Keene Little : 3/25/2007 10:16:18 PM
A lot of my weekend reading of various market analysts shows an overwhelming majority "yelling from the roof tops" to get long, just as I said would happen during this bounce. I will admit the "bounce" has become more like a rally and has me seriously 2nd guessing my bearish stance but at least we're getting close now to letting us know for sure one way or the other. If the rally proceeds much higher then it will clearly become very bullish, not just bullish but very bullish. But until that happens, we're being set up for a very disappointing time for the bulls.
At the end of the day Friday I posted updates to the 60-min charts to show the latest roadmaps so I won't repeat them here but I'll review a couple of things to show where the important levels are located and what I expect to happen next. I'll use the DOW and the RUT to paint a picture and point out the potential patterns we'll watch for in trying to figure out if we have a bullish or bearish setup in front of us.
The DOW 60-min chart shows the up-channel from the March 14th low. Ideally we'll get a minor pullback on Monday morning that finds support at the uptrend line and then rally from there. I don't expect a big rally but something to give us the 5th wave (labeled with the green wave count) up and finish that rally leg. Link
As I show on the chart, the dark red labeling calls the high on Friday as the end of the run and it will drop immediatly on Monday. We had that kind of surprise drop on February 27th. But if the uptrend line holds and we get another push higher then that's when I'll be looking for the completion of that 5th wave. It looks the same on the RUT 60-min chart: Link
The interesting setup on the RUT is its broken uptrend line from August--a push higher could finish the 5th wave at the same time it's running into that broken uptrend line for a retest. That would be a very nice short setup.
Once we have a 5-wave move completed, either as of Friday or after another push higher on Monday, it will get corrected. So we'll get a pullback and that's when we'll start to get some clues as to whether the leg up is the completion of the a-b-c bounce from March 5th or is instead just the first leg up in a new larger rally. This DOW 120-min chart shows those two possibilities: Link
The bullish wave count (green) shows how price could pull back and then launch into a new leg up. So, any pullback that then leads to another high would undoubtably be bullish. In that case I would be abandoning all bearish ideas and getting long in a big way. But until that happens the wave pattern is very clearly bearish and I expect the current rally to be followed by a strong decline--stronger and longer than the decline off the February high. Ignore the bullish sentiment out there--it's what I said would happen during this 2nd wave correction and it's exactly what we're getting.
This DOW daily chart shows the bullish and bearish projections and the key price levels: Link
The green path shows a pullback followed by new highs, especially with a move above 12635 (but really back above wherever this rally stops), and I suspect that it would then lead to highs well above 13K. Otherwise the next leg down will start to convince many that they got suckered into this bounce just as it's designed to do.
The RUT daily chart doesn't show the bullish path but it would be the exact same setup. A move above its broken uptrend line (for more than something that closes its gap at 823.79) would be bullish. Otherwise I expect the next big move to scare the bejeebers out of the bulls. Link
Just as a comparison, the SPX daily chart (without the bullish path drawn in), shows resistance at the top of its parallel channel just under 1450. It doesn't mean it'll get there but that's the upside potential I currently see. Link
When asked about the end-of-quarter push that so many expect to see, my answer is that that might be a reason we drop hard. So many people are expecting a rally into the end of the quarter that they may already be positioned for it. Without more buying power it could falter. Any selling would then scare a lot of recent buyers out and then the stops start getting hit to the downside. That's just a guess--I'l stick to the wave pattern which is currently telling me to get ready to get short and then we'll figure out if it's going to be just a scalp short or one for the roses.
The VIX has pulled back down to where it could find solid support, especially if we get another minor push higher in prices and have VIX drop down to its new uptrend line, currently near 10.20. That would be good confirmation for a short entry. Link
Another indicator that says we're getting over-the-top bullishness, again as I said we would, is the NYSE adv-decl line. Bulls have been slobbering all over this market and can't get enough stock fast enough. The 10-dma of the NYSE adv-decl line (with just the 10-dma showing, not the spiky line itself), shown in the lower chart here, shows a higher level has been reached than even the previous highs in February (sorry for it's size but I'm trying to get enough data to make it meaningful): Link
The above chart shows what I mean when I say we'll see excessive bullishness that is very typical of a 2nd wave correction where everyone feels the pullback is over and it's time to get long. The next leg down, assuming it's coming, will be the 3rd wave down and it will disabuse many of the notion that the correction is finished. But we'll let price dictate and the first thing I'll be watching for is whether or not we're going to get one more push higher on Monday or if instead we start down right away. Keep scalping until we know.