Weakness Confirmed ~ The Risk Averse Alert

Thursday, August 19, 2010

Weakness Confirmed

Today's weakness resulted in something unexpected: technical confirmation indicating weakness is increasing. I was rather expecting technical divergences indicating some measure of underlying strength building, thus raising the likelihood that, highs reached earlier this month might be exceeded (how ever slightly) during the market's anticipated, upcoming bounce.

So, let's consider the possibility the market's forecast decline slated to challenge March 2009 lows, indeed, has begun...


As you can see, RSI confirmed today's decline and MACD fell ever so slightly into the negative. These both indicate weakness is persisting.

Likewise, that today's volume exceeded volume over the past week while last week's losses were being consolidated further indicates weakness is not diminishing.

Still, today's volume was in fact a little lighter than that coinciding with last Wednesday's gassing (8/11/2010). Thus, selling precipitating the market's decline over the past two weeks apparently is becoming exhausted: a conclusion in keeping with yesterday's observation that, long equity positions are being hedged to a degree suggesting a bounce might be in store.

So, the fifth wave of five waves down from August 9th peak appears to have unfolded today. These five waves lower could mark the first wave down of five larger waves slated to challenge March 2009 lows. Either that, or another a-b-c "zig zag" down presently is unfolding (like what formed during the latter half of June, but one degree larger), with wave "a" completing today.

OEX 5-min

Just as wave ii filled a gap created during the formation of wave i, wave 2 might similarly fill a gap created during the formation of wave 1. This could result in major indexes bouncing right back up to the vicinity of 200-day moving averages (coincidentally enough).


Another repeating CBOE Put/Call Ratio pattern for your consideration, supporting the present outlook for a decent bounce straight ahead.

If my "you are here" on the 5-minute chart of the OEX above is correct, then the initial portion of the market's upcoming bounce could prove fairly indecisive. Likewise, the greater bulk of the expected move back up to 200-day moving averages could develop rapidly thereafter, and set up for an even bigger fall.

Whether this fall likely will produce wave 3 of (c) or another "c" wave in the formation of wave (b) presently is uncertain. I rather suspect the latter, yet the technical state of things at that moment is likely to offer some useful clues.

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Greg said...

Hi Tom,

Well at least the short ETF positions taken this time last year can now be sold for a long term loss and new positions taken in corresponding short etf's without a wash.

The next downturn is no doubt just around the corner but the FED has put the walk to get there in slow motion.

I'm hoping for a S&P run to 1080 before the real decline starts to take increased LT losses and position new shorts at lower basis.

Good luck to your trading!