3/12/2009

The bear market is over right?

Based on the past few days of market action, it is easy to believe that the market has bottomed and is starting a big countertrend bear-market rally. After all, sentiment has been extremely bearish that past few weeks, and there are all sorts of bullish divergences forming. However, I believe we have one more drop to go (and it could extend since many people think 600 will be the bottom). This drop should at least retest 666 on the SPX, and will likely drop far past that. I last posted about the overall market here.

The above chart indicates that we have complete 4 out of 5 waves to complete Wave5 from 1576. We still need a sharp 5th wave to complete the sequence, and to enforce the bearish sentiment. Notice that Wave-ii of Wave5 was slow and shallow whereas Wave-iv has been fast and sharp. This is normal alternation of corrective waves and does not indicate that the market has bottomed. In fact, given how fast bullish sentiment has returned to the market, I think we could see a very steep Wave5 decline to washout all the bulls that have returned to the market. If you don't know what I'm talking about, check out the CBOE Put/Call Ratio.