Market at Crossroads; August 20, 2009

The lack of follow through of the selloff from Monday puts the immediate bearish scenario in jeopardy obviously. It's possible the final downward correction is over in wave B (of Y) and now wave C of Y is now underway to finish off wave 2. A break of the S&P futures 1016 level will bring this bullish scenario to the forefront. But if 1016 is broken, most likely it means that the final rallly leg in wave 2 is underway, and the market will reverse sharply in wave 3 down to new lows for the year.

High risk assets are already lagging behind, which usually happens at major market tops. Silver formed a head and shoulders pattern and is declining 5 waves and no where near new highs like the US indices are, the euro is in the same position as silver as it is having trouble rallying with the US stock indices, and probably most importantly the Chinese index is selling off sharply almost making it into bear market territory in a very short period of time. This risk aversion to risky assets occurs at market tops, not at the beginning of bull markets. The US indices may rally higher taking the S&P cash into the 1100 area (my target has always been 1067) but I expect many assets to lag and not make those highs such as silver, the euro, the Chinese and numerous global indices.

If the market barrels through 1016 in the S&P futures tomorrow, it most likely means wave 3 is coming very soon, like within a couple weeks!

Nothing Changed; August 18, 2009

Today's rally changes nothing. As long as last week's highs remain intact, the immediately bearish outlook stands. The market should decline in the coming days, and possibly much more. I remain short with my very long dated (2011) put options but sold my only short term options (August 09 expiration) yesterday on the big selloff. I have not added any positions yet but will post it here when I do.

Bottom line: the market is bearish in the short term.

August 17, 2009; Pullback Underway as Expected but Wave 3 Call Needs More Time

I don't have time to go into great detail but I wanted to post an update in response to the massive decline today. NYSE decliners outnumbered advancers by over 8 to 1 and over 90% of all the NYSE volume as to the downside. Weakness entered the market at the opening bell and was never alleviated, and the Nasdaq Comp did not confirm the highs of the indices, creating a bearish divergence that often accompanies major market tops.

Bottom line: I expect some further declines in the coming days, and I'm on high alert for signs that wave 3 is in fact underway. Right now, I'm only viewing this as a correction before new highs that take the S&P toward the 1100 area before wave 3 starts. One day of extreme weakness does not make a new trend or tell us much for the longer term. What happens in the next few days will tell us a whole lot more. If we have more days like today with similar weak NYSE internals within the next couple weeks then I will strongly place the wave 3 possibility on the forefront. But as of right now, it's just a temporary corrective pullback that should work lower in the coming days before one final rally.