Ready for a Pre-Melt-Up Mini-Meltdown? ~ The Risk Averse Alert

Friday, January 02, 2009

Ready for a Pre-Melt-Up Mini-Meltdown?

Gather 'round, kids. The man with the goodies is here.

Vote this leading stock market expert at FeedTheBull(Those of you old enough might recall an anti-drug commercial some 25 years ago starring a "pusher" who spoke that line. You can blame CNBC for my recalling it. They're pushing their new feature documentary on "business" and "economy" titled, "Marijuana, Inc: Inside America's Pot Industry." Is it an industry? Or just a logical follow-up to their last feature "business" documentary on high-end prostitution?)

Moving right along...

You might recall a couple weeks ago I refuted the bearish case some were making for the "rising triangle" that had formed off November's bottom. My reasoning was that underlying technicals (RSI and MACD) had confirmed the market's advance every step of the way higher. Thus, with no divergences on which to hang a bearish hat as well as a host of other positive technicals ... I saw no reason for concern.

Today, this insight was vindicated...


The market's advance to a new, post-bottom high destroys any possibility a bearish "rising wedge" had formed. End of story. Case closed.

And lookie there. Today's burst higher was once again confirmed by RSI and MACD.

However, you still might need to wait on the melt-up I have been projecting. Wednesday, I detailed reasons for caution with commentary on the Volatility Index. Now, today, consider this...


That's what I call divergence heaven. You might duly note how each occurred at rather decisive inflection points over the past year.

I am not at all inclined to characterize the present moment the same. As I just indicated, today's advance coincided with underlying technical confirmation. The NYSE McClellan Oscillator likewise did the same. So, the market likely has not reached a decisive turning point.

Yet the [bearish] divergence noted on the NYSE Bullish Percent Index chart above strongly advises caution here. Hence the "best guess" near-term projection you saw drawn on the chart of the NYSE Composite above. Likewise, a reason for banking profits in ProShares Ultra ETF positions today. (I sent out Trade Notification just after 11:00 a.m.)

We also should note volume on the Big Board today. It came in lighter than Wednesday. You might think this subtle and excusable, particularly given yesterday's New Year holiday. However, it confirms this week's advance likely will be reversed over the days ahead...

NYSE 5-min

You see very typical RSI performance coincident with a 5-wave advance ... both in the five waves since Monday's bottom (12.29.08), and the five waves unfolding today (forming wave 5). Much as I indicated in today's final Mr. Market Twitter post, the 5-wave advance beginning Monday appears to complete a "c" wave of a corrective pattern that began to form following the market's initial launch off bottom on November 21, 2008.

This corrective pattern is projected to continue over days immediately ahead and lead the market lower.

Now, in addition to today's lighter volume and price-RSI divergence (relative to Wednesday, 12.31.08) ... I found further confirmation today's trade more likely ended the present move higher, than represented a "breakout" on the way to a melt-up.


Ever so slightly the NYSE Advance-Decline differential came in today. This simply serves to further confirm the wave count indicated above (i.e. five waves up from Monday's low).

You also see something of a larger technical divergence here, too. If ever there were a day when a surge to new high ground should be accompanied by broadening participation (such as the NYSE Advance-Decline differential would reveal), would not today have been a likely candidate?

Instead, the NYSE Advance-Decline differential gives the appearance that, the market remains trapped within the confines of the consolidation that began following its initial advance off bottom on November 21st.

And so, there's much reason for caution here...

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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