Keene Little : 8/5/2007 10:26:44 PM
Monday's pivot tables: Link
Re-posting Friday night's commentary (with the SPX chart this time) and some added commentary:
Friday's new low for SPX and the RUT open up a few possible wave counts. One is that we're going to see relentless selling next week as a result of the spreading contagion from the credit crunch, hedge fund closings, mortgage bank failures and leveraged buyouts coming to a screeching halt. We haven't experienced this level of credit creation before (and the probable "mind-numblingly fast" credit collapse that I've been warning about), nor all the exotic financial instruments that have been created. Therefore we really don't know how this correction will play out.
You should stay aware of the danger from a potential market collapse but it's not a high-odds scenario to play. Because the DOW did not make a new low (nor did the NDX), it's still possible for these to be showing us that we'll get another leg up as part of a 3-wave bounce from Monday's low: Link
It's still possible we'll get another rally leg that takes us to new highs but that's looking much less likely at this point. The bounce pattern strongly suggests we've seen the top of the bull market. I show a strong rally for the 2nd leg up (wave-C of the 2nd wave correction) where it would equal 162% of the 1st leg at 13769. It doesn't have to get that high but it's the potential (it would likely come from some strong short covering and might even happen post-FOMC).
SPX maintains the same potential wave counts as shown for the DOW. But because it made a new low, it raises the possibility that Friday's leg down is the one that's completing the decline from July 17th. The bullish divergences at the new lows since Monday support this wave count (dark red). Link
If true then a little consolidation and another minor low should complete it, perhaps down to about 1420 by Tuesday, just in time for the FOMC announcement (which could be the final flush to the downside to finish this leg down or it could start the short-covering rally--this should be clearer as we approach FOMC). From there the larger correction of the decline should start.
NDX looks like the DOW while the RUT looks like SPX. Last Tuesday and Wednesday I thought the RUT needed another leg down and sure enough we got it. Now it's approaching its uptrend line from August 2004, near 750, and I think this is where it will find support: Link
The RUT may be proving to be the more accurate wave pattern to follow and therefore a small consolidation and final low around 750 by Tuesday would likely set up a large rally.
So be careful on Monday for a potential day of consolidation. With the high volatility of late you need to remember that a day of consolidation can be a day with 200-point swings in the DOW.