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

Wednesday, December 16, 2009

Live and Let Live

Sorry, the correct answer was d) (not shown). Not fair, you say? That's life (yuk, yuk).

Oh Dollar Boy, the Pipes, the Pipes are Calling --> These pipes ... are CLEAN!!! --> Cabin Boy (starring Chris Elliot) --> Get a Life (Elliott's TV Show in the 90's). --> Live and Let Live

So in this post I want to take a look at the Russell and Financials and see what they are up to, and see if they are giving us some clues for the rest of the market.

Several of us believe that Financials have already ended their Primary 2, and I also think this is true of the Russell (the only broad market index to do so)

Financials look ready to rally. They have been consolidating. And too me, it looks like a very complex triangle. The shape is only vaguely triangle-ish, but the key feature is the consolidation at the end. It looks ready for a breakout to the upside:

But minor waves are minor waves. This might be a good short term trading opportunity. But financials are volatile garbage and the cancer of the economy (as I have said many times). I would never touch these with long term money (except to short).

So given this count, which looks/seems right to me, I tend to favor the Ending Diagonal option for the rest of the markets.

The Russell is proving more of a puzzle. It has put on a very good show recently and now it is at a crossroads. It is hitting resistance. Does it break through and join the rest of the indicies in making new highs? Or will it again play the canary in the coal mine role and break down early, giving a signal for the rest of the market?

I don't have the answer to that question.

But I will show you a chart that I put together over a month ago here in this post: Projections, In the Corner of My Mind

Looking at the long term Russell Chart and it is showing significant weakness. This is an obvious sign of risk aversion. There is a huge risk spread (the difference between the "safe" Dow and the "risky" small caps of the Russell). If the atmosphere was really bullish, shouldn't small caps be outperforming?

Anyways, a legitimate question is: has the Russell ended its P2 already? Based on the chart there is certainly a case to be made for this. Columbia has an excellent new post discussing this option Week-end Outlook!!. I went ahead a put together a long term chart so that the overall retrace, trendline, and price action can be seen in the larger context like I show with the SPX above.

So, if P2 is not done for the Russell, then I think its most likely scenario is a triple top like I was showing in November. Very bearish indeed.

Let me go back to what I have been saying before: these Minor Waves may be good short term trades, but I am personally using this last move up to get positioned in some longer term shorts. I have a feeling that the rug will be pulled out from under the market in January.

Updated XLF for Gumbo

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