A Doubting Thomas Ponders His Stock Market Melt-Up Thesis ~ The Risk Averse Alert

Friday, April 18, 2008

A Doubting Thomas Ponders His Stock Market Melt-Up Thesis

Believe it or not, I am not convinced I am an idiot for taking the view I have expressed over the past week. I will say, however, today's advance leads me to wonder whether March 17th's low might be more likely to hold up now. You are seeing why I couched my view of this likelihood as being a 60% probability.

But I will be honest with you. The 40% probability the March 17th low won't hold also remains in play. In fact, I am afraid a bout of selling worse than anything I have thus far considered could — I repeat, could — be in store. I will write about this over the weekend.

Contrarily, I also recognize how there are noteworthy similarities now to circumstances early in '03 when the stock market was bottoming. I will elaborate these, too, over the weekend.

Here's a little taste of my concern. There is something to be said about similarities now to price-RSI action and volume prior the crash of 1987.


I take you back to March 28, 2008, when I stated, "One thing I am fairly confident about is the stock market probably will not trade outside the range it has been stuck in for the past two and a half months over much of the month of April." So far, so good.

This thinking also was consistent with perspective I laid out a few days later in "Channeling Stock Market Bracing for Dizzying Melt-Up?"

The one big difference then, though, was I had no inclination whatsoever to consider whether the stock market might subsequently crash. Up until today I have been expecting a melt-up. Now I am not so sure.

Again, I will comment more on the big picture over the weekend. Just to summarize, then, I continue to suppose a market melt-up still is likely to unfold over the months ahead. However, I have some doubts about just when this might begin...

(Believe it or not, British Prime Minister Gordon Brown's visit to the U.S. this week only adds to my suspicion. I suppose one need fear the utter frailty of the global financial system to appreciate the potential for an historic political power play, this being an election year. For a better sense of such possibilities have a look at what the same J.P. Morgan interests who just took down Bear Stearns were up to in 1932.)

OEX 5-min

So much for the line of "resistance" that began with the S&P 100's gap open lower on Tuesday, April 8, 2008. (I drew this line on the above chart a little differently than in recent posts; this simply is taking into account today's gap open higher ... the third this week! ... not that I give any significance to this beyond what sentiment it indicates.)

RSI, too — with its registering a higher peak today than was registered when the S&P 100 gapped open higher on Wednesday (4.16.08) — suggests there's still higher to go before any turn lower toward March 17th's low might unfold.

And I do believe we will see such a turn lower before any stock market melt-up commences — that is if a melt-up is, indeed, in the cards.

(I still believe it is. As I have said, however, I am a little wary right now. I also regret having abandoned diffidence when I said, "there's a 90% probability the stock market will melt-up sometime during the months ahead" on April 3, 2008. I am saying this for the record...)

NYSE 5-min

You see a different RSI picture in the broader NYSE Composite Index than registered in the S&P 100. Namely, today's burst out of the gate did not take RSI to a new high (which, here, was set on Wednesday, 4.16.08). Right now, I simply consider this a red flag substantiating other red flags I have recently noted ... the likes of which elevate the probability the stock market will succumb to selling pressure over the short-term.

The first is the CBOE Put-Call Ratio. This measure is, in fact, much nearer past peaks in optimism, just prior to the stock market turning lower.

Then, on Wednesday (4.16.08) I mentioned "underlying weakness signaled by divergence forming in the McClellan Oscillator for both the NYSE and the NASDAQ." This continues. Oddly enough, though, the Oscillator's divergence is ever so slight in the NYSE and more pronounced in the NASDAQ. This stands in contrast to recent price action in both indexes. Now that I mention it, though, this contrast might be supporting the case I am presently making for a near-term bout of selling.

(Here's how I see it: the wider the complacency — justified or not — the broader the reach of buying; I'm sorry, but I still see the NASDAQ as the NYSE's little brother.)

One other thing to note about the McClellan Oscillator, and it is a cautionary one. The Summation Index for both the NYSE and NASDAQ remains trapped below the 0 (zero) line. This condition brings me to question my view about imminent prospects for a stock market melt-up. In fact, it could be suggesting things might get much worse before they get spectacularly better. Again, this weekend I will be elaborate the particulars surrounding this caution.


How many times have I claimed relatively subdued NYSE volume of late is a picture of both weak demand and underlying complacency? Well, that's my story and I'm sticking to it.

NASDAQ 5-min

Like the S&P 100, the NASDAQ Composite's RSI peaked higher this morning than it did when the index gapped higher at the open on Wednesday (4.16.08). Again, at first blush this suggests the stock market has still higher to go before turning south.

The channel drawn on the above NASDAQ chart, as well as on the S&P 100 chart presented earlier, are Elliott Wave formulations. The advance within these respective channels suggests a completed move [higher] might be in place.

Now, I might have a problem with this view because of RSI performance (such as I just mentioned). However, my [incorrect] attitude following last Friday's (4.11.08) and Monday's (4.14.08) decline was relying on RSI behaving a certain way, and yet this did not pan out. So, I do not want to entirely discount the possibility the stock market peaked today and might be heading for some trouble.

The more I look at the situation, the more I am concerned. I simply must say this in all honesty. I really am afraid my forecast for a stock market melt-up over the months immediately ahead might be premature. I just have this sneaking suspicion all the evidence suggesting the stock market is poised to break out higher, though legitimately noteworthy, is something of a trap. (See "Analysis Supporting My View For A Stock Market Melt-Up" to the left.)

In other words, I believe this bullish evidence could remain just as compelling following a move substantially lower. At worst, the evidence leads me to suppose a solid bottom would likely form not long after a [heretofore assumed improbable] sharp decline, were this to occur.

Come what may over the next couple months ... short-term, the stock market appears vulnerable.

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