I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Sunday, January 24, 2010

The Real Deal? (Divided Opinions)

So, is this move the real deal (meaning is this a subdividing 3rd wave as Minor Wave 1 down?), or is this move done in essentially a "fakeout" drop on Friday afternoon to end the down move and we get a very strong bounce up on Monday for Minor Wave 2?

Much of this depends on how you view the VIX move. This is a crazy 4-sigma event (4 standard deviations on a Bollinger Band with 20 period reading are needed to capture the move)

A valid observation would be "We got up to >3 sigma moves (not quite 4 sigma) in Sep - Nov and the each time it pierced that zone, there was an immediate VIX snap back the next day"

This was also met with some sort up upward move in the market (as expected).

Fair point. The VIX "rubber band" analogy.

My counter-observation (not even necessarily a rebuttal) would be: We were in P2 then. The main trend was bullish. **If** we are in P3 now (and despite what anybody thinks, that is still very much an assumption at this point), the main trend will be bearish. Are fear spikes without *immediate* snap-backs reasonable? My gut says "yes".

But let's go to the price action. The next chart examines the move side-by-side on the SPX, INDU, COMPQ, RUT, WLSH and NYA.

Here are the notes on my chart:

Key observations:

1. There is clear separation between the Wave down peaks and the retracements peaks on the SPX. So while the waves are more exaggerated, they could count down as a 1-2-3-4 for part of the waves
2. **HOWEVER** This is not the case on any other index!! On the COMPQ and RUT, there is *significant* 1-2 overlap between the sets of waves
3. Why is the SPX so exaggerated then? BECAUSE FINANCIALS ARE TANKING!! (SPX is financial heavy)

4. The Fourth Wave Down is technically *much stronger* than the rest of the down waves (the first and second waves are panic gap down opens, yet the 4th wave was a mid-day drop that accelerated through very strong support)

This looks like the real deal. When all the indices are viewed side-by-side, this looks like a nested set of 1-2's (4 levels deep) to me.

So when I look at the price movements across the board, and the move on financials (which is *very* bearish and is in a very clear extended 3rd wave) which explains the move in the SPX according to my observations above, and I note the overlaps which negate a 1-2-3-4 count on the NDX, COMPQ and RUT....

(BTW: Here is my financial count, which explains the exaggeration on the SPX)

... I come to the conclusion that the most likely count is a series of 1-2's, 4 levels deep. I put >70% odds on it. I think my count from Friday is a valid one and it remains my preferred count: Looks Like Hibernation Time Is Over

One last thought:

The last 8 months has neutered a lot of bears (my voice is a little bit higher). And the entire US investor pool has been conditioned to "buy" the dip. So much so that many are trying to call the bounce here in the midst of a strong down move (hey, I did the exact same thing Friday morning: L(S)D Option. Not blaming, just observing).

Maybe that's how P3 starts. It crushes dip buying bulls as much as it crushed the top-shorting bears in July and October. Absolute conviction of a market rise gets replaced by doubt for the first time.

Just a thought.
blog comments powered by Disqus