Sunday, April 26, 2009

A crazy Friday, but where does it leave us...

No downside confirmation came in Friday much to my dismay. After taking a deeper look at the patterns of this bull rally since March 6th, I have to conclude that we are putting in a triple zigzag. There is just no bullish pattern to make of it. Now the market hasn't been able to get where it did on Friday without giving us some significant clues about what prices are important and whether or not we may be getting close to a reversal.

First: SPX 834 is VERY VERY important. Since the end of March, this area was tested 4x from below before breaking above it on a morning gap on 4/9. Since then, it has now been tested 3x from above. A daily close beneath this level would be a very low risk signal that the bull run is indeed over.

Second: Momentum is waning. The first upward trendline off of the low was broken on 3/30. This trendline was slightly greater than a 45 degree angle, which meant it was very bullish and had a lot of momentum. The 2nd trendline kept getting weaker and weaker as price kept moving through it for longer and longer periods of time (4/7-4/8, 4/14-4/16) but was finally broken this last Monday on 4/20. The 2nd trendline was just under a 45 degree angle showing that momentum was easing significantly. Although trading to a double top (if price action dies here) it would essentially be an underside test of the previous trendline.

Third: Financials are lagging. While financials led the market in the bounce, they have now drifted back. Much like the runner who sprints his first lap only to fall to the back of the pack on lap 8, the financials have yet to break above their 4/17 top unlike the Nasdaq and the Russel.

Fourth: Key stocks are lagging. Two of my favorite stocks to watch for signs of a turning point are aapl and gs. Where are they? Well, GS hasn't even been able to break above its 4/22 high let alone its 4/13 high. And aapl with its stellar earnings performance has been unable to break above its post earnings gap on 4/23 and traded down on Friday while the Nasdaq was hitting new rally highs.

Fifth: Volatility as measured by the 5 day Avg True Range (ATR) has been contracting significantly and is reaching the same levels reached when the market fell apart at the end of last year. The VIX has also been unable to get close to its low made on 4/17.

So with that said, I still favor a signficant move to the downside in the near future. Will it happen on Monday, maybe maybe not. We could still put in a true double top at SPX 876, which if reversed could definitely cause an avalanche since it would not only mean a double top but also match an exhaustion price target. Pay attention to SPX 834. I did reduce my short position to 1/3 w/ an avg cost of 866 (after a horrible Friday but that was due to personal/family reasons and not the market). I did open up put positions on AAPL May 115 puts w/ an avg price of 1.67.

BTW, as I write this the futures market is trading at 855. It wouldn't take much follow through to get us to 831.


  1. Rich, if we go through 834, is it curtains for any hope at a 4 digit S&P?

  2. saleen, it is only curtains for this wave 'a'. There is still the strong possibility of a 1000-1100 spx much later in the year.

  3. Thanks Rich..Can I ask why you say much later? If we figure wave A has lasted a month and a half, wouldn't you expect the rally to come sooner rather than later? Especially now while we are in the eye of the hurricane? Thanks again, love the blog.

  4. saleen, the general rule of thumb in a zigzag price wave is that your wave 'a' has a steeper slope than your wave 'c'. With that being said, wave 'a' is running in the 6-7 wks area. Wave 'b' could easily last 3-4 wks. That makes wave 'c' lasting 8-16 wks. Overall, I estimated our primary wave 2 to last 4-8 months.