Zeroing in on Pending Stock Market Mini-Collapse ~ The Risk Averse Alert

Friday, May 09, 2008

Zeroing in on Pending Stock Market Mini-Collapse

Each day ... I approach my analysis with skepticism toward whatever view I have most recently expressed.

That's how yesterday's "Holy Sammy Davis!" came about. I was doubting the view I published just the day before. There I claimed, "It seems probable a number of days will pass before the mini-collapse I am forecasting will commence." Looking at the evidence differently ... it just hit me. The top is in!

So, of course, today being a brand new day my analysis begins with skepticism toward this new view.

Now, for many weeks I have been anticipating major stock indexes, including the S&P 100, falling below their respective March 17, 2008 lows — this before a spectacular stock market melt-up ensues. None of this is new news.

My present doubt only questions whether the moment of truth is truly at hand. And I simply must conclude it probably is.

The March 17, 2008 low is in jeopardy — big time.

However, I also said yesterday, "It might just be January" ... thinking next week's May options expiration might be as devastating as was the week of January '08 expiration (if not more so). So, what say thee now? What has today's trade revealed?

OEX 5-min

A price-RSI divergence has developed since Wednesday (5.7.08). This suggests a bottom from which the S&P 100 might develop some legs, or at least some muscular function.

Monday could see an early pop taking the S&P 100 to the 645 vicinity ... and then an afternoon fade. Don't be surprised if near the peak, RSI exceeds the high it reached on Tuesday (5.6.08). In fact, we should expect this ... particularly if next week's options expiration is NOT to be just like January.


Let me just say this about January's six and a half percent collapse during options expiration week. An unusual number of options writers got their asses handed to them. A whole lot of wealth was destroyed ... at least enough to rattle confidence. And this has shown ever since.

You might look at this as background supportive of my outlook for the stock market's multi-month decline still having lower to go.

Wealth Destroyed + Rattled Confidence = Lack of buying support.

This is not necessarily the recipe for disaster (i.e. a mini-collapse); these are, however, all the right ingredients.

Question: Should a market near to bottoming and reversing spectacularly higher (as I have been forecasting) be subject to suffering the same kind of debilitating slap as January '08 during next week's May options expiration?

I think not.

How about the week after, with five weeks hence to recover?

Oh yeah. That would work.

Now, if there really is the kind of underlying strength scheming to put the hoard of cash on the sidelines (money markets) to work in the stock market, it seems there might be a vested interest to insure next week is not a repeat of January, 2008. Yet, I have little doubt a decline worse than occurred during January '08 options expiration week is at hand. So, the worst carnage from the stock market's pending mini-collapse probably will not unfold until after May OEX options expire.

It just stands to reason in the mind of this Elliott Wave Guy. Such an outcome would "fit" my outlook toward what has already unfolded ... and my forecast of what's to come (both the market's pending mini-collapse and its subsequent melt-up).


Here's a good picture adding substance to my assumption the stock market is lacking buying support. You see how, since the stock market's March 17, 2008 bottom and subsequent advance, the differential between advancing and declining issues traded on the NYSE has been fading as the market was moving higher.

What you really want to see is more stocks moving higher as the stock market moves higher ... not fewer. The differential between advancing and declining issues should be expanding, not contracting.

There's something else here, too. It supports my pending mini-collapse thesis.

Today was a rather weak performance in the stock market ... particularly considering there were only 203 more NYSE stocks declining than advancing. Now, some might think this indicates underlying strength despite the market's poor performance. I would offer this insight instead...

Imagine the carnage to come should this differential widen.

It's gonna be a turkey shoot...

* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!