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Saturday, September 25, 2010

Major League Divergences

My last few posts give my preferred EW counts for this rally (More, Breakup, Breakdown? and Breakdown? (Revisited)). Here is the summary of my position

1) Looking at only the SPX will produce a garbage count. It is not a clean waveform and can be interpreted several ways
2) The SPX is also not leading here, so which index is?
3) It is obvious that the Nasdaq is leading and it gives a very clear impulsive waveform up
4) This same count also works on the SPX, and we have a winner
5) At SPX = 1158 we have some very nice wave relationships to the July and August waves especially if the rally runs out to Oct 1 (Gann time relationship). This is my preferred count
6) However there is a case to be made (and a supporting count: More) for the rally to have ended on Friday.
7) ***

I will explore point 6 in this post. There are some massive divergences taking place and I am doubting this rally will be able to continue in light of them.

First is the NYMO.

A rally or breakdown can continue in the face of a divergence. And it can get more pronounced even. But the 2% gap up rally on Friday is HIGHLY UNCONFIRMED by MOe. In fact the divergence is almost as sharp as it gets (the NYMO did print a positive value, but only barely)

Next is the Equity Put/Call Ratio.

Bullish? Check.
Is the setup supportive of a turn the way it has been for the past year and a half? Check.
Anecdotally, a number of sentiment surveys are between moderately bullish and extremely bullish. And with a very high ratio of calls to puts this week, we have the makings for a top coming into place.

Last is the 60 minute chart

Tons of divergence have been brewing for awhile. But like with the NYMO, Friday's rally is not only unconfirmed on every 60 minute indicator, it happened on highly negative divergence.

This picture is really favoring a very red week next week.

*** I still disagree with virtually every P2 done count that I have seen (a LD ending at the beginning of July because the wedge trendlines are not converging on almost any index, and the impulse down Minor 1 for 3 weeks followed by 3 months of a very complex Minor 2 looks utterly ridiculous and makes very little sense).

My thoughts on the next intermediate wave are summed up here: The Big Picture: Technicals and Macro
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