Stock Market Approaches Bridge on the River Kwai ~ The Risk Averse Alert

Wednesday, April 16, 2008

Stock Market Approaches Bridge on the River Kwai

There's no reason to alter a thing about the outlook I have elaborated for well over the past week or so.

The Put-Call ratio still says look out below.

Today's rise also finds underlying weakness signaled by divergence forming in the McClellan Oscillator for both the NYSE and the NASDAQ.

Therefore, March 17th's low will, in all likelihood, be tested (and probably taken out) sometime over the next week or two.

OEX 5-min

April OEX open interest at the 630 strike is over 3x greater on the call side versus puts. The imbalance above 630 is astronomically greater. So, odds are quite good the long side of the trade largely shot its wad today.

RSI indicates much the same. First, there's simply little more immediate buy-side strength rightly to expect. All the strength to be had was milked today — RSI is at the upper end of its typical range.

Likewise, this afternoon's final lift resulted in the sort of RSI divergence one expects when a move has exhausted. Interestingly enough, too, today's late-day S&P 100 advance and consequent RSI performance look strikingly similar to last Thursday's (4.10.08). This was precisely the point of yesterday's S&P 100 - RSI analysis.

So, now we should expect the same outcome as followed last Thursday's bounce. Indeed, we should expect selling to markedly worsen. The extent to which the S&P 100 has risen and resulted in last Thursday's RSI peak finally being exceeded is saying so. This condition I contrarily anticipated would occur while the S&P 100 meandered within the narrow range it traded on Monday and Tuesday. That the S&P 100 has risen so strongly — still remaining below last Thursday's peak, yet reaching this lower high on stronger RSI than was registered last Thursday — is but another red flag signaling there's trouble ahead.

Another gap open higher today... Obviously, the result was better than yesterday. But, did we see any marked increase in underlying demand or any notable decrease in prevailing complacency (resulting in increased selling into today's rally, out of fear), of which I have written about on a number of occasions recently?


Nope. The volume of shares traded today, relatively speaking, remains suspicious.

Just a couple more days to wait it appears (extending through Friday's expiration) and we might just initiate a put position.

Although not every comment expressing some anticipation I have made of late has proven eerily accurate, the gist of my outlook has remained with an eye on the March 17th low ... and, still, nothing changes my sense about the 40% probability I have given to the likelihood this low will be broken.

A Graphic Metaphor of the Moment, Start to Finish

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