Bigger Bounce Coming in the Market's Bottoming Process ~ The Risk Averse Alert

Monday, November 24, 2008

Bigger Bounce Coming in the Market's Bottoming Process

So, do you suppose the financial press will be picking up on my weekend piece detailing How Bankrupting the U.S. Treasury Makes for a New Bull Run? OK, so I lack Ben Franklin's diffidence...

Per the market's first two-day rally of the month, I have my doubts bottom is in. Indeed, the market's bottoming process seems likely to continue. Yet, still, over days ahead we might see a good deal of bullish excitement. The rally beginning on Friday appears slated to carry the market considerably higher...


The line I have drawn above simply is a point of reference. Whether it might stand as resistance is suspect. In fact, there's growing reason to believe the S&P 100 could rise above its election day peak ... hit the brick wall somewhere slightly higher ... then subsequently grind lower into bottom.

If you look at the RSI panel, you see colored dots in the January - March '08 period corresponding with various turning points in the market's bottoming process at that time. I also similarly marked the present period, basing my points of reference solely on RSI behavior.

Obviously the current period is extending over a longer time frame. This probably stands to reason, given the market's relatively steeper fall September - October versus December '07 - January '08. Thus, selling excesses can be expected to take more time to wash out.

What's really interesting, though, is considering the Elliott Wave Principle's "Rule of Alternation" in relation to price-RSI performance now versus earlier this year.

So far, you can see the S&P 100 in the current period behaving precisely in opposition to the prior period. For example, at the white dot the S&P 100 failed to rise to a new, post-collapse, reaction high in the current instance, whereas back in early-February it did just the opposite. Similarly, at the red dot the S&P 100 sank to a new low in the current instance, whereas previously it did just the opposite.

If this alternating pattern continues, then at the blue dot we should see the S&P 100 rising above its election day peak. Similarly, in the final fall to bottom yet to come the S&P 100 might fail to reach a new low.

Obviously, there's really nothing terribly compelling about this analysis. It simply stands as a curiosity worth keeping an eye on...

OEX 5-min

Seems to me the 5-minute price-RSI relationship is pointing higher. The S&P 100's rush to a new high during the last hour was, indeed, confirmed by RSI.

Likewise, at no time today did RSI register an extreme buy-side reading (i.e. markedly above 80), which would suggest a crazed surge of bullishness was sweeping over the market (something not typically rewarded by buying taking prices still higher, at least not immediately).

Finally, today's late-day action resulting in RSI falling back to a position reflecting a relatively healthy balance between buyers and sellers suggests the market's rally since Friday is not overdone.

And the Fast Money gang is not exactly ecstatic about the gains we've seen over the past two days. I consider this another positive...

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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