Wednesday, July 7, 2010

Market is Well Into Wave (ii)

So the market's declining momentum and bullish divergence last week (click here for post) told us the market was gearing up for a snap back rally from it's oversold condition. Yesterday's 5 wave decline fooled me, but I was able to exit around 1043 once the start of that 5 wave decline was breeched today. Today was quite a ferocious rally that was an across the board all bull move. You can see that the internals were very strong with almost only buyers in the market today. There was probably a lot of short covering today as the bears realized the easy pickens on the short side have already been made. With a wave (ii) now underway, I expect to get a minor feel of overall optimism and glee come back into the financial media with talk about great earnings and all the bad stuff already being priced in. Over the weekend there was a feeling of doom and gloom with headlines talking about the second Great Depression. This obviously was around the wave (i) bottom. So when looking for the wave (ii) top, we should get a bit of the opposite in the headlines which should talk up the recovery and "great stock values" again. This should alleviate the oversold condition the market was in just in time for a monstrous wave (iii) of 3 of [3] or C. Although this reversal can happen at any time, and it will be so fast that it will be tough to enter without a good strategy in place, I don't beleive this rally is over quite yet.

So let's start to look for area for a reversal. That way when the market approaches this level, we can anaylze the internals, momentum indicators, and wave structure to see if the market may be rolling over. You can see in the above S&P chart that a good reversal zone is between 1070 and 1084 since that is between the 50% and 62% fibonacci retracement levels of wave (i) down, and there is an open gap there too. So for now, I will expect the market to continue higher into this area where I'd expect to see some resistance and weakening of the uptrend. Any rallies would bring about good opportunities for the bears to get short this market with stops just above the start of wave (i) at 1131.23. And although today's internal strength suggests rallying the rest of the week at a minimum, the fact that we're in a wave 3 of [3] or C means that rallies can be very sharp and short lived. So I'm not falling asleep at the wheel on this one at all.

As long as the market stays below 1131.23, this market is very bearish in my view. However, a break above 1131.23 would be very bad for the bears, and would strongly suggest that we are back in bull mode and that the market will surge to new highs on the year. But I don't want to get ahead of myself since we're far far away from that level. The focus is on resistance in the 1070-1084 area for now, and I'm of the opinion that rallies should be shorted in the short term.



Blankfiend said...

Very nice blog Todd. I just discovered you through Binve's blog. I agree with your SPX target box.

Rob said...

Sentiment seems to be flipping back to positive pretty quickly this time. I just visited the CNBC website:

One of their headlines is "Strategists Agree: Market is Bottoming Out" - the only thing the two market pro's disagree on is how quickly the S&P will surpass its April high.

Another headline touts a report just released by Goldman's strategy department entitled "Double Dip or Double Up?", in which Goldman argues for the latter.

Todd said...

Thanks Blankfiend!

Todd said...

Hey Rob,

Thanks for pointing that out. I too noticed optimism all week, and after that rally yesterday, it seems that all is safe and back on track for the bull run according to many analysts.

But many bulls wanted a panic selloff "washout" to mark the bottom. They didn't get it, and are ignoring the fact that they didn't get it and are now jumping right back in to buy buy buy. Amazing how blindly bullish folks are and how quickly they are to just buy and forget that Rome is crumbling around them.

Good for the bears though. It allows us to reshort at better levels! :)