Wednesday, August 11, 2010

Barring a Massive Reversal by Close Today, a Significant Top is in

Above is a snapshot of the internals of the market as if 1201 EST, and you can see they're quite dreadful. 86% of NYSE stocks are trading down and only 6 stocks on the S&P are trading higher. In line with the analysis the past few days suggesting a wedge, or diagonal, was at its end it makes sense that we'd see these numbers on the decline today. It also means that the divergences between the indices I've been talking about remain in place and are now much further and harder for the bulls to rally and resolve those divergencse. Advantage bears.

The breakaway gap and accompanying internals suggest this move is a wave 3 at some degree. If so, the market should grind lower in the near future. I previously mentioned that my initial target for the decline after the diagonal was the 1100 area, which was easily taken out this morning. But with the internals so bearish and the technicals suggesting a wave 3 of same degree is underway, I see no reason to cover shorts on short term trades as long as this decline holds into the close today.



Well EWP certainly isn't perfect, but when it works, it works very well. Yesterday's call for a strong decline proved accurate as the euro has been absolutely hammered last night into today. I see no reason to not be short this pair.



Rob said...

I am not one to complain about a day of hard selling like today. But do you think that this could turn out to be another "Wolf's Mouth" (as I think you called them) -- like move from 1099 to 1065 a few weeks ago? Steep early sell-off, then meandering a bit further down the rest of the day. It would be great if we get another day of hard selling tomorrow to strengthen the near-term bearish case. Regardless of what happens in the very short term, the index divergences that you have been highlighting are great news, and got even bigger today. The Nasdaq is now a LONG way from being able to make a new rally high.

PrincipleAnalysis_Blogspot_Com said...

Hey Rob,

I was looking for that "wolf wave" structure today but don't feel it's there. The reason is that the wolf wave will selloff sharply and then immediately do a choppy grind lower. This time, it had little pop rallies coincide in size and time to the rallies prior to the selloff, suggesting they were probably little 4th and 5th waves since they matched the degree of 1st and 2nd waves. These pops after the selloff do seem small, but it's much more than what we had in the past when the wolf wave bit us. So I don't feel this is the same situation. Follow through tomorrow would be fantastic and I think we'll get it at least in the morning, but I'm not sure it will hold all day. If it does, then all the better for the bears. And those divergences between indices, especially the Dow, along with the weak structure of the rally and the strength of today's decline, along with the high risk Nasdaqs and small caps leading the charge lower all suggest that the larger trend has turned down and that it still has further to move to the downside. My opinion. So where's your loyalties lie Rob? both in the short and longer term? You in Prechter's camp for total destruction or a little more prudent, only playing the short term?

Rob said...

Hey Todd,

Rest assured that I am firmly in the bearish camp. On the economics, I completely agree with Prechter and other prominent bears: the US economy is broken, we have a long slog through a deflationary depression ahead, and it is going to take a lot to recover from this as a nation. I have only been following the economy/finance/markets closely for the last year and a half, and it has been one the most eye-opening experiences of my life -- I picked an exciting time to start! The blogs, yours and many others, have done a tremendous job of getting the truth out in the open.

I am firmly bearish on the stock market too, but more cautiously. I have learned that shorting with leverage (I mainly buy put options) is an extremely dangerous way to play. You can get the overall direction right and still lose big if your timing is off; and there is the old Keynes quote about the market's ability to stay irrational longer than you can stay solvent. It has been a really tough market. Even the grandmasters who have seen it all, like EWI, who read Oct2007-Mar2009 almost blow-by-blow, have missed the timing more than they have gotten it right over the past year.

Long term, my best guess is that over the next few years we will break the SPX 666 low, and probably bottom at SPX 5xx or 4xx. I think a good target would be the downsloping trendline connecting the 2002/2003 lows and the March 2009 low. Will we go all the way to DOW 1000/SPX 100, like Prechter says? I really don't know, but my guess is that we won't in nominal terms, although we could in the DOW priced in gold terms (which Prechter would probably consider to vindicate his forecast).

Short-term, I still think the picture is very cloudy. I am heartened by the apparent topping action this week and the move down yesterday, but after so many brutal head-fakes I will need more convincing. One thing that has struck me is that although the market can fall violently hard when it wants to (eg, the "flash crash"), overall this tape is really taking its time. Look at how Minor 2 (if that's what it is), is so much longer in time than Minor 1. I think the odds are high that SPX 1220 in April was the top and we will not see that number again for a long time. But then, lots of people were saying that about SPX 1121 a couple of months ago. I certainly do not think we are in a "cyclical bull market" that will send the tape to 1300 or even new highs -- the horrible, deteriotating fundamentals of the economy just seem like too too strong of an obstacle for the sunshine-blowing by Wall Street, Washington and the media to overcome. However, given the way the market has been taking its time, a "rounded top" that brings us deeper into the 1100's, or even to a marginal new high, still seems well within the realm of possibility.

I hope that this is indeed the start of a huge move down -- it's long overdue. But until we see more confirmation, I am planning to stick mainly to longer-term puts when "the trade comes to me", and to keep shorter-term bets small.

PrincipleAnalysis_Blogspot_Com said...

Well I would agree with you in general. I have to doubt the nominal Dow 400 call Prechter touts. It works well in theory, and he's basically an academic so that fits him. But Dow 400 would be catastrophic and as Faber says, if we do get that low then the best investment is a farm for your own food, a fence and machine gun for the "Mad Max Beyond Thunderdome" life we'll be in. I just don't see how that will happen politically and in this day and age. I'd have to think we'd have a complete government takeover or the Fed straight up buying S&P futures or something. But Dow 400 is just too much of a reach for the day we live in.

But I do feel we are headed lower. The technicals, fundamentals and EWP all support that. But once 666 in the S&P is broken, whenever that is, I'll probably be much more objective and neutral at that point. But the 2008 lows look very vulnerable in the years ahead. So i'm playing it to capitalize on those lows being broken.

Take 'er eazy