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Thursday, September 24, 2009

Thoughts on the Leader Indices / P2 or not P2?

First let me say this is a post about the bigger picture. And while I will talk about the micro count in a minute, it bears keeping in mind the bigger picture. Daneric put together 7 or 8 fantastic posts last night, and while we differ only slightly on the micro-count from the past few days, we are in agreement on the big picture.

From this comment:

"Amen brother. That is my view too. I do think it is Minute 4 of C and we go up to 1100. ... but that is only 3.5% more upside. So lets see, we have an economy that has not been fixed, and despite a lot of positive rhetoric, is actually in worse shape now than it was a year ago, we have a hugely overbought rally that has run it's course, bears capitulating to the upside, everybody is bullish, economists declaring end of the recession, analysts upgrading everything .... ... Two words ... B. S.

I am differing with you on the micro count for today, and I have voiced my alternate opinion. However I am right with you on the big picture technically and fundamentally. This rally is overdone and risk is now to the down side, not the upside anymore.

Thanks for all of your works, thoughts, charts and analysis! It is very much appreciated !!"

And this comment:

"I completely agree with Dan here. I was also bullish and went long on Oil and Gold/Silver Miners in December (for trades, I still am very bullish on gold in my long term investment account). And I also went long on equities in March around 700. And I started dumping around 900. Did I get bearish too early? Yep, in retrospect. But I made a nice chunk playing the meat of this countertrend rally. And countertrend rallies are exactly that, countertrend. And they end abruptly (which is one of the things Dan's microcount has going for it!). Going seriously long here is crazy. People can be angry at the bears or call us stupid for trying to call a top and not trading the trend. Fair enough. But use a phrase that GoodVibe likes, when the bulls talk about going long here, they are advocating "picking up quarters in the street, right in front of the steamroller". You might get lucky and eek out a few more percent. Or you could get flattened.

So getting back to the criticism at hand: Risk is far and away to the downside. So this is why a lot of us are counting to the top of P2 or working on projections that may have a "bearish slant". Because we all see the giant wedges. We all see negative divergences beginning to show up, especially in the leader indices. We all see bullish sentiment on equities at bubble top highs, and bearish sentiment on the Dollar at oversold lows. Conditions are ripe for a turnaround. The bullish case from here to say 1200, based on current price action, sentiment and fundamentals doesn't make much sense (at least not to me). So when I think about the bull case, and I do, I can't find a compelling argument for it. But since >88% of the other investors right now are bulls, maybe we should ask them :) Personally, I would rather not have my hands flattened by the impending steamroller :)"

Main themes:
1. P2 is done, or P2 is very close to done. This depends on your preferred count, but the jig is almost up.
2. P2 done: huge downside risk. P2 not done: 3-4% upside, then huge downside risk. Either way the risk, from this price level, is to the downside.
3. Everybody is bullish. Changes happen at sentiment extremes

So, lets get to the technical meat of this post. Dan put together another excellent post: The DOW Wedge (Updated with OIL). One of this main observations was that breaking the bottom wedge line will be a confirmation of the start of P2.

I disagree, but only slightly. My take is: a break of the wedge line signals the jig is up. And a failed retest of the broken wedge line is required to confirm the top.. I think we will get a retest (another wave up). But the question before the group is: Do we make a higher high on a retest of the broken trend line?

I offer two exhibits that say this is possible, if not likely: Hong Kong Hang Seng (HSI), and the Sensex (BSE).

I always look at a large number of leader indcies and many of them international. The last time was in this post: A Massive Chart Dump - P2 Analysis Wrap-Up. I will be doing an update to this post this weekend. Here are the charts

So what I hope to illustrate here is that a break of the bottom of the wedge line is *NOT* a definitive indication of an immediate top. But if you look at these charts (and there are more indicies showing the exact same behavior) you see negative divergence and support now turned into resistance. In short, I don't believe they paint an overall bullish picture, but the US indices could still *eek* out slightly higher highs after breaking their wedge lines.
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