Tuesday, February 1, 2011

Dow and S&P to New Highs Means it's "Scotch Night"

It’s days like today that I end up curled up in a ball, underneath a blanket, on the cold linoleum kitchen floor sobbing next to a half empty bottle of scotch as my dog looks on at me like I need some serious counseling.  But I’m able to pull myself together and crawl out from under the kitchen sink and face the music.  Today’s new high in the S&P was very discouraging.  The evidence was quite overwhelming and promising that a significant top was in.  I’m not saying the Primary wave ((2)) top was called, but at a minimum a 100+ point S&P pullback looked good.  But no dice!  At least not yet.
I’m down, but not defeated.  Let’s get hookin’ and jabbin’ again.

The internals today were extremely bullish and basically matched the intensity of Friday’s selloff.  Although volume was very high at 1.09 billion shares traded, of those shares 87.2% traded to the upside and there were a whopping 1,943 more advancers than decliners on the NYSE today.  It seems quite obvious now that Friday’s selloff was probably mostly profit taking after a large and long rally to round number resistance (12,000 Dow and 1300 S&P) on the back of the Egyptian unrest.  Since the bears went back into hibernation, the bulls were able to come back to take control of the market again.  With internals like this it’s hard to call a top here with any evidence to support it.  Doing so would be a guess, and I don’t put my money on guesses outside of Las Vegas.  Barring an immediate, and just as strong, reversal to the downside tomorrow, today’s push suggests further upside in the coming days.  There are several possible scenarios for the next few days, and sharp ups and downs with little upside progress is definitely a possibility as it would represent  an ending diagonal which is quite common at the end of overstretched trends.  So today’s rally doesn’t eliminate the bigger bearish case, it just puts it on hold and hits the “reset” button to make us wait until the evidence suggests the bears might come in again.

The S&P count remains the same; it’s in the final stages of Minor wave 5 which, when complete, will lead to at least a 100 point S&P selloff.  I’m not going to try and pick a top in the heart of the rally, I’m simply going to wait for another sign of weakness for an opportunity to short when the evidence supports it. 
Learn Elliott Wave Principle

Despite the strength in the Dow and S&P, and even the Nasdaq 100 that pushed them to new highs, the Nasdaq Composite has still failed to do so.  Now I doubt this will hold since it would mean a triple top is in place and as I’ve said many times triple tops are extremely rare.  But the lagging in the higher risk tech stocks supports the lagging RSI indicator, which all still supports the 5th and final wave scenario. 

Interestingly enough, a VIX buy signal executed yesterday since it closed above the upper Bollinger band Friday, and then closed below it yesterday.  Stocks wasted no time at all getting their resultant rally underway telling me that the trend is still firmly higher.  Barring a sharp and just as strong reversal tomorrow, I’d stay out of this rally’s way for the time being.

The euro’s 3 wave looking drop has come back to haunt me.  The weak recent rally, the Australian dollar’s impulsive decline, and diverging momentum, all suggested the pairs would fall and the dollar would rise.  But that 3 wave drop in the euro on the daily chart always nagged at me and it looks to be the one signal I should have focused on.  After making a new high and taking out most viable resistance areas, the 1.4281 level looks vulnerable here.  As in stocks, I’m stepping aside and waiting for weakness to resurface before I make a move on the euro.
Trendlines: How a Straight Line on a Chart Helps You Identify the Trend



agnes1938 said...

One day this market will crash big time...but only "allah" knows when

Have a look at a 3-year chart of XOM....simply amazing for a blue chip stock

PrincipleAnalysis_Blogspot_Com said...

Yeah I know, some of these stocks are insane. On one hand I'm disappointed I missed a majority of the rally, but on the other hand it just seems like a mania or bubble, like in real estate in the early 2000s. Bubbles are fun while they last but they don't end well.