Monday, August 16, 2010
With 5 Waves Down Possibly Complete, a Larger Corrective Rally may be Underway
A few things occurred today to make me conclude that there's a strong possibility the short term trend may have reversed from down to up today:
1) This morning we had a sharp drop that was immediately reversed and held all day. Oftentimes when we get an intraday spike like that which is reversed and held it means that a top or bottom is in; and in this case it would of course mean a bottom.
2) There was much more strength in the higher risk indices like the Russell 2000 and the Nasdaqs compared to the S&P and Dow. Since the riskier indices often lead the way the fact that today they were the strongest may be a telling sign.
3) The VIX was down 1%-2% most of the day, even when the market was negative, suggesting that some confidence was entering the market today where it had not been the previous week or so.
4) It's now possible to count the decline from the August 9th highs as a completed 5 wave move, and therefore a short term bottom is in place for a few days at least.
5) Today's new low created a bullish divergence with intraday momentum indicators and price, primarily the RSI, which is usually consistent with a 5th and final wave.
So the evidence is there to support a short term bottom being in place now, or will be very very soon.
The only problem with all the action today is the fact that today's volume was extremly light. In fact, it has to be one of the lightest volume days of the year. The last time we dipped below the 800 million NYSE shares mark was right before the August 9th top. So with such light volume today, it's hard to gain much confidence in the market action and evidence I just listed above. Regardless though, I've made some good quick gains on my short term positions so I took profits today just to be safe. I can always re-enter at any time.
S&P Cash Index
Euro vs. US Dollar (from earlier today)
Above are charts of the S&P and the euro, both seemingly to fall more or less in unison. I mentioned last week that the euro appeared to have complete 5 waves down before the S&P did which might signal that the euro's leadership of the stock market will have the S&P put in a 5th wave bottom soon as well. Perhaps that happened today with the early drop in the S&P this morning. Right now the count looks good, and if correct, the euro and equities should push higher in the coming days. The S&P might try to fill some gaps before turning lower, the first gap will be filled at 1089.47 and the second one at 1121.06. There is also congestion around the 1110 area that I think will be a good topping area for the market. If the market can get that high, I will take that as a great opportunity to reshort.
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.