Bid Succumbing to the Call of the Mojave ~ The Risk Averse Alert

Friday, June 04, 2010

Bid Succumbing to the Call of the Mojave

Hello lowest close since late-April top. That is except on NASDAQ ... where hope waxes eternal Steve Jobs and Bill Gates will combine to form their own global banking system, thereby saving tech from chaos slated to wreck the one we've presently got.

One thing today was not: overdone...

SPX 5-min

Seeing RSI compressed firmly on the sell-side of its range all day (i.e. below 50) suggests a third wave unfolded. The question is whether today's decline was the start of a large, third wave down from late-April top ... or rather a part of an ongoing [upward] correction off bottom on Tuesday, May 25th?

That today's negative RSI never became terribly extreme supports both possibilities...

Per the former, the prospect of a further throttling, straight ahead, is well-disguised by today's relatively modest sell-side RSI readings. The way is paved for a decline even worse than today's, coinciding with more deeply negative relative strength (as might be expected during a third wave).

Per the latter possibility, today's less extreme sell-side RSI compared with Tuesday's (June 1st) suggests selling pressure is modestly diminishing, this in the context of sideways trading over the past week-and-a-half. This divergence suggests wave "c" [up] of an a-b-c [upward] correction off May 25th bottom might be imminent.

What will it be?

The better part of me thinks the latter. Yet today's call of the Mojave ... slowly but surely evaporating the bid amidst supply too great for still another day's smooth transfer of shares into weak hands ... (revealed by relative strength's behavior during today's decline, as well as increasing volume) ... suggests best levels in the bounce off May 25th bottom might have been seen yesterday.

(However, this is not to suggest corrective price action off late-May bottom has completed. Rather only that a ceiling has been reached, offering resistance to any future upside challenges.


The above view approximately conveys the gist of it. The second wave of five waves down probably has not yet completed. The above depiction is meant only to suggest this likelihood. The actual path wave 2 takes probably will be more complex than there is space available to draw. (Yet a day like today's certainly raises the specter of wave 3 coming...)

Since today's bid increasingly evaporated without any climax in selling pressure (as evidenced by RSI on the 5-minute chart) it appears weakness winning the day is likely to be a continuing theme as wave 2 unfolds further.

As for wave 1 completing on Tuesday, May 25th ... following is an amended view of wave v of 1. (At the end of last week I was under the assumption wave v of 1 had not completed.)

SPX 5-min

I also should return to a possibility raised a few weeks ago (The Fat Finger Called Glass-Steagall) wherein the first and second waves down from late-April top might resemble in reverse the relative behavior of the first and second waves up from March '09 bottom.

This is to suggest the second wave presently unfolding might continue forming until the S&P 500's 50-day moving average is pulled down below its 200-day moving average. At that time we might more confidently suspect wave 3 down is imminent. In the interim the 200-day moving average should prove formidable resistance as the second wave continues developing — an event that could extend over the next several weeks.

So far — this week and last — this particular similarity (in reverse) to the June-July 2009 period has been unmistakable. Look for this to continue, then.

Fast Money
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