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

Saturday, February 6, 2010

Taking a Step Back: The Case for Staying Bearish for the Near Term

Many of us who perform Elliott Wave Analysis have been looking at the current move down as an impulsive wave structure. It has certainly been sharp and clearly against the trend of the last 10 months.

Is it the start of bear market? Is it the start of Primary Wave 3 down?

My answer is: For the big picture it doesn't matter yet.

I know, this is a false statement, because it actually does matter, but I am coming at the from the viewpoint of actionable trading observations.

Maybe this is the start of a bear market, maybe it is a pause in the continuation of a bull market, maybe we are all going to die in the next 8 minutes because the Sun went nova (based on the speed of light, we have an 8 minute delay of what is actually taking place on the sun).

So, like I was saying last month, IF this is the start of P3 and the beginning of another stock market crash, we will not know until we receive a confirmation signal: What To Look For As a Long Term Trend Change Confirmation.

The other main option is that there is no P3 at all, and that we are in the middle of a Cycle degree X wave (an option I discussed here: The Long View). Which means we will be in a volatile trading range for the next year or so.

But what I am going to say in this post is that the next few months are most likely going to be bearish, and it has nothing to do with Elliott Wave Counts

Exhibit A - Weekly Chart for the SPX

Ignore the Wave Counts on this chart and let's focus on the indicators and the pattern

Bearish Observation #1
The SPX was unable to manage a weekly close above its long term down trend line

Bearish Observation #2
Massive Divergence was building up on the RSI prior to the peak

Bearish Observation #3
First negative MACD cross since March and the Histogram had been declining since July

Bearish Observation #4
The large wedge since the bottom broken sideways into another wedge with broken down at the down trend line. Wedges are very bearish reversal patterns

Bearish Observation #5
Volume had been decline during the rally and it looks like it is picking back up again as we begin to sell off

Bearish Observation #6
The CMF (Money Flow Indicator) had it first negative print since March!!! (Very bearish) and the rally had been going into distribution for the past few months.

Bearish Observation #7
The Stochastics are below 50 for the first time since March!!! A cross of 50 very often (not always, but often enough to take notice) accompanies a trend change

Bearish Observation #8
Breadth (participation among stocks) has been declining in the overall rally as the rally progressed

Exhibit B - An examination of some Major Indices

Looking at the Dow: Money is still scared. It is staying in risk-avoidance issues. Large Dow Blue Chips are not selling off as badly

But do you need a *HUGE* reason to be bearish? The NYSE Composite (an index of all issues traded on the New York Stock Exchange) made LOWER LOWS THAN ***BOTH THE NOVEMBER AND OCTOBER LOWS!!!*** . This is a very bearish development.

I think those who believe the current pullback is just a correction and we will be making brand new highs next month are going to be very disappointed. There has been a lot of technical damage that happened this month that took place just after a peak in bullish sentiment from a number of different sources that rivaled all time high sentiment readings.

This seems exactly like a recipe for a top of some sort (more than a couple of weeks) to me.

Beside the wave counts, these other factors give me a lot of confidence to stay short. Even if we get some sort of bounce next week, and even if it is surprisingly strong, the bigger picture charts are telling me that some larger move down needs to take place first before the bulls can even begin to contemplate new highs.

I still like the support area at 950 on the SPX as a target.

The point of this post, just like the point of any of my posts, is *not* to try to convince you of anything. I am an analyst who is sharing observations. That's all. It is immaterial to me whether you agree or disagree with my observations or conclusions. But I do hope that my observations are useful in helping you to formulate your own opinion, even if your conclusion is completely opposite of mine.
blog comments powered by Disqus