Channeling Stock Market Bracing for Dizzying Melt-Up? ~ The Risk Averse Alert

Thursday, April 03, 2008

Channeling Stock Market Bracing for Dizzying Melt-Up?

Today's lower start resulted in the sort of RSI divergence that puts a floor under a decline. The S&P 100's subsequent rise took RSI to the upper end of its declining trend of the past three days. Then, the final hour's mild sell-off raised a red flag.

OEX 5-min

Best case it could simply be the S&P 100 will fluctuate in the range of the past two days. Then, we might expect a rise to the 650 area to complete this week's advance from 610.

Alternatively, there's reason to entertain the possibility much of Tuesday's (4/1) monster advance will sooner be given back than find the S&P 100 following through to 650. You get the picture of this via the markup drawn on the OEX chart below.


There's something about how the S&P 100 has been trading since topping yesterday that brings me to look back at action following last Monday's (3/24) top. This top, too, soon followed a monster, moon shot higher. Are we once again about to see another period where the stock market slowly drifts lower? Or, more generally, might the S&P 100 remain relatively confined over the next couple weeks by the channel defining the range it has traded over the past couple weeks?

I am likewise curious about those two instances late last year (circled above) when RSI dipped below 50 (demonstrating sell-side strength) ... and diverged as the S&P 100 temporarily bottomed ... then, as the S&P 100 recovered some of its prior losses, subsequently rose above 50 ... only to peak and fall lower in harmony with the S&P 100. Is a repeat performance possible?


Do I think it is likely?

Right now, no. If I could pick a number out of the sky, I'd say there is about a 60% chance Monday, March 17th marks the bottom of the S&P 100's multi-month decline. However, take this in the context of my belief there's a 90% probability the stock market will melt-up sometime during the months ahead. In other words, I am not positively certain the stock market has bottomed. Contrarily, I am utterly convinced the stock market will soon embark on a huge rally and leave last October's peak in the dust.

On Tuesday (3/25) I wondered, "... might [the S&P 100] fail to fall below last Monday's (3/17) intra-day low before exploding higher?" and opined, "[t]he longer-term view of the S&P 100 suggests this is possible." You can go back and look again at the S&P 100 chart that shows why, today, I suppose there's a 60% probability March 17th's low will hold.

Then, on Wednesday (3/26) I wrote, "The more I look at the big picture — the nearness to which all major indexes are to points at which, were they to fall below, the stock market might likely thereafter collapse spectacularly — the more I am persuaded last week's low [(i.e Monday 3/17)] represents something of a strong floor." This is to say that, should the S&P 100 sink below its intra-day low on March 17th, it probably will not fall much beyond it. So, that's a little qualification on the 40% probability of it happening at all.

Maybe you are thinking my analysis is moving all over the board? The discussion I am raising today is unlike anything I have mentioned over the past several days.

Well, this simply is the nature of the game. Nothing is set in stone, really. This is particularly true regarding probabilities over a short time frame.

Be that as it may, there's no harm entertaining different possibilities. Today's last hour of trading, by my analytical methodology, simply gives rise to the need.

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