Speculating on a Playable Top ~ The Risk Averse Alert

Thursday, May 14, 2009

Speculating on a Playable Top

I must admit. The minute I saw the Volatility Index trading down today to a new, post-disaster low ... my sense about top being in became acute.


I simply fail to see how today's modest rally would result in a nearly 7% reduction in risk premiums. I read this instead as optimism misplaced.

So, per setting up for a final charge higher in a bear market bounce, rather looks like a consolidation of the first leg down is better expected here. In other words, assume top is in and the better part of the market's pending decline might be but days from unfolding.

SPX 5-min

There's a rough view of a 5-wave, Elliott Wave channel containing the S&P 500's initial move lower from its top on Friday, May 8, 2009.

The "prospective reaction target" (green line) notwithstanding, the S&P 500 could rise back up to 920ish before reversing. In the process severe underlying technical damage noted yesterday might simply repair ... and setup for a steep turn lower in the market.


A similar a-b-c Elliott Wave count can be applied to the S&P 500's counter-trend rally from November '08 through January '09. We see both RSI and MACD confirm this view. So, what next, then?

Well, first, let's admit technical conditions have in fact improved since January. There has been a pickup in volume (demonstrating genuine buying interest), and both relative strength and momentum have displayed a greater measure of buy-side strength.

So, we can assume odds the market might collapse over the next couple months are quite near zero.

But quickly shed 61.8% of gains made since March bottom?

Hey, now that's a distinct possibility. Technically speaking that is. Key right now simply is the fact some measures saw weakness turn up a notch yesterday ... while many other measures appear well-positioned to "catch up" in joining a weakening trend.

Bottom line, favorable conditions preceding a sustained move lower appear to be in place. If so, looks like it could be about time to establish speculative positions...

Fast Money
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