Confirmed Ominous ~ The Risk Averse Alert

Thursday, July 01, 2010

Confirmed Ominous

Here I am preaching, "prices can fall of their own weight, but it takes buying to put them up" and just look: they've been falling like a stone since peaking on Monday, June 21st. Not only that, but selling urgency has increased this week, as seen via heavier volume relative to that which traded over the course of last week's decline.


Yesterday I spoke about "selling exhaustion" as evidenced by lighter volume presently registering as indexes fall to lower lows — this relative to late-May, and then May 6th's flash crash before that. Yet truth is, too, volume this week exceeds that in early June (ever so slightly) when late-May's intra-day lows first were tested. Thus, the market's move lower this week is confirmed ominous: fear evidently is growing.

Momentum's state (MACD) is again like late-April — decidedly turning over. This time, though, MACD is on the sell-side of its range (i.e. below 0). Ominous! Danger, Will Robinson.

Still, a brief period of stabilization — much like occurred late-April just before "the machines took over" (yeah, right) — appears near the horizon.

OEX 5-min

By "near the horizon" think something along lines of a summer morning's first faint sight of light when birds start singing. There certainly appears more downside remaining before a counter-trend rally stabilizing momentum might develop, as anticipated, in a fashion similar to late-April.

First, we must see 5-min. RSI improving. Relative strength associated with a fourth wave versus a second wave typically will show an increase (that is as five waves down unfold). We have yet to see RSI better last week's best(!), meaning there has been no sign yet of bottom in the course of this week's decline, and thus the market's decline since Monday, June 21st.

RSI improvement over last week probably will happen tomorrow, though. Yet this only will set up one final move lower producing an RSI divergence relative to Tuesday's worst (June 29th).

Is there any chance what is labeled 1-2-3 above instead might be waves a, b and c of wave (b) of (2)? Maybe, but it's doubtful. Today's price recovery off bottom fails to impress possibility wave (c) of (2) has begun to unfold.

So, it's likely that, either wave a of (b) of (2) presently is unfolding, or wave 1 of (3). No matter which it is, following an anticipated, upcoming bounce serving to stabilize [declining] momentum, a sharp sell-off then will follow. Whether this coming swoon forms wave c of (b) of (2), or wave 3 of (3) ... dynamic, powerful and lucrative its impact quite likely will be.

Fast Money
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