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Sunday, January 16, 2011

Sunday Observations, Why the Bullish Scenario Does not Fit!!!

For the last couple of weeks, most of the talking heads on the boob-tube and the Internet have entered into a Bullish euphoria, boosting that there is only one direction for stocks, and that is up. At this point, the Bullish Elliott Wave count circulating has the SPX in a 1-2, 1-2, 1-2, up, something that the internals just do not support. The middle part of a large degree 3rd wave should have the highest Volume AND Breadth of the entire move, and with this Bullish count, we should now be in that middle part, the point of recognition. But a quick and simple look at any chart shows the exact opposite, Volume is waning, and Breadth has now trended down close to even. The Breadth reading are the biggest spoiler for the Bulls, because the Advancing issues should be far out numbering the Declining Issues, not running down at these levels which are close to flat.
A case can be made on the RSI that we are in fact in a Bullish wave count because the extreme readings on this indicator should be at the top of the iii of 3rd wave, however, in a corrective A-B-C wave count, the "C" wave should act and feel just as a 3rd wave and it would be perfectly acceptable for the RSI to peak at the conclusion of the "C" wave. A great example of this can be found back in July 2010, at the bottom of the B after concluding an a-b-c down, or 2nd wave at 1010.91 where the RSI bottomed at 38.98, with NO divergence, that is the price action and the RSI bottomed simultaneously. Also of interest is the lack of Divergence back at the previous top in April 2010 where the RSI topped at 72.46 at the same time as the SPX, so, not having a Divergence on the price action does not guarantee that a sell-off will not happen, although having a divergence before hand is a great clue to a coming trend chance, it is not always required.
So if this is not a 1-2, 1-2, 1-2, up, that leaves one basic option, that this entire rally from 666 is corrective, but that also does not mean we will test the lows ever again, a case can easily be made for a contracting triangle that will last for the next few years, and yes, P3 is still on the table, although odds are low in my opinion. My main two options on the longer term count can be found in my New Years Day Predictions.

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  1. We are experiencing the biggest mass delusion ever...

  2. Thanks Mike. Very interesting observations and conclusions regarding the RSI. I was taking a look at the RSI on the SOX (semiconductors) and started having auditory hallucinations of Prince singing Party like its 1999!

  3. Here is my Gann Time and Price Vibrations chart Using the all important Jan/19/2010 Pivot High as the Starting Point ,,,,,,It's also the Mid Range of from the 1010 low to the 1292 High:

    So 360 degree's in Time and 360 Degree's in Price:

  4. Mike
    Nice post. You make a key point in regards to Breadth and Volume not supporting this move. In particular, we have been highlighting how NYSE 52 new week highs have been diverging with price whilst 52 new week lows have actually been increasing as we have been moving higher!
    We believe the market may be topping out looking across a broad range of markets:

    Great work as ever