Day of the Still-Living Dead ~ The Risk Averse Alert

Tuesday, March 09, 2010

Day of the Still-Living Dead

At this point ... considering the hypothesis that, "there is a ton of equity whose intermediate-term prospects are likely terminal, [and so] every effort will be made to offload as much of this exposure as possible, while illusions of financial system solvency still can be maintained" ... we should look at the possibility that, the stock market's levitation affected particularly following last July's monster short squeeze might continue a while longer.

For the time being let's frame this possibility in the context of technical conditions relating to trading in NASDAQ-listed issues. First, it is from this perspective a solid case is made claiming the advance off March '09 bottom is but a counter-trend rally in a larger corrective wave that began in the fourth quarter of 2007. And it is from the same perspective — observing technical conditions coinciding with NASDAQ trading — a case supposing a further period of levitation might ensue.


So, the virtual trend of having to extend the formation of five waves off March '09 bottom — each instance technically well-justified — could prolong further. Yesterday's need was not the first, nor may it be the last.

Indeed, what's labeled wave 4 above (February 2010) might be but wave a of 4. In other words, the present advance might be but wave b of 4. So, the end of wave 4 of C of (B) might still await even a test of $COMPQ's 200-day moving average.

There's good reason to suspect this particular possibility, as well as its effect in extending the formation of five waves off March '09 bottom.

NASDAQ McClellan

All the way up to January 2010 top a deteriorating McClellan Oscillator accompanied NASDAQ's advance. Likewise, during the formation of each [higher level] fourth wave in $COMPQ's advance NASDAQ's McClellan Oscillator dipped ever further to the sell side, with late-October's low even exceeding that set at the March '09 bottom.

Yet what I labeled wave 4 yesterday did not accompany this [deteriorating] NASDAQ McClellan Oscillator trend's extension.

Furthermore, now that $COMPQ has reached new high ground, post-March '09 bottom, characteristics of a second wave (wherein technicals like the McClellan Oscillator might be expected to exceed readings prior to the first wave forming) no longer apply here.

However, still true is the rather elevated likelihood that, NASDAQ's McClellan Oscillator more likely would disguise an explosive, upcoming advance rather than so blatantly seemingly signal its prospect, such as is seen evident right now.

Thus, the conclusion "something's not right" — typical Elliott B-wave character — comes to light, and prospects highlighted here gain probability, it seems.

All told, though, the market's continued levitation could have $COMPQ alone still completing its counter-trend rally off March '09 bottom, while $NYA fails to extend any higher than was reached in January 2010.

Again, the present stock market-wide burst of seeming psychological optimism (as measured by the McClellan Oscillator for both the NYSE and NASDAQ Composite indexes) is seen a red flag, particularly given precedent over the past year.

And per today's sudden burst of "optimism" and "desire" for the still-living dead — C, AIG, FNM, FRE in particular ... could it be but more of the same game played as recently as December 2009? The rules go something like this: happily swallow the offering, or else everything comes down.

Cynical, you say? Well, were truth behind today's dash for trash otherwise, these still-living dead more likely would be breaking out, leaping into new, post-recovery high ground, rather than merely recovering recently lost levels. In other words, strong hands would have long before today been slowly accumulating these still-living dead, and seen the fruits of their patience pay a handsome dividend on a day like today. Instead, strong hands more likely shoved the shares of these still-living dead down the throats of those who can ill-afford to suffer another 2008.

Such is the world we live in: were there any meaningful sense of integrity left in the financial community, the still-living dead would not be trading at all.

Fast Money
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