Saturday, October 10, 2009

Technical Update 39.09

The material change in market character we were looking for did not materialize. As suggested, the first whiff of this led to bulls piling back on and quickly retesting the previous highs. Without significant followthrough from last week's decline it was readily apparent by Monday that dip buyers had not exhausted themselves and the risk seeking behaviour we have witnessed over the last seven months would reassert itself.

The Elliott Wave structure was confirmation of this after failing to register 5 full waves to the downside. The most probable counts now show the S&P rising in either a 5th wave to ~1120 peak or a 1st wave of something far more bullish (projecting to over 1200). The rally obviously intends to destroy as many bears as possible prior to reversing. Maximum ruin indeed.

Two weeks ago I outlined 3 indicators I was watching for confirmation of a rally peak. I will expand on that this week with a few more and will continually track them as the weeks pass. Readers can feel free to add their own.

1. Consecutive daily declines of 2.5% or more. This hasn't happened since the rally began (if so, only marginally).
2. Weaker internals than previously displayed during the rally via 10 day moving averages of a) put/call ratio b) advance/decline issues c) advance/decline volume.
3. A considerable increase in the US Dollar Index. A crossover of the 20 day EMA over the 50 day EMA is something that has not yet occurred since early April.
4. Divergence between major indices. Dow, S&P, Nasdaq, Transports, Banks. We should see significant divergence between some of these indices at a major top. There have been divergences present at various points, but they have quickly resolved themselves. Specifically, I am looking for underperformance in the transports, banks and/or the nasdaq.
5. A complete Elliott Wave '5' down on more than an intraday basis.

All or most of these factors should be present in the first 10% decline from the highs. Until then, it should be considered that the bull trend remains intact. It seems that too many are focused on calling the exact top (I'm guilty of this sometimes) rather than waiting for confirmation. Keeping it simple is typically the most prudent course when using technical analysis for timing entries and exits. And most of the best known traders adhere to this principle. Giving the market 10% on either side of a large move still allows one to participate for 80% of the move.

The German DAX has a very logical target denoted by the blue line on the following chart. The 6100-6200 area has proven to be a point of inflection numerous times over the past few years. And it is also where the Mar-Jun wave A would be of equal size to a wave C peak.

Finally, it needs to be pointed out that the US long bond experienced two consecutive days of intense selling to close out the week. What is it trying to say? Is it sensing a potential rise in the Fed Funds rate? Is the long bond now trading as a risk asset class? Is the cessation of Fed POMO activity being reflected by interest rates rising to a more natural level? Nobody knows for sure, but the activity is certainly deserving of attention.

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Roger J said...

With big bears converting to big bulls (e.g. Martin Weiss, Marc Faber, Jim Grant), we should expect them to be right for a while before they get wiped, eh Matt? LOL.

These are difficult times for bears indeed.

What do you think of the dollar, Matt? Many EWers are already shouting a complete [v] ED. Well, if SPX tops out in low 1100, that can certainly be right. But if 1200s, ugh... I guess the dollar must go down to test its all-time low?

occdude said...

Matt good point on following "what is" the technicals rather than "what will be".

I'm not ready to throw in the short towel yet. Ill give the market 10-20 percent before I get nervous on my short entry points. Golds rise was a surprise though and paired with the dollar and long bond falling, somebody big out there smells currency trouble, but that is likely a short term phenomena due to the fact when anything gets shaky, into the dollar everyone runs.

One thing I can say is that this market is a "wear em out, then shake em out" one so make sure to hedge, I personally am into gold up to my eyeballs to play this dollar is doomed theme.

R. said...

Thanks for the update, Matt

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