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Sunday, March 7, 2010

The Case for More Weeks of P2

I know I am guilty of being a Permabear and its tough to fight the bias, but I do try. Friday's internal numbers were certainly strong enough to support a continuing kick of P2 for a few more weeks.  Its hard to ignore particularly if prices can hold for a while and sentiment remains somewhat "neutral".  If Friday can be reversed and 1116 on the SPX can be taken out and closed under than the bearish outlook will look good.  However, the market has put some distance between that key pivot mark. So the bulls have indeed repaired a lot of technical damage inflicted on January/Feb selloff.

But in trying to be a good, unbiased Elliottician and tie all the markets together to try and anticipate possible moves, I  have to ask myself some of the following questions: "What would be the reasons to support a further move for P2 and how would that fit into the wave structure? Are there any loose ends that need to be taken care of in stocks or any indexes and all targets been met? Are commodities done with their run-up? Is seasonality going to support a grand ending to P2 for a few more weeks/month? Will a dollar wave (2) retrace equate to a final equity bullish push for stocks?  How about public sentiment? Will a persistent rally final convince them to jump back in at the top in more numbers than they have been and strengthen the survey numbers? Does social mood need more healing time prior to yet another disastrous crash? Can the debt bubbles run a few more months?  Will Gold breakout and hit $1300 inverted H&S target finally?  Are bear EW blogs still too popular for their own good? Does EW theory need to be thoroughly pummeled to the point where many who jumped on the bandwagon will be disillusioned and disgusted?  Will China make a new recovery rally high? Will financials briefly breakout and make it to at least a 38% retrace of its 2007 high? Shouldn't the transports and Industrials have some kind of decent non-confirmation event?

These are some of the logical questions I ponder and they are worth pondering.  There are certainly more.

As far as the wave structure goes, I think its best to stick with a triple zigzag-type formation and suppose that the final zizgag kicked off on the 1044 low and all the various lows that the world markets experienced at that time.  That would imply a simple ABC higher in some form or fashion.

This would mean that the "A" wave up will peak soon, likely early this week.

The best chart I can find to support this structure would be Australia. How the final ZZ plays out and to what levels and how quick is a matter for the market to decide.  I do consider P2 to be in "overtime" if indeed it still is.  So the moves would probably coincide with however long it takes for sentiment to lock into a "permabull status" and break every last bear there is (which by judging the comments lately, it is happening)

How would the moves look on our markets?  Well, the "A" wave should be topping out soon. Then a B wave would likely retrace toward the 1125 gap. If the 1125 gap closes it should only be briefly and certainly 1116 is the absolute key pivot support and we assume a move back in this area would be the B wave low. Closing the 1125 gap, even if only temporarily, would still be flashing overall market weakness though in my opinion. Closing under 1113-1115 is very bearish.  But as I said this weekend, Friday's gap up is the first key zone and a likely "buy" spot for the algo's. (if this final ABC scenario is in play that is)

Again, in review, here is the specific index price targets and the reasons why they are targets and why it supports this argument of a few more weeks of P2. Groundhog Day:

1. Oil has yet to hit my retrace target of $86-$90 (my blue box target). Seasonality and the call for "recovery" may push it higher.

2. Exxon Mobil has a big gap down at $71.3- $72.83. Thats a big gap for the big workhorse stock in the S&P500/DJIA.  It might want to challenge that gap as it stands out like a sore thumb if oil heads up. That would push the markets when other stocks will be showing weakness (small caps perhaps)

3. Sentiment. New extremes and sense of permabullishness needs to set in. The Jan/Feb drop saw bearishness spike too high too quickly. It  could take a few more weeks to produce a sufficient bullishness to be maintained in a somewhat elevated manner when the market starts dropping for real. We are getting there again certainly. Public may also get more on board. They need someone to dump it on after all!

4. The Nasdaq Daily Sentiment Index is still probably too low.  Needs further strengthening.

5. IYR has yet to challenge its breakaway gap at about 50.

6. The Value Line Index is very close to making an all-time high. It needs a bit more to do it. That would really screw people up and create bullishness.

7. McClellen Oscillator has made a new recent high (overbought at 75). It might need some more market moves to create a negative divergence on subsequent wave C highs.

8. Dollar has been consolidating likely for a  wave 5 of (1) move up soon. That move would correspond likely with the stocks'  "B" wave back after "A" wave tops.  Correspondingly, the Euro is consolidating likely for its wave 5 of (1) low.  Then after the Euro bottoms and Dollar tops, an Intemediate wave (2) retrace in each would equate to the final equity "C" wave to new highs.

9. Financials have yet to hit their 38% retrace from their early 2007 highs. This would equate to $17 on the XLF.

10.  Gold still has an inverted H&S target of $1300. I am not sure it is impulsing down as originally assumed.  Starting to look like a big corrective off the $1226 high.  They just started them new gold funds in early January. It is unusual that these funds start after a high is in place.  I am beginning to think gold has a $1300 possibility and we see it back it the news in a huge way.. This gold breakout would correspond naturally with an Intermediate wave (2) retrace in the dollar

11. China's ($SSEC) market could make a new recovery high. Although everyone assumes it topped out last fall on its recovery rally, I am not so sure. The wave structure is unclear at best. Its been largely treading sideways not impulsing and starting to look like a big darn triangle.

12. Some states are now leveraging up to chase high yield junk bond returns. If they wish to do so, the MM's will oblige them and let them buy the tops and chase it when they start falling.

13. DOW theory.  I would like to see a more solid non-confirmation event between the Industrials and Transports. I respect the hell out of DOW theory. All E-wavers should.

14. Seasonality.  Public has been couped up in a nasty winter and Spring was in the air this weekend.  There is room for a blowoff complacency top and a sense of relief finally that more than a year has passed since the dark days.  That is when it'll bite them again when they finally release their guard.  Like someone facing death battling grueling injuries alone (ever watch "I Shouldn't Be Alive"?), when they are finally found and "rescued" the adrenaline releases and they go and die anyway as they let their guard down. Thats sums up the stock market right about now.

So there are probably a few other good reasons. The least of which, the EW blogs, mostly bearish, are likely to be destroyed by the fans which has been something that has been much on my mind.  I certainly will not be turning bullish, if in fact all that I have laid out comes to pass. Some prominent ones (not EWI or Kenny) will turn very bullish dividing the camps.

So there you have it in a nutshell. I think Friday's gap up is the key to the whole formation.  I do think the markets will likely take a stab at 1148-1150 but will fall back as the market is quite extended going into stiff resistance.  If this "A" wave then falls back into a consolidation zone above 1125 gap and holds firm, (or the 1116 buy gap at the very lowest), it can then make another run and break through for a small move above it causing all hell to break loose. There is firm resistance at 1178 or so (I think off the top of my head) and there is certainly  resistance lower at 1160.

So again, this is the scenario that supports more weeks of P2. Groundhog day for the bears.

Again,1116 gap is the line in the sand. 1125 gap though is also a key marker.  If  they both break, this scenario loses much credibility.

Many have asked for the "bullish count".  So this is my scenario to fit the most bullish case I can come up with for now.
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