Building the Case for Death by a Thousand Cuts ~ The Risk Averse Alert

Friday, August 15, 2008

Building the Case for Death by a Thousand Cuts

The probability of an expected move taking various stock indexes to new lows for the year coming by way of a sharp sell-off might be lessening. The McClellan Oscillator for both the NYSE and NASDAQ Composite indexes suggests so much. Death by a thousand cuts instead appears the more likely manner in which July '08 lows will be taken out.

I originally thought the McClellan Oscillator's burst higher in July might be likened to what happened last December '07 (see Cramer's "Bull Run" Takes a Trip Down Memory Lane). That it is holding up positive longer than I supposed, though, probably means something different. Of course, I am only speculating.

A drawn out decline completing the stock market's multi-month correction certainly would be harmonious with the entire move lower over the past year.

Likewise, this final move lower, once it gets under way, might result in the McClellan Oscillator remaining negative for an even longer duration than was the case May '08 - July '08. You will recall the Oscillator's prolonged stint in the negative was considered a condition indicative of capitulation (see Unmasking the Stock Market's Capitulation). An extended stay below zero would be harmonious with Elliott Wave expectations for a correction-ending decline, too.

I might also anticipate the McClellan Oscillator registering notably shallow negative readings, though, over the duration. This would further the case for capitulation, indicating selling finally has been washed out.


The market climbs a wall of worry. So, when you are worried would you hold shares? Would you buy shares? No! You would sell shares and this would result in the volume of shares traded increasing.

However, precisely the opposite is happening. Therefore, a case for anticipating the present rally's failure is made.

Look for RSI divergence to form (much as occurred at the May '08 peak) before the S&P 100 turns over.

MACD appears near to reversing and returning to the negative. Of course, nothing is set in stone and things could evolve in a manner similar to early April '08. One notable difference now versus then, though, is no price-MACD divergence developed prior to the present launch higher. So, I am more inclined to think MACD's current position suggests a reversal lower is near.

Moving forward, though, we might expect positive MACD divergences to form as the S&P 100 sinks below its July 15, 2008 low. Already a positive divergence has developed ... comparing July's S&P 100 bottom to January's (not shown). Further MACD divergences forming as the S&P 100 bottoms over the weeks ahead would be favorable confirmation suggesting a melt-up likely will follow...

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kwaj said...

Yes, we are getting closer to agreeing! :) history shows september and october to be BAD months in the market...this year should be no different..things will roll over after the first of the month...nothing more than a bear market rally right now. good stuff tom!