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Friday, November 20, 2009

Week-end outlook!!

Signs of a Top?

I wanted to spend the week-end laying out the case for why I have became so bearish. Not merely because of all the negative news of the economy, or the relentlessly rising unemployment numbers, or all the small business struggling to make ends meet, or the %&$#*@ FED policies ........., but real things that you can see with your own eyes, charts.

Charts don't lie, charts don't cheat when you are away on business, charts are not Democrat or Republican, charts just show the condition of the markets in black and white!!

Start this out with a chart of The Summation Index which is simply a longer range version of the McClellan Oscillator. Whereas the McClellan Oscillator is used for short to intermediate trading purposes, the Summation Index provides a longer range view of market breadth and is used to spot major market turning points.

This is one chart to really watch because it is so close to showing a trend change. During the last rally the Summation Index was diverging from the NYA, moving down as the index was heading higher. This should be a red flag for the bulls if a lower low is made, and it is very close to doing so now!!

This is a chart of the number of stocks above their 50 day MA, with an overlay of a 9, 20, and 50 MA. It also is showing negative divergence during the last two rallies, never making higher highs as the SPX was doing, again showing that fewer stocks are participating in the rallies as less and less stocks are strong enough to hold above their 50 day MA.

The McClellan Oscillator, a momentum indicator that is applied to the advance/decline statistics. The McClellan Oscillator is now giving a sell signal after breaking below zero, meaning that the 19 day EMA has crossed the 39 day EMA on the NYSE advance-decline issues. Again notice the divergence. The $NYA making higher highs, while the MO is making lower highs.

The Bullish percent index, based on Point and Figure chart is now giving a sell signal after surpassing 70% into overbought territory, and reversing more then 6% to the downside. It is also showing the same divergences as the above charts and has already made a lower low!!

This is a longer term daily chart of the SPX since the bottom back at 666. Notice how the MACD, TRIX, and the PPO have respected the trendline of resistance for the whole rally, while also diverging, and now are back to a sell signal as they bounced off of the resistance and are falling again.

This is the count I am carrying, but I am not 100% confident in these counts. It has been one weird and very hard to count corrective wave. This is the main reason I am showing all the charts this morning, at this point in time I believe that trying to count these waves is very unreliable and confusing. Elliott wave should never be used alone, but with all the Technical Analysis one can muster.

The most interesting part of this chart has been how the trendlines have developed, turning from support to resistance as the SPX as moved higher, but with less enthusiasm as time has gone by.

Now to the Russell, the leading, lagging index. This chart I have a little more confidence in the count, the 1-2, seems to be playing out as it should, with a very corrective looking wave for the 2nd. As long as the Russell continues to be leading it will be the best tell for the rest of the indexes.
The most important thing I want to see now is when the 3rd wave gets underway, is that it truly behaves as a 3rd. It should leave little doubt in anyone's mind that something very serious is happening as a very strong sell-off catches the Bulls off guard!!

Here is a comparison of the Russell and the SPX. As investors are getting timid about risk there has been a movement out of the higher risk, high beta small caps stocks, back to safer and lower risk stocks, mainly into the blue-chips. It is a sign that most investors believe that the risks are no longer worth the rewards and are looking to protect their holdings by sacrificing rewards for safety.

The Russell has not been able to make a new high in over two and a half months and is one of the most bearish looking indexes as the gap continues to widen when measured against the SPX and the DOW. A strong and healthy market can not exist when all the indexes are not participating. This is just another sign that the markets is getting very weak and fractured as fewer and fewer stocks and sectors are left to hold the market up.

This is one of the more important events that has happened in this month, and one that nobody is talking about. The 50 day MA crossing over the 20 day MA. This a basic and textbook Technical Analysis, and one of the simplest and more reliable forms of TA. This is definitely a bearish sign seeing this cross-over.

Notice the difference in the distance apart of the 50 MA, and the 20 MA now, compared back when the last major sell-off in July happened. Much larger this time, last time it was a quick crossover that generated very little separation. This time is much different.

The indicators on this chart are also showing the same sell signals that many of the above charts are displaying.

Here is the big picture of the SPX, and there is not much that can be said that is Bullish, except the 50 MA and the 20 MA have not crossed. (yet)

This is the VIX, and one that is the most concerning for the bears. The VIX needs to get some strength and not make a lower low. A good sign would be seeing it break back above the channel line and ultimately making a higher high above $31.84. That would be a very strong sign a new long term trend change has happened.

Bonus chart!!

I do not trade off of the Fib fans, but I always keep my eye on them. In the past they have really helped to confirm trend changes.

-These are the charts I watch most everyday, it is up to you to make your own conclusions!!

Personally I do not know if this the start of P3 are just the start of another correction that might shed 10-25% off of the highs. It is also possible for the SPX to try and make one more stab at a new high. But as long as were are in these over-bought conditions and with all the divergences going on I find it very hard to want to be long in this market. The risks far out-way the rewards.

You have to ask yourself how much as the market gained in the last two months as the Perma-bulls keep tooting their horns, Buy, Buy?

The SPX at best is flat, and the Russell is down. Sell volume is increasing, while buy volume decreases. Until I see some substantial improvements in the underlying internals in the markets I can not be Bullish!!


  1. Thanks for all the hard work and great analysis.

  2. I too believe that a big trend change is on its way. It may not happen next week. But it is very close.

    Great analysis. I am learning from you.

  3. great stuff

    the storm is brewing, it is very close

    i would not be surprised if the health care fiasco passes today that monday will mark the onset of P3 with a massive 500 point down day


  4. Col, Holy s**t brother! Fantastic work!! I am definitely on board. Besides the wave counts, there is a lot of signs that topping is taking place right now, as confirmed by traditional TA (such as my post Important Bearish Chart of the Day: NYAD). This is really top-notch stuff and it is most definitely appreciated !!

  5. Binve, You absolutely amaze me, how you can put together 31 charts in one post, and add all the commentary on top of it to support your observations and finish with a conclusion, and all in one day!!

  6. Dog, you've been busy, I was too exhausted Friday to even look at charts. Great work on supporting the wave count with a variety of technical and trend indicators. I especially like your look at the % stock above their 50MA chart/analysis.

    Great work Col!

  7. Alpha, thanks, I almost added a Renko chart just in your honor :)

    PS, I still might do one to add this afternoon!!

  8. Col. Awesome work! I'm with you on the trend change.

    Going out on a limb here but I also think we may see a surprise correction before the year is up.

    Others would argue that any correction should have occurred by Oct but nothing has been normal this year. You know "sell in May and go away"; that didnt happen and this past summer was far from being flat.

    I guess we will see.

    Glad to have found you guys (GV, Alpha, Binve et al)

  9. Appreciate all the dedicated work!!! Hope You're weekend is rocking!!

  10. Love your contributions on ES and now I'm going to be a regular visitor / lurker here. Thanks mucho for your time on these charts Columbia...any comfort is welcome while weathering through this nonsense

  11. Outstanding work!!!

    Have a nice weekend,


  12. Lots of good TA Michael. Nice work. There is big battle brewing for the November Month end close on Monday Nov 30th. AnSP-500 close over 1040 on the monthy 20-period is extremely bullish. In October the Bears saved it by pulling it just below 1055. This time the Bear only have 4.5 trading days to drop it over 50 points. They'll need a couple 10:1 down days to even come close.

  13. tons of great charts and commentary michael, thanks!

    my only thought, and it's only a thought, is if the vix is actually signaling a persistent complacency, a topping bullishness in price expectations, rather than the trend will actually be up or down...yet -

    but, as always, we'll see ;-)

    thanks again