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.

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.

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.

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.

August 15, 2008; Nasdaq Weakness Continues

This morning I saw the Nasdaq futures still showing tremendous bearish divergence on the 1hr - 4hr time frames. This was on the stochastics, MACD, and even the RSI. Bearish divergence on the RSI, especially at chart time frames above 30min tends to be a very good indicator. This suggests heavy weakness in the Nasdaq coming. Plus, it's close to its recent highs from a few weeks ago, so risk is well defined and tight if taking a short position.

I sold some of my QID position to free up capital to buy QID call options (which double shorts the Nasdaq 100). I wanted to short the Nasdaq 100 on even more leverage because I feel it's about to fall hard.

This Nasdaq weakness may lead the blue chip S&P and Dow down as well, but that's yet to be seen. I don't say any big divergences in the blue chips on the larger time frames, and I keep getting 5 and 3 waves both up and down all over the place so the trend is unknown to me right now. Also, breadth is slightly positive in the NYSE even though it's been in the negative most of the day. So I'm primarily looking at the Nasdaq for direction because the only area that's showing any signs of immediate direction.

August 14, 2008; Nasdaq Weakness Could be Good Signal

I noticed this morning that the Nasdaq futures chart on the 1 hour+ timeframes is showing a huge bearish divergence on the MACD especially, but also the stochastics. Plus, the Nasdaq is getting real close to the June highs. This tells me the Nasdaq is about to roll over soon. And that should lead the blue chips down as well.

Look for Nasdaq weakness compared to the blue chip S&P and Dow. Once the Nasdaq starts underperforming those indices, it may be the first sign of a top and reversal.

August 14, 2008; Two Clearly Impulsive Rallies

The above chart is of the S&P over the past two days on the 3 minute chart level. You can see 2 clear 5 wave rallies which I labeled. Also, NYSE breadth has flipped to be just as strong on the upside as it was weak on the downside two days ago. Demand to buy stocks is back, and there are 2 impulsive rallies to support that. It is possible to count those two five wave rallies as an A wave and a C wave in a zigzag correction. But it should be a correction from a 5 wave decline. I don't see a five wave decline occuring prior to that, I see a three wave decline. As has been the case over the past few weeks, the market has been on crack and forming impulse waves both up and down. But with all that said, the rallies are becoming harder to sustain, bearish divergence is building on the daily charts, and the rally off the lows last month is choppy. So I have no doubt this is a correction to the upside and the larger trend is still down. But as we can see, trying to count corrections are very difficult. The best thing I can do is protect myself from huge rallies, and just watch and wait...........patiently.

August 14, 2008; Bears Need Uptrend Line Break

Breadth closed almost flat yesterday with only about 56% of NYSE volume to the downside which is much less than the 72% yesterday. I can also count a 3 wave correction downward complete. So the signal for a short term bottom may be in. However the data that came out this morning has shot the futures down this morning and it looks like a pretty weak open this morning. So I want to creat a "breaking point" that should hint that wave 2 has topped and wave 3 of (3) is underway. Notice on the daily chart of the Dow above the uptrend line (orange line) that has formed. The market is telling us that this line is important because it's tested it several times. I'd like to see a break and close beneath the trendline, but more importantly I'd like to see a close beneath the previous low that touched the trendline. This level is at 11,388 in the Dow and 1262 in the S&P. A close below both those levels would indicate that wave 3 of (3) is underway.

August 13, 2008; Impulsive Decline??

The selling pressure continues today as I called for yesterday. But the key question is whether this is a correction before another rally to new highs, or if wave 3 of (3) is underway. Right now, it looks like an A-B-C correction is unfolding, and you can see my EWP wave count a couple posts ago under the one titled "August 12, 2008; Nothing New After Today".

But I keep looking for a possible wave count that would have this as an impulsive decline, combined with NYSE breadth being 90% down volume and at least 3:1 decliners vs. advancers. Well, so far today (11:25 eastern) NYSE down volume is only at 65%, which is about 10% less than yesterday's close which was actually 25 points stronger. This is bullish because it shows the downtrend is weakening internally. Because of this, it seems another strong blow off type rally may be coming which will rally the Dow over 500 points POSSIBLY, only possibly, so I bought DXD put options today to protect my tail in case this happens. DXD has rallied yesterday and today, making the put premium attractive on it.

With all that caution and possible bullishness said, I posted a possible wave count that would mean wave 3 of (3) is underway. The main problem I had with this being an impulsive decline was with the first wave which ended very choppy. But it's possible to count that as an ending diagonal 5th wave, however I feel I'm forcing it a bit in doing so. But it is possible so I posted the wave count on 3 minute closeup in the above chart. The red line in the bottom right is the projected near term path. After posting all the numbers I realized my degrees are off from the first wave to the last wave. But you get the point I'm making here in the chart regardless.

For the record, I'm just posting this as a possibility. Right now I feel the evidence does not support this wave count, and that wave 3 of (3) is not underway yet. But this count needs to be at least considered.

August 12, 2008; Big Picture

In light of Diver's comments to keep an eye on the big picture I thought I'd do just that and post a chart of the big picture. We're waiting for the wave 2 of (3) rally to end which will give way to a wave 3 of (3) decline that will destroy the market. It should shave at least 2,500+ points off the Dow, and do it in just a matter of weeks probably. This can occur any day now, but most likely not for another week or so. I'm agressively short............and waiting.

August 12, 2008; Nothing New After Today

Nothing new to really add from my earlier post. I'm not at all convinced that wave 3 of (3) has started. 72% of total volume on the NYSE was to the downside today, which was pretty bearish, but decliners outpaced advancers only 1.9:1, which is nothing stellar. A wave 3 of (3) down should consist of over 90% of NYSE volume being to the downside, and decliners outpacing advancers by at least 3:1 for the majority of the wave down. This just looks like a correction before another test of the highs.

However I don't think this little downward correction is over. Today's decline formed a bearish engulfing candlestick on the daily chart (see top chart, circled area). Also, yesterday's decline late in the trading day formed a large wick at the top of the candlestick (see arrow on top chart). Both of these are bearish candlestick formations suggesting further losses tomorrow. Also, it appears this current correction is unfolding in wave C right now and it's not quite complete (see bottom 5 minute chart where it needs to fall to a new low in a wave 5 to complete C and then resume the rally). So I expect further weakness tomorrow before any short term bottom forms and the rally resumes.

This is all short term analysis and speculation on my part. It just seems the trend is still up for now. But eventually it will roll over in a huge decline in wave 3 of (3).

August 12, 2008; Waiting...

Thanks Diver for waking me up today, lol. With Friday's monster rally that broke any immediate bearish secenario from possibly unfolding, it's taken a bit of the wind out of me. And I see further rallying ahead and I'm holding short for the big wave 3 of (3) down so I'm not following every little short term movement in the market right now. I don't want to get emotional about all the pain I'm going through now because it might lead to a bad decision. I've decided to just sit back and wait for wave 2 to end, and give way to wave 3 of (3) down. Just waiting.

The weakness in the market today is not impressive all, neither from an EWP perspective or a breadth perspective. I don't see any clear 5 wave declines, and breadth is mildly weak. Not at all what I'd expect if wave 3 of (3) down was underway. The market has rallied a lot the past week or so, and quick, so I expect at least some pull back here. But at least one more new high seems likely as of now.

One positive note from a crowd psychology standpoint: I have noticed the bulls are back out talking about a market bottom and buying up high beta (higher risk) stocks like small caps and technology so they don't miss out on the next big bull run. I'd like to see more and more of this talk on financial TV because once the bulls start coming back talking about a bottom and minimizing the bears' point of view, that's when the market will collapse. Now that those bulls are starting to make some noise, it appears we're approaching that time. I do strongly feel that wave 3 of (3) will begin by the end of August.

August 5, 2008; Wave 2 Rally Still in Full Force

Obviously today's huge 300+ point rally negates any immediate bearish scenario calling for the wave 3 of (3) already being underway. There seem to be a lot of waves, both up and down, that can be counted as impulse waves which keeps giving misleading signals of the larger trend. This has been very costly for me. Moving EWP counting aside for now, let's focus on the above chart. It should a resistance shelf in place over the past couple weeks. The Dow shows a similar shelf around 11,700. The way I see it, if the Dow and S&P close above this shelf today, not only does it break a strong resistance level, but it will create a huge bullish engulfing candlestick totally negating yesterday's decline. This is extremely bullish and will open the door for the S&P to get to the 1320 area with ease, and perhaps in the 1350 area.

All-in-all, the next few days/weeks looks very painful for the bears.

August 8, 2008; Big Rally This Morning

Well this is definitely not wave 3 of (3) behavior with the market up 200 points right out of the gate. And for no reason of course........oh wait, oil is down, so the media can give us that excuse. With the big rally this morning it looks like a 3 wave drop occured yesterday, and the rally this morning looks very impulsive. This is a very bullish wave structure. As long as Wednesday's high remain intact (1292 S&P cash) then the triangle scenario in the post just below this one is still in place. If by some miracle, wave 3 of (3) is underway, then the market better go on a monstrous historical-type reversal in the next couple hours.

August 7, 2008; Triangle Possibility

Well the market made a slight new high like I thought it would on the day, but then rolled over much lower eventually. The initial drop today looks like a 3 wave affair which is not consistent with EWP's impulsive moves with the larger trend. NYSE breadth ended very weak at 80% of all volume being to the downside, but it's still short of the 90%+ I was looking for. With this decline today, it brings the possible B wave triangle into play. See my chart above. I trace out the projected path of the market over the next few weeks. A break of 1234 in the S&P would eliminate the triangle scenario and increase the odds heavily that wave 3 of (3) down is underway. Until then, either this triangle scenario should trace out, or the combination correction (a-b-c-x-a-b-c) I posted earlier today will play out.

Tomorrow should prove an important day. Even though it's Friday, any follow through with the selloff today will hurt the odds of the triangle pattern being underway. A rally tomorrow will increase the odds of the triangle being underway.