Stock Market Bottoming Process Has Begun ~ The Risk Averse Alert

Monday, October 13, 2008

Stock Market Bottoming Process Has Begun

Well, Shemp says sell, and you know what? This time I find good reason to agree. Of course, my basis for doing so is entirely technical in nature.

Originally I was inclined to believe the market might launch on a moonshot following today's rocket higher. I passed off the buy-side extreme 5-minute RSI reached during the final hour of trading ... thinking this was harmonious with my Elliott Wave outlook (i.e. wave (c) higher).

Likewise, skepticism expressed by Fast Money traders toward today's advance seemed a perfect setup to a melt-up over the next several days.

However, upon inspection of underlying technicals I am putting the brakes on any thought the market will just turn on a dime and proceed higher from here. As I indicated recently, "the market's bottoming [in all probability] will be a process." Today's advance pretty much seals the deal...


Today's rally had a similar effect on RSI as occurred when wave b of (b) was first taking form in early July '08. At that time the market's interim reversal was setting up the price-RSI divergence that registered when indexes bottomed on the July 15th.

Now, a price-RSI divergence probably will develop differently in the present instance. Still, today's substantial price-RSI lift indicates ... or maybe better ... suggests ... the market is not about to collapse (although this possibility remains open).

This time around, I suspect RSI will behave in a similar fashion as occurred from the January bottom to the late-February peak. Just how indexes coincidently behave remains to be seen.

You might notice a slight alteration in the Elliott Wave count. This accommodates the greater likelihood the market's bottoming will be a process.

During the formation of wave 4 of c of (b), look for RSI to rise higher than it did during the formation of wave 2 of c of (b) (which peaked on 9.19.08). Subsequently, wave 5 of c of (b) should form, taking indexes back down to the vicinity of last Friday's intra-day low (and possibly lower) and resulting in an RSI divergence (relative to RSI registered last Friday).

At that point the best buying opportunity in over a year should be at hand...

NYSE 5-min

There's today's buy-side RSI extreme. Quite a display I must say. No doubt a red flag. In a word it signals "imbalance." Although not necessarily signaling an immediate reversal, it nevertheless suggests a reversal is near. This similarly was the case when a sell-side RSI extreme was set last Monday (10.6.08).

The line just under 7000 on the 10-day chart of NYSE Composite above is about as high as I expect the present bounce to extend. Chances are some sort of price-RSI divergence probably will develop as top to the present bounce is reached.

The NYSE McClellan Oscillator was the one technical indicator alerting me to the probability bottom is not yet in. The Oscillator clearly diverged from the NYSE Composite when the index bottomed on July 15, 2008, as well as on March 17, 2008. So, at this point, given how decidedly the McClellan Oscillator has confirmed the market's recent decline, expect some kind of divergence to form here, too, before the market embarks on any sustained advance...

(Revealing who our "government" actually works for)

Fast Money
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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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