Keene Little : 10/7/2007 10:32:18 PM
The bulls are roaring (do bulls roar?). It seems everyone is bullish and it's fitting for where we are in the rally. We could have a bit more to the upside but I feel it's important to consider something less than bullish and I'll use a couple of charts to show why I think we're a lot closer to a top than a breakout. Starting with the SPX and DOW 60-min charts I'll show where we could be in the rally pattern.
SPX didn't quite ring the bell at 1563 on Friday and the short term pattern does support the idea that we could see one more press higher on Monday so that's the risk if you're currently short. And if we do get one more high then it'll offer another opportunity to test the short side--I believe we're there, as of either Friday's high or what me might get on Monday. Link
Using the same wave count on the DOW as the SPX, in the 5th wave (the move up from Sept 28th), wave-c = 62% of wave-a at 14117 (vs. equality for SPX at 1563). Friday's high was 14123 so the minimum Fib projection was tagged. Now it's a question whether price rolls over from here, which it's set up to do, or first presses a little higher (it could head for 14219 and drag SPX higher with it): Link
The RUT shows the possibility to head a little higher to a Fib projection for two legs up from Sept 28th at 852.36 but the wave count is subject to interpretation with one of the counts (dark red) suggesting Friday's high was it. A couple of ascending wedges on different time frames also suggests we may have topped (especially if it drops back down on Monday): Link
The daily chart of the RUT shows how price action fits within the potential ascending wedge but is only bearish at this point if price immediately collapses back inside (below Friday's closing price): Link
Not shown on the NDX daily chart is the Fib projection based on the July-Aug decline. Price is currently between a 127% and 138% projection and this is a common reversal level. As I've been pointing out, the upside target zone has been 2135-2170 and we're there: Link
. NDX is currently stretched as far away from its 200-week moving average as it was in January 2006 which then led to a 300-point drop over the next six months. Most often the techs charge higher at the end of a market rally as an exhaustion move where the last of the wannabe bulls pile into the sexy techs.
But a tech rally without the semiconductor stocks has never made it very far. This weekly chart shows the relative strength of the SOX index to the COMP: Link
. If you look at previous instances where the SOX started to underperform the COMP, the COMP declined shortly thereafter. And now the RS chart shows the SOX "breaking down". The weakness here is simply not bullish and in fact is bearish.
The COMP weekly chart above shows price running into the top of its potential ascending wedge (trend line along the highs since mid 2005 and the negative divergences against the oscillators is a screaming short here. At least that's the higher odds play in this kind of setup. You can listen to the bullish hype around you or you can listen to the charts.
The banks have been lagging the broader market rally and the daily chart shows price is nearing resistance by its downtrend line from May and its 100-dma: Link
. It could make it a little higher to its broken uptrend line from October 2002 or it could roll back over at any time.
The 60-min chart of the banking index shows the negative divergence as price has pressed higher over the past week: Link
Looking at Goldman Sachs (GS), one of the stronger banks, shows strong price action: Link
, but the higher high in the oscillators is not being matched (yet) by higher highs in price and that's another version of negative divergence. The 60-min chart shows the negative divergence building since the Sept 19th high: Link
And lastly, the brokers look vulnerable as well although slightly stronger than the banks: Link
. Price could head slightly higher to around 252 to reach the top of its ascending wedge but right now it has run into its 200-dma and the 60-min chart shows the same negative divergence at the new highs as the other charts: Link
Which brings us to Mother Merrill (MER) and its daily chart: Link
. Again, it could press a little higher to the top of its sideways triangle (a continuation pattern for more downside) and downtrend line from May near 78 but the risk is for price to turn back down at any time.
So, the bottom line? I don't think there's much of a question as to the vulnerability for this market to be topping very soon if it hasn't already. I'll continue to test the short side since the next significant move should be down.