Friday, October 8, 2010

Still Waiting....Wave Count Still Sub-dividing Higher

So the market grinds higher, giddy that the Fed's Quantitative Easing 2 (QE2) is probably all but certain at this point.  I view taking the approach to the market where you're buying stocks because things are so bad that the government will jump in and do something is not sane or appropriate for the stock market.  It's made the market into a Las Vegas poker game where it's not about investing, it's just about ouplaying the other guy.  And we know how well governments have done with holding the market up over sustained periods of time.  Refer to yesterday's USD/JPY chart of what happened after the Bank of Japan intervened with the yen.  Hoping for bad news to get government help is like getting hit by a car and on the way to the hospital in an ambulance you're hoping your injuries are really really bad so that you'll get pain medication and disability from work.  It's sad.  But the market is always right, and it wants to go higher.  So logic is irrelevant.  I see no signs of a top at this point so I have to look to higher levels.
The above wave count suggests an ending diagonal-type structure may be unfolding right now.  The preceding price action supports the interpretation that a 5th wave is unfolding, and the diverging RSI since the peak of Subminuette wave iii also supports the 5th wave interpretation.  The structure is struggling to obtain new highs, despite the feel that this market has done nothing but rally straight up for weeks.  So the market looks tired, but there are no signs of a top, in fact it appears the market wants to push higher with QE2 assisting that move higher.
As I mentioned Tuesday, the big rally that day on high volume and strong internals concerned me a bit as a bear since that type of behavior usually acts as a launching pad for a strong bullish move in the coming days/weeks.  It appears that might be the case this time as well.  In order to reverse that bullish setup, I'd like the market to close beneath it's Tuesday intraday low which 1140.68 in the S&P cash index, and 10,711.12 in the Dow.  Doing so would be a good sign that a major top may be in place.
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In a follow up to a chart I posted earlier this week, the Nasdaq 100 continues to lag the S&P and Dow as shown on the above top chart over a 10 day period.  In addition, you can see that recently the XLF (financials) have started to peel away from the S&P as well.  On the hourly and daily charts you'll notice that the XLF has still failed to make new highs where the rest of the market has done so.  This is very bearish behavior since the overall market cannot sustain a big bullish move without the financials in my view, and if technology continues to lag then it's a good sign things are getting really bad internally.  It also fits well that the Nasdaq 100 is lagging over this 10 day period since it aligns itself well with the RSI divergence noted on the 2hr S&P chart I posted all the way up top which is typical for 5th and final waves.

Sentiment measure I've read recently have suggested a strong bullish sentiment in the market.  So those bulls need to feel compelled to switch to bears in order to flip this market's trend to the downside.  It might be tough with QE2 on the table.  But we'll see.  Europe has some underlying problems surfacing again so we'll see if that picks up steam or not.

Lastly, looking at the weekly stochastics for the S&P you can see that they're in overbought territory and will pinch and cross down at anytime.  One strong weekly close should do the trick.  In previous instances where this occurred since the March 2009 bottom we can see that it's led to declines, some much bigger than the others.  But notice that as the rally became more and more mature, the declines got bigger and bigger, for the most part.  This is not a good timing indicator at this point since momentum can remain at extremes for a long time, but once we get the cross down it should be a good signal that Minor wave 2 is complete.

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