Thursday, September 2, 2010

Taking a Step Back.......Looking at the Bigger Picture

The market was relatively flat most of the day but the Nasdaqs and even the S&P did have a slight upside bias to it while the Dow struggled in and out of positive territory. A few weeks ago when the market was topping, the Dow was exceeding the Nasdaqs, most likely because people were rushing into "safer" blue chip stocks and out of higher risk tech stocks since people were getting a little nervous, a behavior typical in tops. The result was a 3 week selloff in the recent lows. Now the opposite is happening. The Dow is struggling while the Nasdaqs are much stronger in comparison. So folks are dumping their boring blue chip Dow stocks and rushing into the higher risk Nasdaq stocks, a behavior typical around bottoms. And when you combine this with yesterday's strong move on solid volume and very strong internals, the foundation is definitely set for a significant bottom to be in place.

Today's internals were modestly weaker than yesterday's but still very strong overall nonetheless. Yesterday we had about 85% of NYSE stocks close higher while today we had only 68%; yesterday we had 96% of volume to the upside while today we had only 83%, and only 6 S&P 500 stocks closed lower yesterday while 67 did today. Also volume yesterday sat at 1.19 billion shares on the NSYE and today was only 960 million shares. So today was still a strong day, but it lagged yesterday's numbers which is typical of a 3rd and 5th wave sequence which I think it is (see my last post of the intraday wave count). Also, as shown in my midday update today, the intraday RSI (and other momentum indicators) is showing a bearish divergence to the new price highs today compared to yesterday's.

So the key level for the bearish case as far as EWP is concerned is just a few S&P points away at 1100.14. It's quite possible the 5 wave monster rally we've seen this week is part of a wave C of ii. If this is correct though, the market has little room for more rallying and should rollover in a fierce decline very soon. Tomorrow is the Non-Farm Payroll jobs number which can easily provide fuel for a big move. For the EWP bears, shooting lower sooner rather than later would be a very welcomed move at this point.

Above is daily chart of the wave iii of 3 of (1) that occurred back in late 2008. (For a bigger picture look at this entire count, check out my "Long Term Daily S&P Cash Chart" on the right side of the blog). You'll notice that at the beginning of this wave iii of 3 of (1) that it was far from impulsive-looking, and there is in fact at least one 3 wave drop (see squared off section in chart above) to which its high was not exceeded and yet it still resulted in a major declining phase shortly after. The up/down churn sideways-to-down lasted for quite a while until finally the bottom fell out from under the market big money was made for the bears' trouble of waiting it out.

The reason I'm showing this is because you might notice a similarity in the structure back then, and what might be forming right now. Both were on the verge of major declines, both started off with a choppy sideways grind, and if 1100.14 is exceeded the current structure might also have a 3 wave decline prior to a massive selloff. What's also interesting is that the top of wave ii of 3 of (1) occurred August 11, 2008 and the current top of wave (ii) occurred August 9, 2010, just two days apart.

So there are definitely similarities between the current structure leading up to today's action with the action of late 2008 that led to a massive decline. So just because 1100.14 might get broken soon doesn't necessarily eliminate the call for a major selloff. It just complicates things a bit, and makes trading it bearishly with high confidence from an EWP standpoint quite a bit more challenging. If that level is broken I'll lay the possibilities moving forward.

Another thing to consider if 1100.14 gets broken on the S&P is that even though it declined in an apparent 3 waves from the August 9th high, the Russell 2000 did not. And in fact, the Russell actually started its decline a couple weeks earlier on July 27th. So the Russell has plenty more room to run to eliminate its short term bearish potential.

The financials are in the same boat as the Russell 2000. It too started its decline earlier than the S&P, August 2nd, and it also sports a nice 5 wave impulsive-looking decline from that high. So it also has much further it can rally before the short term bearish case is eliminated.

SUMMARY: so even if 1100.14 in the S&P is broken soon, it does not completely eliminate the possible extraordinarily bearish longer term outlook (just look at late 2008). But exceeding 1100.14 will in fact damage the shorter term EWP bearish case and bring less confidence to the immediate bearish outlook than it would if it remained beneath it. If volume spikes higher and internals strengthen similar to what occurred on Wednesday's rally, then I'd consider getting long on a break above 1100.14 for the short term trade at least. Aside from that, a break above 1100.14 would just turn me short term neutral the market for the time being.


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