Neat Chart

Below is the Dow Jones Industrial Average from 1953 using quarterly bars. Doesn't it look like it's forming a nice head and shoulders pattern? It would need to drop a bit more to hit the neckline, which would fit with my scenario for slight new trend lows explained here. Then, a nice counter trend rally to form the right shoulder, and then back down to new lows, perhaps 4000 which is the beginning of the "thin" period, where little trading took place.


Would you be long this chart?

Take a look at the chart below (I'll tell you what it is at the end of the post). Would you want to be long?

Notice the long-term MACD divergence and the sweet head and shoulders pattern. This is definately a bearish looking chart. It is the flipped chart of oil, and implies crude rallying to 70 or so.

The interesting thing is that crude oil tends to move in line with the stock market. So, the market looks bearish and crude oil looks bullish. One will be right. I will have to adjust quickly if the stock market decides to follow crude oil higher.


Market headed for new lows? If so, AAPL will be a great buy!

I am going to take a risk and speculate that the market will soon make a new bear market low. I believe this will happen without a significant rally (i.e. staying below 875). I also think that if/when this drop occurs, it will not break the previous low by much (5-10% or so). Finally, I think AAPL will be an excellent stock to buy if this drop occurs as anticipated.

I last posted about the overall market here, and about AAPL here.

Above, I posted an Elliot Wave count for QQQQ which I find intriguing. From the '07 high, the market has declined in 3-waves to complete WaveA down (Nov. lows). Since then, the market has been correcting in WaveB which should unfold in 3-waves. I am considering the possibility that WaveB unfolds as an irregular flat, where Wave-b of WaveB slightly undercuts the WaveA low, and then rallies sharply for Wave-c. This wave would break above Wave-a (Jan. '09 high), tricking everyone into thinking a new bull market has started. This would complete the entire WaveB correction, and then the final leg of the bear market would start, bringing prices much lower in WaveC.

The key to this scenario is that Wave-b unfolds in 3-waves, as opposed to 5-waves. I think this could happen, as I'll explain in the next chart.

The 1h /NQ (NASDAQ futures) chart is displayed above. It looks like a triangle is forming to correct the recent drop from the Jan. '09 high. Triangles are often terminal, meaning that any subsequent downleg would end the downtrend. This fits with the 3-wave drop scenario for Wave-b mentioned above.

I'm showing the daily BKX chart to indicate that there should be more downside in the recent downtrend. Banks have led on the downside and I believe they have one more down-leg. Notice that they rallied in 3-waves from the Nov. '08 low, and then began downtrending. So far, 4 waves have unfolded, meaning the fifth wave is forthcoming. This could certainly be a strong drop (perhaps as low as the channel bottom), helping bring the rest of the market down quickly.

The Put/Call chart above indicates a high level of confidence (by retail traders, that is) that we will rally before continuing to drop. I am tempted to agree that we could see a rally to, say, 875 on SPX. However, the triangle scenario implies that we will not see this, and will instead drop as soon as Monday. I think the bullishness implied by the Put/Call chart makes this quick-drop scenario possible.

Finally, now that you've seen my reasoning for an imminent drop, take a look at the AAPL daily chart above. I believe it finished a multi-year 5-wave rally in May, and therefore should decline in an ABC correction. WaveA seems nearly complete, as there are 5-waves down from $192. Wave-5 certainly seems to be an ending diagonal that should lead to an intense rally once the upper trendline is broken. However, a closer look at the inner structure indicates that we could have one more drop to below $78 to complete the pattern. I have purchased a few shares around $90 in case the triangle is already complete, but if the market does drop and AAPL follows, I will get aggressively bullish around $75-80. Ending diagonals are super strong reversal patterns. Search this blog for "ending diagonal" and you'll see some incredible examples of what they can do.


I've been taking advantage of the holiday rally to unload

I'm a bit late posting this, but I took advantage of the rally from 741-->942 to cut my losses on the poor positions I bought back in September 2008.

As you can see from the chart, I sold:

  • C around $8
  • F around $3
  • AAPL around $100
  • GS around $71
  • IFN aroudn $18 (plus a $6.50 or dividend)

I took a pretty big hit on each of these, but it's been a good learning experience. One of the best lessons: if everyone is predicting the same thing as you, it's not going to happen (e.g. the common consensus was that the bailout was going to end the market downtrend).


Adv/Dec divergence blown out

I now believe there is a possibility that we make a new trend high before starting the next downtrend in this bear market. I will close a small portion of my short position (25% or so) on a break below 890 with the intent to reenter above 940.

Notice on the above chart that the NYSE A/D divergences I posted a few days ago have been negated. This makes me believe that we could see one more high with lower stock participation to complete the rally. This would post the final A/D divergence and then lead to the next bear market decline.


SPX is going to the Moon!

Well, that's what the past three days of market action would make you believe. I last posted about the market here; I was prematurely bearish on the market, and clearly many other market participants were too, as the alternate scenario I posted did come to fruition. However, I believe that we may be within 15-20 points of a short term top that should precede new trend lows.

The above chart shows a possible Elliot Wave count. We should be in the Wave4 correction, and you can see that the move is not impulsive. The waves are choppy and overlapping in what appears to be an "abc-x-abc" 7-wave pattern. This implies lower prices, as does the low volume in the recent rally.

Furthermore, the NYSE Advancing Issues count is showing divergence with price action. Notice that while the SPX made new price highs relative to the early December spike, the 5- and 10-dma of the $NYADV indicator did not. Again, this indicates that fewer stocks participated in this rally, which is not a good sign. One caveat with this indicator is that if the market rallies again on Monday, it could blow out the divergence. I want to see the market drop hard with few advancers to confirm this divergence.

Finally, take a look at the 1h chart above. It appears that the final "abc" in the Wave4 rally is forming as a flat in the normal 3-3-5 structure. I like this because the last rally is super strong and persistent, exactly what is needed to convince people to switch to "buy-the-dips" mode. That is the mentality needed to support a new down-leg.

If you need further evidence that we are near a short term top, take a look at Will Rahal's top/bottom indicator here. It is in the traditional sell zone and is also diverging with price.
Should my analysis be wrong and we continue to correct higher over the next few weeks, I expect a drop to at least 900 to correct the 5-wave rally up to 935.