1209, I'd consider a great opportunity to get short.

So what degree of trend are we in right now? Still too tough to call with any certainty at this point. The above chart assumes that this current slide downward is just an ABC correction. If so, I expect a drop to at least the 38% fibonacci level and prior congestion area of 1150-1160. But we could see the correction decline all the way to around the 1085 level perhaps. Breaking below 1044 will be the breaking point. A break below that level would be an extremely strong indicator that wave [3] or C has begun, and that the big top all the wavers have been waiting for is probably in. One thing I'll be looking for as the days go on here is where the market is moving in 3 and 5 wave moves. In other words, is the market moving down in 5 waves, and up in 3 waves? If the market continues to fall hard with little letup, and declines are composed of 5 wave drops and rallies are in 3 waves, or combinations of 3 waves, then it will add to the larger bearish case the farther it falls and longer it does so. So even though we're far from 1044 being broken, by looking at the EWP structure of the decline, we can still make good short trades and control risk. Only a rally in 5 waves on strong volume and internals would make me cautious.

The above charts show the Nasdaq 100 with two different basic technical analysis views. The first chart shows a head and shoulders top I originally pointed out last Wednesday (click here for original post). This is of course a classic topping formation and clued us into this top and reversal a day or so before it really started getting underway.

The second chart illustrates the battle between the bulls and the bears. Notice that the bulls kept charging higher quite strongly but was met with fierce bear resistance every time around the 2050 area. The bullish push was persistant as it kept rallying on every selloff, but the bears had seen enough and met the buying with even more selling. This is evident by the later established series of lower highs and lower lows we're currently in right now. This illustrates that the bears were starting to gain the upper hand on the bulls, and that the market's uptrend was ending and rolling over. Then, like we saw today, the bears wore out the bulls and finally took control of this market and gave us a nice big selloff today as the bulls retreated in full. So this is typical topping process behavior. The bulls keep trying to push the market trend further and further but the selling pressures eventually prevent it from doing so until eventually the bulls give up. Today they gave up. The only question now is when they'll regroup and return again.

Tomorrow will be very telling. In the past few months we'd get these big selloffs like we did today, only to see them reversed and new highs made in the following days. So if we can get some good continuation through to the 1150 level and test the 1100 level in the coming days, it would be very encouraging for the long term bearish case, and inch us closer toward possibly being in wave [3] or C. So the action the rest of the week will be very important.



Rob said...

Hey Todd,

Thanks for the excellent analysis as always!

The 'feel' of the action so far also makes me hesitant to think we are in for a huge move down just yet. To me, gaps downs and fairly choppy intraday action just don't seem like makings of Primary 3. After the January fake-out, I'm going to wait for a bigger drop before putting too much faith in this move down.

Although EWI notes that bullish sentiment levels are still very high, the news coverage about European sovereign debt problems seems to have gotten too panicky, too quickly. I think it would be easier for a big move down to happen if people just keep saying "oh, no problem" in the face of these obvious big problems ... and then all at once everyone panics big-time.

I think it would be poetic if we're in a B wave correction now, to be followed by a Primary 2 top in June or July. This move down now is making most market participants jittery. So if the market recovers later this month and makes a new high in June, then maybe the bulls will think they've conquered "Sell in May" and nothing can stop them now.

Todd said...

Yeah the market sure feels more like a 'B' wave than a 3 or C. But as I've said for long time, I think too many elliott wavers were on board with this wave 3 from Prechter that something would have to happen to get wavers to not believe anymore, or trick us. Well the 3 wave move into a new high and now flip flop decline we're in MAY be what I was projecting. We'll see.

Also, I agree with you on the sentiment through the media being too panicky too quickly. But if you dig deeper you'll see that everyone's calling it a correction, and many analysts are citing their buying levels. I don't hear anyone telling people to go to cash; I hear people saying they should "expect a 10% - 15% correction, and that's healthy". Also, the mess doesn't have to end with Greece. What if it snowballs from here and Portugal and Spain fall in the coming weeks, then China hits major headwinds, etc. Maybe it just won't stop.

It's stuff like this that racks my brain so I just play the charts. In my opinion, the longer term is irrelevant at this point, and I'm focusing on the series of lower highs and 5 wave drops. As long as those are sustained, I'm shorting.

Thanks for the comments!