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Keene Little : 1/7/2007 10:04:11 PM

There were a lot of bearish signs thrown off by the market last week. Most of my comments last week though were about expecting another high before the market tops. I'm still in that camp. The break of uptrend lines from July have me seriously questioning that call but oddly enough, considering their relative weakness over the past month, the techs and small caps lead me to believe there's more upside.

Before proceeding with a look at the RUT and NDX charts I will say that it's possible the DOW has already made its high and may flop around while the techs and small caps make new highs. We saw something similar in 2000 although the the DOW topped out 2 months before the techs and SPX. I've had an upside target for the DOW and SPX at 12630 and 1437-1439, resp., so it's still possible we haven't seen the highs (or a test of the highs) for those two.

If we do get another rally and SPX climbs up through 1440 then I think it will head for 1450. That's the next level I've got some Fibs pointing at. Interestingly, 1451 is the level where SPX would have two equal legs up from October 2002 for a big A-B-C correction to the 2000-2002 decline (wave-A up to January 2004 and then wave-C up from August 2004). That would have most convinced the SPX would be headed to all-time highs. I don't think so.

When I look at the patterns for the NDX and RUT over the past month I see pretty clear consolidation patterns. This suggests we'll see an upside resolution which might have started Friday. First the RUT daily chart which shows the sideways triangle pattern since November: Link

Sideways triangles, labeled wave-4 on the chart, show up just before the end of a run and this pattern calls for wave-5 to finish up the rally. I show Fib projections to 804 and then 822. The 804 level would be typical if the rally leg is weak. This 120-min chart shows the triangle pattern and the "under-throw" on Friday. This is a very typical move in these patterns but in order for it to be bullish it must rally right away on Monday. Link

Looking at an NDX 120-min chart doesn't show a triangle pattern but instead more or less a bull flag. Without getting into the details of the wave count you can just look at it and see all those overlapping moves and that gives it a corrective look. If it's a correction to the rally then we should see another leg up. This 15-min chart shows the past week: Link

Again, without getting into the details of the wave count, the sharp thrust down on Wednesday appears to have been the completion of the month-long correction. That impulsive move down (c-waves are impulsive) was reversed by another impulsive move (wave-1) to the upside and that's the move that looks like the start of a new uptrend.

The pullback on Friday morning is either all of the correction to the rally from Wednesday (which means an immediate rally on Monday) or it was just wave-A of a larger A-B-C pullback (which would mean another pullback on Monday). It takes a drop below last Wednesday's low to negate this bullish wave count. Until that happens I'm thinking we'll see more rally this coming week. Upside projections, using the same technique as shown for the RUT, are 1830 and then 1890.

For both the RUT and NDX those lower Fib projections are minor new highs. If that's all we get, and especially if they're accompanied with lots of bearish divergences, that will be an outstanding short play setup. So watch for a rally as an opportunity for a scalp long play but more importantly a longer term short play setup. But if we take out last week's low then it will be time to short all rallies.

Keene Little : 1/7/2007 10:03:39 PM

As requested, I'll try to remember to post this information as it changes. Approximate futures premium over cash indices:

YM -- + 60
ES -- + 10
NQ -- + 16
ER -- + 5

Keene Little : 1/7/2007 10:02:21 PM

Monday's pivot tables: Link and Link

OI Technical Staff : 1/7/2007 9:59:59 PM

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