McClellan Oscillator Trumps S&P Oscillator to Steal Mad Money Show ~ The Risk Averse Alert

Tuesday, June 17, 2008

McClellan Oscillator Trumps S&P Oscillator to Steal Mad Money Show

I see nothing deferring the possibility these next several days could bring a tsunami of selling. In fact, all the evidence seems only to raise the likelihood the stock market's trend downward is about to accelerate.

There has been one thing bugging me lately. I suspect it has been bothering you, too. It's the slow pace at which this much anticipated capitulation phase of the stock market's multi-month consolidation is developing. This decline is slated to take out lows set during January/March '08 and set up the stock market for a subsequent melt-up. So, come on already! Let's go!

Yesterday I alluded to this slow pace at which selling presently is developing ... noting the performance disparity between the large-cap S&P 100, the NYSE Composite and NASDAQ. This suggests a lot more selling probably is in store for the stock market...

...but it says nothing about when this thing will get cooking with gas.


Considering the circled areas, I might reduce the picture that says a thousand words to just two: Patience Pays.

The smaller circled areas probably are more revealing in the context of present expectations. However, a potential decline considerably larger is currently unfolding. That's why I also highlighted the early-October '07 through late-December '07 period.

Stick around as it might ... fighting the path of least resistance ... the S&P 100 invariably fell apart ... and with a vengeance.

So, in as much as the above circled areas contain but the beginnings of a much larger decline, the S&P 100's relatively slow descent from it May 19, 2008 peak might be seen similarly. The index's performance thus far in a capitulation projected to sink it to the vicinity of 520 is very much in keeping with its prior behavior throughout its multi-month correction.


This chart suggests a pending collapse is by no means out of the question. There are plenty of stocks in the S&P 100 yet to turn over. Oh, and don't let the warm temperatures outside fool you. It's like mid-January in the land of large-caps, where big time money managers roam.

Now, as you know, I evaluate several simple technical measures to substantiate Elliott Wave outlook. So, let's take a look at a few of these because they all say, "Look out below!"

First, I give you the NYSE McClellan Oscillator. (Per the various components presented on this chart, you can get a thorough explanation at DecisionPoint.)

Just to refresh your memory ... the McClellan Oscillator revealed the stock market's underlying weakness throughout the entirety of its advance since March 17, 2008. This I have amply noted over the past couple months (see "To Sir Elliott, With Love," for example).

Now observe how the NYSE McClellan Oscillator continues confirming the stock market's weakness. The oscillator is locked on the sell side (below 0) and has been unmistakably trending down since the NYSE's May 19, 2008 peak.

Last Wednesday in "Market Trades Like Being Slapped in the Face by a Woman," I indicated "the NYSE and NASDAQ McClellan Oscillators' ... present dive to the sell-side — clearly breaking down, and supporting the prospect of a pending market meltdown — sets up for a similar bounce to the zero line as occurred last October '07 ... just before the stock market decisively turned over." I also said, "Coincident with the recovery of both oscillators we obviously would expect both indexes to rise, too."

This projection has come to pass over the past few days. So, next up is the stock market's dive to the depths.

Now look at the 5% and 10% indexes in the bottom panel of the NYSE McClellan Oscillator chart. First, note how both indexes since May 19th are trending down in a similar fashion as occurred from early-December '07 through mid-January '08. I'm not sure if the current period's greater steepness means anything. It could.

Finally, observe how the 5% and 10% indexes are similarly positioned to where they stood right before the stock market came unglued in mid-January '08.

Confirming those underlying technical conditions I presented yesterday, the McClellan Oscillator and its components seem to be suggesting things are about to turn volatile.

And speaking of volatility...


Let's just say the Volatility Index is not saying the stock market is "oversold."

Likewise, we should expect the VIX to register its worst reading yet since the stock market began its multi-month consolidation last summer.


Back on May 30, 2008 I wrote, "Elliott Wave Guy Take Aim in Stock Market Turkey Shoot" and indicated how the CBOE Put/Call Ratio suggests the stock market's January/March '08 lows probably do not mark "bottom." This view strictly is out of expectation for a sell-off reflecting a correction-ending capitulation.

Thus, the Put/Call Ratio itself, as well as its MACD, should register readings worse than those put in at any time since last summer. As you can see, the door is wide open right now to a period lasting several days taking sentiment to the promised land...

From the Mouthpieces of Friend and Foe Alike to the U.S. Constitution...

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© 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.

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