Everything that I pointed out last week reversed completely. If there was ever a picture perfect justification for the "stop loss" order, it can be found in the chart below. The reversal was breathtaking in its ferocity. The Nasdaq surpassed its highs from early June. Volatility was slammed back into the low 20's. And the circus barkers delighted at the apparent justification for their "the worst is over" claims.
As I mentioned on Wednesday, the function of this entire rally is to convince as many people as possible that the worst is over and "happy" days are here again. Until that function has been satisfactorily fulfilled, the rally can have legs. It is also possible, however, that there is a "light switch" event for social mood somewhere along the way. Where something happens and people immediately, rather than gradually, revert to their Oct/Nov '08 frame of mind. I realize that is fairly ambiguous (ie. the market could go up or down), but such is the nature of countertrend moves in any market. They are notoriously hard to gauge, yet when they end, they end with a bang. Think back to the Currency Crises of the late '90s and how they were quickly brushed off prior to the last years of the dot.com bubble.
Looking a bit more short-term, there is a decent amount of evidence supporting a "closing of the gap" open from Monday, which surrounds the 906-911 level. RSI and Stochastics are both overbought on the hourly chart and a selloff to those levels would relieve that condition. However, I've noticed a number of technicians mentioning this possibility, which means it may just not happen. I got a number of e-mails from readers talking about the "head and shoulders" pattern formed from the May-July price action. It was one of those that seemed to fit the bill of, "If it's that obvious, it's obviously wrong." That proved correct. Bear that in mind when looking at any pattern such as the "double top" or various trendline breaks.
While the major averages all seemed to rally in kind last week, we can glean a bit more information from the individual sectors that make up those averages. All sectors are not created equal. And perhaps the most important of those is the banking index. Although posting 8% gains on the week, the index is nowhere near it's highs posted back in early May. This is despite the apparently bullish earnings reports posted for the second quarter and a government green light to commit accounting fraud. The banking sector is still under extreme amounts of pressure, and this, again, is one sector I would want to watch for potential non-confirmations of new market highs.
Oil is one market that has actually been performing as I expected all along in 2009 (trust me they're few and far between). I originally targeted a range between 66 and 74 for this rally, and it pinned the top end perfectly before reversing. The CRB Commodity Index is another sector (of which oil is a part) that I would watch closely for non-confirmations. Virtually nobody is looking for lower oil prices. I am. I see oil trading with a "2" handle by next spring. Additionally, the Elliott Wave pattern on this chart is clear as day and is supportive of my hypothesis.
Another Elliott Wave pattern that appears to be playing out nicely is that of the US Dollar. It appears ready to make a "5th wave" low for this current "wave C" of "Primary wave 2". If you do not understand Elliott Wave that makes absolutely no sense whatsoever. For the layman, it is saying that it wants to dip slightly below it's December low (77.69), before reversing higher in a move that will prove to be greater in magnitude and longer in duration than that seen between July and November '08.
Have a great week!
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