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March 22, 2009


Things are getting interesting. The week was dominated by the Fed's announcement of $1.2 trillion of new cash to be injected into the world, absolving miscreants and punishing those rare benefactors of society, the savers. Stocks used the news to move right up to the powerful SPX 805 pivot before pulling back into opex. The interesting characteristic of this move is what didn't happen: we saw absolutely no selling-on-strength in the spyders. Just the opposite, in fact. Friday's decline brought a modest amount of buying-on-weakness.

A week ago I indicated I would only be keen on playing the short side if we tested the 805 pivot in conjunction with SoS data. Well, it was an unintentional fib, as I decided to take on a small short on the test even without the support of the big boys. I took that play partly for amusement and partly to sharpen my senses to market action. The short was covered going into Friday's close because I have no taste for weekend risk, especially when by bias leans toward seeing a greater rally.

Neverthless, I anticipate more weakness in coming days. Bears' bellies are rumbling, and there is no better way to bring them to the table than a quick drop. Such action will also shake out longs who are keen on profit-taking after the incredibly sharp percentage gain seen in less than two weeks. This opinion is not formed purely by instinctive conjecture. Our quandary from Monday has been resolved in bull market fashion. The 10DMA on the McClellan Oscillator has returned to overbought territory while the put/call ratio has become even more overbought:

stock market indicator

stock market indicator

We will probably see a quick drop followed by a few days or a couple weeks of choppy action while these overbought conditions are worked off. The remainder of this major counter-trend rally will work higher in a fashion that will keep bulls on guard and bears too aggressive. Assuming we have, indeed, seen the end of the Primary Wave of this bear, its duration will be booked at 18 months, from October 2007 to March 2009. The corrective phase will not end in only a few weeks. I expect the rally to surprise and frustrate bears with its persistence, possibly lasting through summer and taking the S&P 500 back into 4-digit territory.

There is an alternative still in play, though given the reasons above, I put much less weight on the possibility. We could still experience a wave 5-of-5 decline that takes equity prices back to a test of the low or below. A move above SPX 805 is the only action that could negate such a scenario in the near-term, as it would cause an overlap between waves 4 and 1... a no-no in Elliott Wave Theory. Personally, if we see a move back to the SPX 730-740 pivot zone in conjunction with some BoW data, I'm going to go ahead an augment my longs without waiting for the move above SPX 805. What I'm not going to do is get heavily long in anticipation of a wave 5-of-5 decline. If it happens, I'll just consider it a fire sale for my longs.

"Okay," thinks the reader. "What is Doc gonna buy?" Well, index futures and probably a smattering of leveraged ETFs will find their way into the Docfolio when we se either heavy BoW data or a break of SPX 805. However, there are some assets I'm going to continue to acquire regardless. Assets that are shiny, seductive, and look great in jewelry or stacked up as bars.

gold chart

If gold can act this strongly through the beginnings of a powerful deflationary cycle, what will happen during the major counter-trend wave?

silver chart

A move back above $14 will and to confidence, but I intend to augment my pile of silver contracts immediately because...

platinum chart

stock chart

As you can see, my bias has shifted toward the belief that the short side of equities has exhausted itself or at most has one more swoon left in it. Therefore, I'd prefer to get myself positioned for a major counter-trend rally, and the best way to do so is to buy leading sectors... sectors that are undervalued and showing relative strength and/or in bull mode already.


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