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September 2, 2010

Last Gasp

The stock market launched Wednesday what I expect will be a last-gasp rally before rolling over into a long and protracted decline. Topping processes are complex and are designed to keep traders holding onto hope before trapping them, psychologically-speaking, into riding losing positions to greater and greater loss. So how far will this last gasp run?

stock market topping process

If my interpretation is correct... that the cyclical bull was skewered at the April high... then the rally out of the July low is nothing more than a counter-trend affair. In that case, it should take an A-B-C form with the two rally legs being roughly equal in scope. Of course, these setups never work out to perfect parity. Otherwise, the game would be too easy! So we need to box the end-point with other tools.

First, cycle theory tells us the current rally should exceed the high of the July cycle (details in the Member Area). Taking out the SPX 1130 pivot will be an important development for the continuation of the bear because droves of traders are watching that level, and sentiment will spike sufficiently bullish to set up the next fall. I have no doubt that technicians will declare a break above SPX 1130 an advancement of the bull because price would be setting higher highs and higher lows or that some reversal pattern or another had been met. It will all be pure nonsense. The only level that can prove the bull alive is that tick above the April high.

Second, we have an important pivot just above our 120-handle projection and just below the congestion pattern formed around the April high. The reaction pivot at SPX 1175, formed as the market bounced out of May's flash crash, should contain price if the bear is upon us. A move above that level will raise the alarm that the bearish interpretation may be premature, but only a move above the April high can put the idea completely to rest.


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