Product of a Lean, Mean, Broke Down Credit Machine ~ The Risk Averse Alert

Thursday, April 30, 2009

Product of a Lean, Mean, Broke Down Credit Machine

Here's a quick review and closer look at a bangin' against resistance NASDAQ Composite Index whose component companies apparently don't need a functional, infinitely expanding, wildcat financial system. (All other major indexes with toxic asset-laden component companies still remain over 10% away from their respective 200-day moving averages, whereas COMP is at the door.)


Judging by the Elliott Wave count labeled above, it looks like there will be just a few days more cheering hope for a new bull market before the fat lady sings. It is no strange coincidence upside volume on NASDAQ peaked during the formation of third waves within each of the Elliott impulse waves (i.e. waves 1, 3 and 5) that have unfolded off March '09 bottom.


The Advance-Decline differential on NASDAQ confirms the lift off March '09 bottom is losing steam.

As usual there is nothing set in stone about this view suggesting a top is at hand. Honestly ... losing steam is one thing ... yet derivative technical measures remaining buoyant (indicating continued underlying strength) is quite another.

This condition concerns me a bit. All the more because a consensus is developing that, there's nothing promising in business made leaner by dramatically contracting economic activity ... such as automatically indicates that better times are near. Therefore, according to this consensus view, reason to drive stock prices higher appears absent.

But what of financial burdens loosed by bankruptcy? Today it was Chrysler. Soon, General Motors likely will join the fray.

What further burden might be shed post- stress test?

And what of all of this is being rigged by masters of today's financial universe?

Time bought (if that's what bankruptcy offers) may not make for a new bull market. But a let's play make believe things will be better soon melt up? Or how about a short squeeze for the ages? We should not discount these possibilities.

Now, I don't think either likelihood is imminent (as in sometime this month). However, my suspicion drifts back to the week Lehman Brothers took a dirt nap. Thoughts entertain the possibility of similar action, upcoming ... but in reverse.


Keeping with NASDAQ (it doesn't matter which index you look at; they all performed similarly over the period following Lehman's collapse on 9.15.08) ... draw your attention first to completion of the move down from mid-August ending intra-day, September 18, 2008. We're just about there right now (but in reverse).

Next was one wicked reaction to the 50-day moving average. That's what might be due up ... er uh, I mean down ... because we're looking in reverse.

And then came the meltdown. So, in reverse might COMP similarly melt up, following a rapid sinking to its 50-day moving average?

Prior to meltdown, look how RSI behaved ... all the while remaining on the sell-side of its range (i.e. below 50). Might we expect something similar during NASDAQ's prospective reaction to its 50-day moving average (with RSI remaining on the buy-side ... above 50)?

Look, too, how MACD was firmly positioned on the sell-side of its respective range (i.e. below 0) throughout the highlighted period. Alas, it now is firmly positioned on the buy-side of its range.

Oddly enough, this thought would be mere, idle speculation were it not indeed highlighting a view I have been elaborating here for some time now. It's the one that has NASDAQ recovering to the vicinity of 2200.

So, once again I am putting forward a scenario that has the market rapidly recovering in a fashion fitting its extremely volatile setback last year. Just last Friday I was scoffing at the prospect of persisting with this particular perspective. However, consensus doubters have me thinking trading could become quite wild over the next few months. Watch Word on the Street below and judge for yourself...

Fast Money
* * * * *

© 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.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!