A Market Melt-Up Moment of Truth ~ The Risk Averse Alert

Tuesday, January 06, 2009

A Market Melt-Up Moment of Truth

Did you feel like a cat and mouse game was being played on the stock exchange today? I did. Caution seemed well advised. The threat of a steep drop remained in sight.

Now, though, I see otherwise...

Much as yesterday's trade canceled Friday's concern for a mini-meltdown, today's appears to have further raised the threshold to which the market might fall. There's little doubt ... strong buying interest abounds. Indeed, the market's anticipated melt-up appears imminent.

NYSE 5-min

Right out of the gate ... we saw a continuation of yesterday's underlying strength ... straight up to a new post-bottom high. Not exactly what I was expecting, huh.

We also see an upward bias in the NYSE Composite's consolidation of gains since last Monday's bottom (12.29.08). This [remarkably positive] development reflects strong underlying technical conditions.

Two things noteworthy about 5-minute RSI...

First, continued sharp transitions from buy-side to sell-side strength coinciding with modest market declines are seen confirming a sentiment stained by blood in the streets. Likewise, subtle price-RSI divergences preceding advances in the NYSE Composite appear a recent trend that's your friend.

Other positive developments include...

Technical divergences noted Friday (1.2.09) on the chart of the NYSE Bullish Percent Index are evaporating.

The CBOE Put/Call Ratio remains at the same critical inflection point noted on December 26th. At the time I indicated, "if in fact a 20-25% melt-up is in the works, it should get under way sometime during the next couple weeks, tops." This view appears spot on.

Moving right along, the Volatility Index is no nearer its 200-day moving average than it was last Wednesday (12.31.08).

Likewise, the VIX's divergence from where it stood on election day (relative to the S&P 500) has had no negative consequence. Fear of a sharp, near-term market pullback appears unwarranted. However, suspicion the market might hit a brick wall as the VIX approaches its 200-day moving average (much as was the case last February) remains intact. This still looks to occur upon the market's pending melt-up.

Just the fact the Volatility Index remains elevated suggests this launch higher could come at any moment...

(Oddly enough, the VIX's present condition receives little mention. Apparently, risk of volatility has not gone away. Thus, it seems reasonable to suppose the VIX might remain elevated even following a market melt-up. Undoubtedly, this bears watching still.)

And then there's the compressed spring symbolized by the NYSE Advance-Decline differential ... shown on December 29th as being poised for release. This measure's present position makes a strong case the moment of truth is now.

(For all you Elliott Wave geeks ... does it not make perfect sense wave 2 of c ... of an a-b-c higher since 11.21.08 ... is registering positive NYSE Advance-Decline readings? Does this not set up perfectly for wave 3 of c ... a "third wave of a third wave" ... typically the most dynamic? Indeed, it does.)

NYSE McClellan

The first thing you have to conclude from the NYSE McClellan Oscillator is "this time, it is different." Well, different than any time over the past year anyway...

To be honest I would sooner point out the present price-Oscillator confirmation of a new, post-bottom high in the NYSE Composite ... the Summation Index's acceleration into positive ground ... and the surge of the 5% and 10% Indexes as being supportive of the melt-up thesis ... rather than point out present similarities to meaningful market peaks over the past year.

If ever there were evidence a melt-up's moment of truth has arrived, the McClellan Oscillator provides plenty.

Finally, according to Fast Money's Guy Adami, three times last week 75% of stocks trading on the NYSE advanced on the day. This has happened only twice before in history. Both times were in 1938. Both times the market was significantly higher subsequently.

The stock market's anticipated melt-up appears at hand...

Fast Money
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