Blow-Off Top Fail ~ The Risk Averse Alert

Wednesday, November 10, 2010

Blow-Off Top Fail

Last week I indicated that, the "rising wedge" thought forming prior to last Thursday's breakout instead appeared to have formed an Elliott corrective triangle — a wave form appearing just prior to the final move in the direction of the main trend (i.e. in the fourth wave or "b" wave position).

Also mentioned was the fact that, according to the Elliott Wave Principle the wave following a corrective triangle typically is sharp and brief.

Last Thursday's sharp lift higher now finds case supporting the move's brevity...

NYSE McClellan

First, seen from the perspective of the McClellan Summation Index, a pair of divergences belie the market's seeming strength.

Then, the McClellan Oscillator's declining trend and subdued absolute readings registered during the market's advance since late-August starkly reveal underlying weakness.

To now the Oscillator's subdued performance was thought opening the door to a blow-off top — something resulting in a challenge to the Oscillator's best during formation of wave a from late-June to late-July.

Yet that pair of Summation Index divergences loom large. Should these remain intact as wave c (from late-August) completes over the next few days, then the Oscillator's subdued behavior can be thought warning of a bad period ahead (supporting my continued outlook for an imminent throttling putting March '09 lows in the cross hairs).

OEX 5-min

Five waves (labeled i-v) set to form wave 5 of c are nearing completion.

Whether today's low brought end to wave iv of 5 of c remains to be seen. Today's worst RSI surpassing that during formation of wave ii is a yes vote. However, RSI's only slight divergence at today's low, as well as its subsequent, fearless dash to the positive side of its balance vote no.

Considering all things presented here today, a blow-off top does not appear to be in the cards. Looming is a strong turn lower whose technical substantiation projecting weakness only grows.

Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!