For a few days last week, those of you who access The DOCument as thedocument.com (without the www) were treated to the web site of Willie Ziavino, a very talented musician from Ecuador. Although Willie is a good friend of mine, the redirection was not intentional. I host his site, along with a handful of clients from the remnants of my hosting business, on the same server as this web site. All the sites were recently migrated to a new server and a configuration error caused the glitch. Everything is back to normal now, but I hope those of you who were dumped onto Willie's site took the time to enjoy some of his songs.
So, how many times in your trading career have you held a strong opinion about your expectations only to have those expectations busted, and afterwards you found a couple indicators that made you think, "Why didn't I see that before?" I have many instances of such trading in my past which is why I like to step back and attempt to build a contrarian case, especially at times when my opinion is particularly strong or when my expectations are taking too long to unfold. As readers know, I have been pounding the table for a high-volume panic sell to end the Primary Wave of this bear market. Along with many others, I was taken aback by last week's 11% ramp, so I figured it was time to examine the contrarian case. Have we seen the end of the Primary Wave? Some evidence says yes. To wit...
Okay, so there is no hard evidence of an important bottom on the daily chart. We'll get to it. Note that the mid-point consolidation I marked is only a mid-point if you measure from the triangle breakdown rather than the test of the 65 DMA. If this pattern is to play out as a T1, we shoud turn lower immediately. Short-term RSI is very overbought. If stocks can ignore the high RSI reading and push higher directly from here, I will become more swayed toward the bull case.
While last week's action formed a weekly swing low, I would have been more impressed if volume had exceeded that of the prior two weeks. For the weekly chart to become more convincing, I think we need to see another weekly gain on advancing volume. Now for the good stuff...
The 10DMA of the McClellan Oscillator doesn't sink below -55 often in a bull market, but we've had 5 instances in this bear. In any case, a cross back over 55 has been a pretty reliable buy signal. Here are the points on the S&P 500 chart:
Given the history of this oscillator, we are likely to see the 10DMA puncture +38 before we see new lows in price, so one strategy may be to wait for a +38 reading in conjunction with heavy selling-into-strength data before attempting the short side again. I mentioned above that last week's reading on NYMO was the lowest ever at -80. There was one other time it came close:
Interestingly, a 22% bounce off the recent low puts the SPX at 805. Sound familiar? It is the number SPX cannot pierce to keep the current Elliott Wave count intact. If all our puzzle pieces were to fall into place nicely, we'd see the SPX work its way up to 800-805 over the next 2-3 weeks. At the same time, NYMO will revert to a +38 reading or higher, bringing some selling-into-strength. We'll then scare the bejesus out of bulls with a quick drop back to the March low before commencing the second major wave of this bear... a larger rally that should last weeks or months before we roll into the final, massively destructive wave.
Of course, when have stock market puzzles fallen into place nicely?