The evidence is piling up that the wave 2 of (3) rally from July 15th is coming to end, and the depth of the rally in the Nasdaqs, and the extreme bearish divergence on the big timeframes they're showing, lead me to believe the Nasdaqs are about to rollover and start selling off real soon. The technicals of the blue chip S&P and Dow are far from clear in regards to when they will rollover too, but I think if the Nasdaqs sells off, the blue chips will follow. Here's the case I'm making for the "Big Daddy" selloff to occur real soon, perhaps this week:
1) The Nasdaqs appears to have topped, or will top very soon, likely within a day or two. The MACD and Stochastics are not confirming the last few highs in price on the 2 hour - 8 hour time frames. This is called bearish divergence and illustrates a severely weakening rally, especially when seen on big time frame charts. We know the larger trend is down, and this rally is just a correction, so a weakening rally of this magnitude should result in a massive selloff.....THE selloff. You can see the divergence in the two charts above in the 4 and 2 hour time frames. With price I drew a yellow trendline that goes up, yet on the MACD and stochastics below I drew the trendline down. When price rises but momentum indicators drop, it means that upward momentum is severely waning, signaling a reversal is coming soon.
2) The Nasdaq 100's last 3 RSI highs on the 4 hour chart are not confirmed by price either. I look at the RSI as a much more reliable indicator because it rarely shows any kind of divergence at all with price, so when I see it, especially on the bigger time frames, I pay very close attention. I drew blue circles on the chart above for the past 3 RSI highs on that 4 hour chart. You can see that the last high in price is represented by the lowest high in the RSI of the last 3 highs. This is screaming at me that the Nasdaq is out of gas and is rolling over. If not now, then very very soon.
3)The Nasdaqs' rally has gone much deeper than the blue chips so there's not much more room for the Nasdaqs to rally for the wave count to remain correct. The Nasdaq 100 can only rally about another 5.5% before it breaks it's previous major high. This would negate my wave count that this rally was a wave 2, and would imply that perhaps some much more bullish potential is at hand. So I know where I'm wrong. And all I have to risk is 5.5% in the Nasdaq to possibly gain 25%-35% when the "Big Daddy" selloff occurs. That's a great risk:reward ratio, and a trade I'm all over.
4)The Dow, and most of the other major indices, topped May 19 and bottomed July 15 in what I have as wave 1 of (3). So in about 57 days the Dow dropped over 2300 points, or 17.6%! The decline can easily be counted as impulsive, i.e. with the larger trend. The resulting rally from the July 15 low has so far taken about 32 days and has rallied only 833 points, or 7.7%. And it rallied about those same amount of points after just 5 days from the July 15 low. So essentially, the market rallied 833 in 5 days and as of today has gone nowhere! So the market drops decisively and impulsively 2300 points, 17.6%, and then the market bottoms and rallies after that only 833 points, 7.7%, in the first 5 days and is currently at that same level. Does that sound like a new bull market to you? Does that sound like all the fear is out of the market and everyone is jumping into stocks right now? No, no, and no. This helps confirm with me that this rally over the past month is just a contertrend move, so the next move is down, and it's going to be a big one.
5) The rally has been choppy and flat in the blue chips. You cannot count a reliable impulsive wave count off the lows signaling a new bull market has emerged. It cannot be done with confidence, it's as simple as that. If the rally from the bottom of July 15 is not an impulsive rally, then it must be a correction, and if it's a correction then we have new lows beneath those set July 15 to acheive. And from my wave count, those new lows will be huge. I project the Dow will get to at least 9000 before even thinking about letting up and forming another short term bottom. We'll be at-at least 9000 in the Dow by November!!
6) We're starting to see and hear more and more bulls coming on CNBC and preaching their bullish strategies. They're talking about value and US resilience and all that other nonsense that will lead to a lot of people losing a lot of money. But this talk is essential for a top to form. We need the bulls to come out, gaining confidence and buying stock. This is a contrarian indicator. It means that more money is coming in on the long (buy) side and also gives the bears more food to gobble up and it leaves more people to convert to sellers. All of which are ultimately what will move the market lower. I thought there would be more bullish talk by now, but it's still there and it's good enough for me in combination with the technicals to conclude that we're in the final stages of a top that should hit sometime next week.
7) The corrections can be counted complete in all the major indices. They are not clear though, nor are they perfect, and all but the Nasdaqs' leave room for a sharp blowoff top type rally. But they can be counted complete, so everything is in place for the selloff to begin at any time. Probably this coming week.
All in all, the evidence I see at this juncture is overwhelmingly bearish. However we already knew that in the bigger picture as I've been calling for a huge wave 3 of (3) decline for weeks now. The only real question was timing. As far as time goes, we're about half way through correcting the amount of time it took to fall from July 15. This is a fibonacci retracement level, and suggests among other things, that the greatest and fiercest stock market selloff in this bear market to date is about to occur.
I'm positioned accordingly.
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