Wednesday, September 1, 2010
Quite a Rally Today
Well, I guess people wanted to buy stocks today. The rally was a complete surprise to me. I figured a few minor short term speed bumps here and there the next few days but the ultimate net result would be lower levels with new lows. I was wrong. Today was a short-covering rally in my opinion, and many bulls on the sidelines jumped in and piggy-backed on that momentum.
Today's move was monstrously strong, with internals registering very strong numbers. About 85% of NYSE stocks closed higher, 96% of volume was to the upside, and only 6 S&P 500 stocks closed lower today. And volume spiked higher today well exceeding the 1 billion share mark. Now this is still low volume overall, but it's quite high compared to what volume we've been seeing the past few weeks.
In addition, the euro broke above the start of my projected 5 wave decline I labeled yesterday which invalidated the short term bearish scenario. So I'm waiting for signs of a top again to re-enter short. Also, the XLF managed to close above $14 today, but it on track to perhaps make a charge toward the $15 area if the stock market rally continues. However, the XLF's decline from $15.09 looks clearly like an impulsive 5 wave decline, so the rally today could easily just be a correction of that 5 wave decline. And seeing as the start of that 5 wave decline is over 7% higher from current levels, it will be tough for the XLF break its downtrend.
The bottom line is that this is the type of behavior and strength we often see in the market when major lows are put in. If so, I expect this market to continue to shoot higher in the coming days. If the rally faulters tomorrow and the coming days, then it would be very bearish. 1100.14 remains key for the bears.
Above you can see the importance of 1100.14 from an EWP perspective. From the 1129.24 high there are a clear 3 waves down. Now that can easily subdivide into a five wave decline since every 5 wave impulsive decline starts with a 3 wave move. But a break above 1100.14 would make that all but impossible. Trading above 1100.14 would make the decline very likely to be a 3 wave corrective drop. It's possible it could be a very elongated flat correction, but that is unlikely and therefore not something I'd trade based on. This means that most likely the market will continue higher if 1100.14 is taken out.
I don't want to get too complicated or overthink this since the market is just 20 points away from the line in the sand at 1100.14. If the market can remain below that level, the odds are high that the larger trend is down and I'd be looking for more shorting opportunities. But a break above 1100.14 would cast serious doubt at the bearish case and would call for a restructuring of wave counts that would most likely lead to the pulling back of the aggressively bearish stance to a more neutral stance until things clear up. Exiting short posiitions at 1100.14 is a way to preserve capital and re-strategize. I can easily just re-enter whenever I think things clear up. But shorting and holding indiefinitely is not how I trade.
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.