A Top, A Scary Drop, and A Bigger Bear Market Bounce ~ The Risk Averse Alert

Friday, May 01, 2009

A Top, A Scary Drop, and A Bigger Bear Market Bounce

Could Thursday have marked top ending the market's advance since March '09 bottom, setting up what might be a steep decline in major stock indexes?

This, it seems, is quite possible...


Well, much as anticipated, the past ten days since April options expiration (4.17.09) proved less positive than the prior ten days.

Volume tailing off ... RSI and MACD diverging ... these likewise agree ... top could be in.

(By the way, the projection drawn above is not to scale in time ... but in price it is ballpark what might lie ahead.)


Judging by behavior of CBOE Put/Call Ratio MACD at highlighted instances over the past year and a half (in a bear market, like now) ... you might conclude the current period is fraught with more downside risk than otherwise seems apparent.

Here's where the S&P 500 stood in '08 ... so you can get a feel.



And while we're looking longer-term, consider how a sideways trade ... like mid-July through mid-September '08, but narrower, top to bottom ... quite reasonably could prevail over the next 2-3 months.

SPX 5-min

If top is not yet in, then it is close by.

Regardless, an Elliott Wave possibility calling for steep selling finds supporting evidence in the options trade. I might be Mr. Short Ultra ETF again soon...

(scroll down toward bottom and get an insightful read)

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The Mad Scientist said...

Do you not find it fascinating that despite everyone expecting the market to go higher...most believe this is a bear market rally?
AAII bearish sentiment rose as the market moved higher..another good sign.
I too personally feel the market is close to a near term top mostly based on the volume we are seeing.
Great Blog BTW.

TC said...

Thanks Mr. Science.

I'll be honest. I think the sentiment read has gotten more challenging. First red flag came second half of last year. Relatively speaking, bearish consensus among investment newsletter writers was very high when the market came unglued Sept-Oct.

One normally can expect positive action when there is high bearish consensus during a bull market. But in a bear market, it's a different story. Keep this in the back of your mind. I referenced this distinction at the start of The Cramer Bull Trap.

The thing I find most interesting about the volume read is its dynamic since turning higher following the post-April options expiration [4-5ish percent] thud on 4.20.09. This decline was arrested with a bid willing to absorb an increasing supply of shares (4.21 - 4.22). It was as though buyers appeared intent upon driving the market higher with increasing voracity. Yet quite the opposite has been seen. Volume is contracting as the market drifts higher. Thus the character of an Elliott 5th wave.