Friday, August 22, 2008

August 22, 2008; Trendline Being Tested

The trendline that was crucial to calling wave 3 of (3) being underway when it was broken is now being retested from underneath today (see chart above, red circle shows today's action bumping up against the trendline). The market definitely is aware of this trendline as it held the market up for weeks and now today it's finding a lot of fierce resistance right at the underside of it. Oftentimes when a significant trendline is broken, it's retested from the opposite side before it continues with the trend. However, if the Dow and S&P close above the trendline, it will negate the bearish wave 3 of (3) call that was initiated when the trendline was broken. This would negate the wave 3 of (3) in the short term, and we'll simply have to wait longer for another signal that it is in fact underway.

The Dow's trendline is around 11,610 today and the S&P's is around 1300. If both indices close above these levels today, it will cancel the immediate wave 3 of (3) down scenario and conclude me to think the initial break early this week was just a "false breakout".

August 22, 2008; Today's Rally Waning

Short term momentum indicators are showing bearish divergence and the NYSE has lagged the blue chips' gains significantly all day. Plus, over the past 30 minutes, breadth has also deteriorated drastically. This is all very bearish in the short term for the overall market. A pull back in the Dow to at least 11,550 should occur within the next hour or so. A break of 11,476 would be bearish and might imply that the downtrend will resume, and negate the larger bullish potential of today's rally.

Also, the Nasdaqs' rallies held at their prior 4th waves and are now reversing. Again, this is very encouraging to the larger bearish case because only corrections tend to stall around those levels, and both indices traced out 5 wave declines prior to their rallies.

Let's see if this coming decline can pick up some speed and momentum.

August 22, 2008; Here's Why I'm Holding My Positions

The Nasdaq Composite and Nasdaq 100 show similar patterns that are text book 5 wave impulsive declines with corrections stalling at their prior 4th waves (for now). The Nasdaqs have tended to lead the overall market all year. When they outperform the blue chips, it's bullish and the market is rallying, when they underperform the blue chips, it's bearish and the market falls. Well this is the third day in a row the Nadaqs have lagged the blue chips. Also, they've traced out a 5 wave decline unlike the blue chips. And their rally today is stalling in a typical resistence area of a previous 4th wave (see 15min chart above).

So the bearish structure of the Nasdaqs are keeping me in the game. Once those give way, and the technicals of the overall market look bullish, then I'll close my positions and become neutral until clarity re-enters the picture.

August 22, 2008; Key Levels Broken, Wave 3 of (3) in Question

Well the market had no problem breaking all key levels and looks poised for a 300+ point rally today as breadth is very strong and the technicals show no real sign of letting up. It's clear that the past two days of sideways action in the market and the lack of reaction to oil prices surging yesterday that the market was just looking for an excuse to rally big. They got it today with the Lehman news. 11,700 is the next area of resistance however I'm not sure how significant that is anymore.

It's quite possible wave 2 is still underway and we have another week(s) of rallying before wave 3 of (3) gets underway. The only question is how much more pain is to come before that happens. I'll be following the Nasdaqs for now for guidance. The Nasdaqs traced out nice 5 wave declines from their highs and are underperforming the blue chips. The Nasdaqs also haven't broken any of their key levels. I'll watch them for guidance.

I'm still convinced that even though wave 2 might still be underway that the market will be very hard pressed to sustain any significant rally over a long period of time. The daily charts and breadth have deteriorated significantly during the past rally, and unless some huge discovery hits the markets and reverses that, I don't see a sustained rally. Buying out one private equity firm in Lehman does not solve the problems of job losses, consumer tightening, subprime, the housing crisis, etc. But it does appear in the short term the market wants to use this news to rally for a little longer.

August 22, 2008; Lehman Bros Buyout Saves Stock Market, Economy, World!!

Lehman Brothers was in fear of going under like Bear Stearns for quite some time and now a bunch of speculation about them being bought out is entering the market and it came in full force last night which has caused this strong open this morning. If this news occurred after a huge drop in the market, I'd be worried a bottom was in place. But it's not. But today is Friday, and liquidity is usually a bit dry, especially on an August Friday, so big moves in the market are very possible. Key levels are already being tested at 11,520. I'd like the Dow to stay under 11,590 because it appears a smaller degree 5 wave drop is incomplete. However this is only for the blue chips. The Nasdaqs have completeled 5 wave declines this week. The Nasdaqs have also been much weaker than the blue chips this whole week which is usually a bearish sign for the overall market.

If this rally holds and picks up steam, or stalls quickly early this morning it will say a lot about how significant this rally is. In no way does Lehman Bros. being bought out save the stock market or economy in any way. So the big picture outlook is still in play. However depending on today's rally, it may put a kink in the armor in calling that wave 3 of (3) is already underway.

The key levels we need to watch for is for the 11,520 area to hold in the Dow because it's the area of a previous wave 4 and the 50% fibonacci retracement of the last decline. More importantly, the next level of resistance after that is crucial at 11,590. That looks like a 1st wave end, so this rally cannot exceed that level and still complete a 5 wave decline. The market has been open 10 minutes and has stalled at 11,522 so it will either break out and probably exceed 11,590, or it will realize saving Lehman Bros. means nothing in the bigger picture and it will reverse and continue it's descent into the abyss.

All we can do is wait, and see what the market wants to do. If 11,590 is broken I'll have to look at the charts, breadth, technicals to see what I should do with my positions.

Wednesday, August 20, 2008

August 20, 2008; First Dow Target, 9,000

The evidence is overwhelming that wave 3 of (3) down is now underway. My first Dow target is 9,000, but going below 8,000 is quite a possibility. I'll look at the wave structure and technicals once we reach the 9,000 level and see if it still has further to drop. This decline should be relentless; rallies should be small and/or quick. Now that a top is in there's not much to analyze. I'm fully invested in shorting the three major indices. I have absolutely no interest in getting in and out of the market, I'm simply going to just hold on to my short positions for the duration.

For the very short term, last night I noticed some heavy bullish divergence on the momentum indicators, especially the RSI and stochastics. I attached a 15min chart of the S&P above showing it. You can see at the bottom of the chart that the RSI was steadily climbing up (see black ascending trendline) and so were the stochastics, which are right below the RSI. Yet while both were going up, the price of all major indices were still dropping. When price drops and momentum indicators rise, it yells at us that a rally is coming. However, seeing as that this is a wave 3 of (3) decline, momentum indicators can often give false signals numerous times, and remain in oversold and divergent territory for a long time. So as I said earlier, even though I saw a rally was probably coming today, I'm in no way going to get too cute in this decline and try to call every short term top and bottom within this huge wave down. I'm just going to ride it out, knowing the overwhelming pressure is down, to much much lower levels. It's likely we need the rally to last all day today and possibly into part of tomorrow's session in order to relieve the divergences from the momentum indicators so the next wave of selling can resume. For the Dow, 11,500 should be a big resistance level because it's a 50% fibo retracement, a prior 4th wave area, and the place where it broke the ascending trendline on Monday. So I expect the Dow to test the 11,500 area. But in no way does more rallying have to happen, this is only a possibility to be prepared for. Ultimately, the market will go lower. Much lower.

Tuesday, August 19, 2008

August 19, 2008; Wave 3 of (3) is Underway

Looks like my analysis over the weekend proved correct (see previous post below). Yesterday NYSE breadth had decliners exceeding advancers by about 2.5:1 and down volume was about 83% of total volume. Today in early trading (10:20am EST), breadth is similar and the Dow is down over 100 points already. This follow-through into today is encouraging. Barring a huge rally that puts the Dow up triple digits by the end of the day, this market is going to get destroyed over the next few weeks/months. On top of what I mentioned above, both the S&P and Dow closed slightly beneath their trendlines I spoke about the other day. This is the market telling us that the uptrend is over, and lower levels will be achieved. But these aren't just "lower levels" as usual, this is the big daddy of declines getting underway. We know what the bigger impact of those lower levels will be. It's a big daddy wave 3 of (3) down that will destroy the markets in the coming weeks/months. There should be little let up at all. It should be constant down days with numerous triple digit losses weekly. It should shave at least 2500 points off the Dow, but quite possible will shave off 4000 from the around 11,800 in a very short period of time.

I sold my protective put options and am now fully invested in shorting all three of the major indices (Dow, S&P and Nasdaq 100).

This should be one wild ride.

Monday, August 18, 2008

August 17, 2008; This Week Be Selloff Week

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.