Pieces of a Precarious Technical State ~ The Risk Averse Alert

Friday, December 10, 2010

Pieces of a Precarious Technical State

First, some on the ground reporting from Europe, with a glimpse at skyrocketing yields on debt issued by a couple exploding sovereigns...

Sometime over days ahead vulnerabilities in the Eurozone appear set to further challenge treaty arrangements bringing substance to the EMU. There apparently is reason to fear a breakdown of the Euro even before Christmas. No matter the timing, a mountain of CDS threatens to create a sink hole in the stock market. (One wonders, too, whether an accelerating risk of capital soon running short presently is behind cratering bond markets.)

$NAAD cumulative

Just how pathetically weak are the stock market's underpinnings is amply revealed by narrow upside participation on NASDAQ. Its cumulative advance-decline line — already badly failing its April 2010 peak — is at a level comparable to October 2008 when the NASDAQ Composite traded at 1550 (compare to today's close of 2637!). Thus, should that relative handful of leading, NASDAQ-listed issues hit the skids, there is nothing supporting even appearances that, animal spirits still live.

Indeed, NASDAQ plainly reveals a phenomenon pervading the stock market at large: behind its rise since March '09 is not increasing interest; rather supporting the market's advance simply is continued complacency finding owners holding (rather than increasingly selling) a growing list of dogs.


Here we find technical circumstance indicative of a top. It is mildly interesting, too, that present divergences noted above find conditions similar at mid-September 2009 top. Turns out that peak more or less marked the midpoint of the market's levitation ever since.

Also interesting is the behavior of the NYSE Bullish Percent Index over the course of the market's forming five waves up from March '09 bottom. Momentum (bottom panel) measuring change in the NYSE Bullish Percent Index during formation of waves 1, 3 and 5 substantiates a wave count suggesting the end of the market's advance since March '09, indeed, is at hand.


We see the same momentum substantiation of the Elliott wave count taking perspective from the NYSE Composite itself. Yes, we have seen the wave count similarly substantiated over the past year when a top was thought at hand. This fact, however, makes the evidence presently no less foreboding.

When taken together with the unmistakable view from NASDAQ that, animal spirits remain vanquished, five waves up from March '09 bottom all the more likely appear but part of a counter-trend rally occurring in a bear market that began in October 2007 — a bear market of the same degree as unfolded from 1929-1932, whose end targets levels last seen in the 1987-1994 period.

Notwithstanding the many technical negatives weighing on the stock market, though, the fact remains its levitation has been accomplished for some time now, and so, some months more of the same still remains possible. Yet any further levitation adding longevity to the past year's probably must first endure a dose of selling pressure whose impact could put respective 200-day moving averages imminently in the cross hairs.

Fast Money
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