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Sunday, October 18, 2009

Whew! One Crazy week! However I Think Next Week Will Make Last Week Look Like a Walk in the Park :)

Lots of crazy moves up and down this week. Lots of volatility. And fun was had by all ... sort of ... well, not really :)

The most obvious question is: Did we reach the top (end of P2) last week, or if we have one small wave up next week, will that be the end of P2?

The best answer anyone can give you is: maybe.

That's all. I have opinions and thoughts on this matter, just like any analyst does. But they are irrelevant.

The top will happen when the top will happen. And we will never *know* it is the top when it occurs, we will only know after a confirmation move. What would be a confirmation move? I would like to see a clear impulsive *MINUTE DEGREE* wave down (5 full Minuette degree waves), followed by a 3 wave Minute degree correction with a lower high on all the major indices (SPX, INDU, RUT, COMPQ, and NDX), and then followed by another Minute degree wave down.

I think a move of that size will a) obviously break the 7 month wedge lines and b) be too large to ignore as a bull market correction because c) a 5-3-5 is either a 1-2-3 in an impulse or a zigzag, and I don't see another realistic Minor degree zigzag X-wave to extend this out to be a triple zigzag (I think we are in the 3rd zigzag now by my preferred count).

So thinking about P2 some more, there are a few things that we would expect to see at the end of P2. The final wave of P2 should have:

- Low volume
- Low volatility
- Low breadth and decreasing breadth as it moves up
- Daily divergences of technical indicators (MACD, RSI, and TRIN more importantly)
- Lots of extension with little pullback and possibly a 5th wave extension for a blow-off, not because of a bullish move but because of little bearish resistance.

And so while I am not calling the top here, I am remarking how much this current wave from Oct 2 fits nearly all of the criteria above.

But again, this post is *NOT* a declaration that P2 is over.

The above was what we need to see regarding a confirmation move, and some thoughts as what the end of P2 should look like. I have already talked about several count options for P2, both bullish (rally extends out as far a December and goes up to 1150-1200) and bearish (P2 is done with this wave) in this post: EOD Count Oct 12 with a Bunch of Charts and Count Options. For my thoughts on this matter, check out that post.

This post will be some observations about P2 and will be some observations about the current wave. But mostly it will set up some of the action that we will be likely to see in the next week.

So lets start with where we are, the current wave since Oct 2:

This is my preferred count. Building off the one in this post: My Count of This Crazy Rally.

So there are two main options with this count

1) The wave is done with the Thursday high.
2) The wave will be done Monday or Tuesday next week. (Only SPX and INDU made higher highs on Thurday, RUT, COMPQ and NDX did not. And due to the weak nature of the move, it could be a Wave B overshoot.) Also the main channel has not been broken yet.

Also, if we go past 1101, then Wave 3 will be the shortest wave in my count (which is unallowable). In that case, Daneric's count is the most likely count IMO, which means a very extended 5th wave. This has some *very bearish* connotations (see the checklist above).

As I have observed before, the breadth of this wave is really bad: Man SPX, Your Brea(d)th Stinks! and SPX says "Pass Me the Binaca!". Friday proved no different. Bearish breadth is rising as the move is making new highs.

This says to me the wave is over, or is over after one more small move up. There is also another aspect to be aware of, which is on my 60 min pattern chart:

There are two channel trendlines currently being fought over (one resistance and one support). When the support breaks, there is the gap at 1075, but another support line right below that. When the move fills the gap, there is a high likelihood we will see an immediate bounce right off that trendline. Just something to be aware of.

There are two ways to play this for a short swing trade (not advice or recommendations, just a swing trade setup that is possible).

1) Assuming you subscribe to the more bullish large count, then this would be the end of Minute 1 and the next move down is a Minute 2 pullback. The correction should last 4-6 trading days and should take us down to 1067 (38% retrace of the Thursday high) to 1057 (50% retrace). There are unfilled gaps at both 1075 and 1057. My guess is both will be filled on the next Minute degree pullback.

2) Assuming you subscribe to the more bearish large count (P2 was done Thursday or will end early next week), I would get short (if you have not done already) and play it this way.

2a) Watch the move down and see if a Minuette degree impulse forms. Hold through the correction with a stop set at the high (either the Thursday high or the high Mon/Tues if this wave has one more move up).
2b) Sell part after the second impulse down (the count at this point will have been a 5-3-5 each Minuette degree). So this could be a 1-2-3 of an impulse of an A-B-C of a zigzag correction (zigzags are typically in the Wave 2 position and this would fit with a Minute 2 pullback in Option 1 above). Either way, this would be a good place to take partial profits. Set a stop where you feel comfortable for the rest of the position, and allow for a possible 4-5 to follow
2c) Exit the position after a full Minute degree impulse is formed (1-2-3-4-5 Minuette degree waves). Wait for a 3 wave move up that looks corrective (could be a 5-3-5 zigzag which would look impulsive) and then wait for the next Minuette impulse down (in the case of a zigzag correction, you might want to wait until the impulse develops more). Then reshort for the next impulse down.

Again, this is *NOT ADVICE*. I am just sharing a potential swing trade setup.

Moreover, this is a trade for a position to be held for only a few days. Many swing traders will hold for longer time periods and will only use this setup to scale into a short position and not exit the way I indicated above. Also there are many traders / investors who have a much longer timeframe in mind.

So next lets look at the Daily and Weekly Charts:

RSI: The up-channel since March has been violated and a new down channel is forming. The second negative divergence on Daily RSI has formed. Showing weakness
Trendline: The trendline from March 9 is broken and is now acting like resistance. I appeared to have broken back through on Thursday but was quickly shoved back under on Friday.
Moving Averages: The 20 EMA and 50 MA are still uptrending as supportive. Watch for bounces at these levels as we correct
Volume: Decreasing as we make new highs (bearish)
MACD: Broke down from wedge and is turning down beneath the support line (bearish)
CMF: Continues into distribution as new highs are made (bearish)
Breadth: Bearish trends on both ADV:DEC and UPV:DNV

Many of the same observations can be made on the Weekly chart. It is not as bearish (some of the weekly trends are still bullish).

But besides the downtrending Weekly CMF (which I pointed out last week) we now have weekly RSI divergence showing up. A weekly red candle this week would cement that and be a very difficult blow for the bulls with regards to this rally.


The last several posts I have been focusing on the VIX, for obvious reasons. Please read this post to see where I am coming from (VIX Thoughts to Accompany a Few Count Options) If we see the top of P2, would would expect to see a corresponding bottom in the VIX.

The middle of last week sported a possible 5-wave finishing move, which turned out to be a C of B of a very complex 4.

The VIX sported a new low on Friday.

This new low was arrived at very implusively however. So it *could* be a bottom in the VIX or it could be Wave 1 of 5 of the final move. Next week will answer that question.

Addition 11:45 pm

Showing the Ending Diagonal option count based on the conversation between myself and kbmartin below

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