Thursday, July 15, 2010
Market Corrected Today; But Far too Brief to Alleviate the Severe Overbought Condition Achieved From the July 1st Low
So the S&P broke below the 1090 level with ease this morning, suggesting that at least a correction was underway and that the short side should be played. But just as quick and easily as that level was broken, it was regained in the last 30 minutes of trading. The decline was far to quick and shallow for the market to fully correct the rally from the July 1st low and alleviate the severe overbought condition left on many intraday indicators.
The wild swings today may be chalked up to light summer volumes, several economic indicators that came out this morning, earnings reports hitting the wires, BP capping their oil leak, Goldman Sachs getting their SEC decision announced, and options expiration tomorrow. But the damage to the likelihood of the top bearish count continues to be done. The rally from the July 1st low looks very impulsive, and is extremely deep for a 2nd wave that's supposed to be within a 3rd wave. I would expect to see more of a sharp quick less deep rally for a correction within such a large wave 3. It's not required to have those features, but it is often the case that it does have them. Although it doesn't violate any EWP rules, the likelihood of this count remaining on track has decreased in the last few days.
A big reversal signal tomorrow or early next week while staying below 1131.23 will re-ignite the probability of this count. A spike to the 1105 area and reversal would be a good start.
Since the top count's probability has been weakened this week I wanted to look at other possible counts. Above shows us in a large flat correction for wave 2. I never really liked this count because wave 1 is far from perfect and adding a far from perfect corrective count just makes it less likely overall, plus wave b of 2 should be a 3 wave move and it's more like an impulse move, and the whole correction would be very large and time consuming. With that said, it's still a possibility since it doesn't violate any EWP rules so I want to keep an eye on it. It would also explain the sharp impulsive nature of the rally since the July 1st lows since that rally would fit nicely into this count as a wave C of 2. If this count is correct, it means we'll most likely get a quick shot to just above 1131.23 before topping and rolling over in a big wave 3.
Remember, tomorrow is options expiration day and when combined with light summer volume it could get kind of wild.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.