A Taste of Things to Come ~ The Risk Averse Alert

Friday, December 12, 2008

A Taste of Things to Come

Nothing like a little test of whether "patience pays"... Fortunately, we had a bead on today's trade.

Beyond this morning's projected price-RSI divergence, something else interesting developed...

OEX 5-min

Just before 3:00 p.m. yesterday (Thursday, 12.11.08), the S&P 100 gapped lower. This sort of development occurring intra-day is rather unusual. You don't often see indexes gapping intra-day ... outside of the market's open.

Following today's opening thud, the market's counter-trend rally carried the S&P 100 up to the vicinity of yesterday's gap, only to be turned away.

This graphically demonstrates a dynamic similar to what we can expect once indexes approach the range in which they traded during the week Lehman Brothers went belly up. I highlighted this in "The q Ratio ... Bullish Technicals ... and Near-Term Resistance."

Yesterday's breakdown came at a level that, all week had provided support. Long positions added prior to yesterday's break probably were closed out today as the S&P 100 recovered to its former support. Expect the same kind of reaction as indexes approach levels last seen during the week of September 15, 2008.

NYSE 5-min

The NYSE Composite similarly gapped lower yesterday.

Now, it might be something when an index of 100 stocks (S&P 100) gaps intra-day. But an index tracking several thousand issues? It is curious to say the least. Nevertheless, it should be noted yesterday's gap lower occurred at a "logical" place from the perspective of the Elliott Wave Principle.

I've mentioned before how "third waves" typically are the most dynamic. Yesterday's gap lower occurred during the formation of wave 3 of wave c of an a-b-c corrective wave that began late-Monday and ended today (wave c is delineated by vertical blue lines).

So, taken in combination with the coincident sell-side RSI extreme registered yesterday, what we probably have here is a stark display of "irrational panic."

You might find this view difficult to swallow. However, judging by how other underlying technical measures continue holding up remarkably well, there is a strong case to be made suggesting weak hands were drained yesterday, and again at today's open.

NASDAQ 5-min

Yesterday's intra-day gap lower in the NASDAQ Composite was filled much like the S&P 100 and NYSE Composite, but in this instance the index closed above its gap ... giving more indication the market is not as weak as it might appear on the surface.

Adding to this was today's relatively low volume of shares traded on both the NYSE and NASDAQ. This surprised me. Apparently, what sank the market at the open was not an overwhelming wave of selling. Rather, it appears more a simple function of a buyers' strike.

Strong hands stepped away and said, "Come Nelly ... fear the Senate's failure to bail out the auto industry ... pay no attention to the remaining $15 billion of currently approved TARP money yet committed." What a coincidence! Thank you very much.

Now, we didn't get an "outside day" like last Friday (12.5.08). No matter. All and all, prospects remain decidedly positive...

Fast Money
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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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