Wednesday, March 18, 2009

When perplexed, get back to basics

Perplexed. I guess that would be the right word. This rally has gone up more quickly and higher than I (and I'm sure I'm not alone) would have guessed. When the EW puzzle becomes cloudy, it is important to get back to TA basics. So that is where I'm going tonight.

Signs that a low is in:
- A close above the weekly 8 SMA, which hasn't happened since the end of intermediate wave 3 (see top chart).
- the nasdaq clearly out in front and already far into the price range of w1.
- the financials showing signs of life

Signs that a low is not in:
- a rejection (assuming we go down from here) off of the trendline (see above chart)
- pervasive amounts of bullishness still existed at the low (putt/call ratio, lack of fear based on the vix)
- market has moved up based on gov't action (in the past gov't action has NEVER put a low in the market - only a rally)
- volume never spiked at the low
- a clear 3 wave move off of the w4 high on the daily chart
- selling never accelerated into the low even though we had plenty of breadth

So, what I do know is we'll have a correction. According to the McClellan Oscillator (see below) it will be a brutal one. I think we at least need to test the 713 pivot before we can have any confidence that a multi-week or multi-month bull market is upon us.

As for the near term. We have a channel that action has stayed between (blue lines). We have the original support line (hot pink line) that was broken and now price has rallied to touch the underside (bearish sign). We have the 30 min SMA sitting at 786. A double close below it probably spells the end of the channel and the beginning of the correction. Staying below 780 for any prolonged period (2 hourly bars) of time would also be a failed breakout and would create even more selling.


  1. hi rich,

    i've been following your blog for several weeks now. great job by the way!

    i'm fairly new to EW, i have one question: why is it that you don't consider the up & down sequence since Nov '08 a Flat? That we are currently in wave C of a Flat, thus making it look impulsive.


  2. Great analysis. I took a pretty big short position yesterday (earlier than I should, but perhaps not too early).

    Pretty sure the financials showing signs of 'life' was caused by this (courtesy )


    By (Karl Denninger) on Strategies


    Hedge funds rushed in to buy preferred shares of Citigroup after the New York bank announced last month that it would convert preferred shares into common stock. The fast-money crowd hoped to scoop up a quick profit based on the attractive conversion terms being offered by Citigroup to preferred shareholders, including the government.


    "There are a lot of hedge funds looking for free money, and a lot of people were betting against Citi," says Jonathon Trugman, who runs Pendulum Capital Management, a stock-picking hedge fund in New York. Hedge funds lost money on Citigroup because "not every patient who goes into coronary arrest fails to come out of it."

    The hedge funds' pain from Citigroup looks like the government's gain, at least for the moment, since preferred holders would be converting each share of preferred stock into common stock that has risen mightily in value. As of Wednesday afternoon, the difference between the preferred and common shares was $8.45, based on the conversion rate of 7.31.

    Free money. Yeah.

    Sold to you guys. The market is never that simple, but you "wizards" should have known that.

    This is starting to get a lot of play in the blogosphere along with the "real press", which may fuel further moon shots in the stock.

    There is something ironic about so-called "hedge funds" that don't hedge, and when their strategies go bad "it all goes boom."

    Anyone remember VW - another "sure thing bet" that blew up in people's faces?

    The lesson is time-worn but nonetheless true - there is no such thing as a "sure thing" in the markets, nor any such thing as a "risk free" trade.

    Further, when trades get crowded (and by some estimates more than 1/4 of the public float of Citi was being shorted by people playing this strategy!) it is a near-certainty that whatever that trade is, it will blow up in your face.

  3. ollie, certainly that could be the case. We would still need to rally to the 940 area though to make it complete. It would also be a very large wave structure in relationship with our previous wave 2.

    dave, derringer always has some choice words for those who are anti-capitalism. I enjoy his work even if sometimes his language is a bit over the top for my personal taste.