Increasing Technical Weakness Context ~ The Risk Averse Alert

Monday, May 02, 2011

Increasing Technical Weakness Context

Despite suspecting a larger piece of humble pie than seems technically justified (given longstanding divergences in place) might be served be up over upcoming weeks, there is a matter of context possibly lessening the market's upside prospect as the final leg up in its counter-trend rally off March '09 bottom completes...

NYSE McClellan

Prior to formation of wave 1 of (c) [off late-June 2010 bottom] the NYSE McClellan Oscillator and Summation Index were improving — diverging — as the NYSE Composite was bottoming, thus indicating increasing underlying strength. Improving technical strength at the start of wave (c), however, was transformed to increasing technical weakness by the time wave 4 of (c) completed (mid-March). Indeed, both measures persistently registered negative technical divergences ever since the NYSE Composite traded above its April 2010 peak.

Now, five waves up slated to form wave 5 of (c) thus far appear to be unfolding in a manner revealing the coinciding NYSE McClellan Oscillator and Summation Index behaving similarly to the start of wave (c). Yet increasing technical weakness both measures presented over many months prior to March 16th bottom might diminish any similarity in the market's performance forward.

Considering this weakening technical backdrop leading to formation of wave 5 of (c), then, it seems the market might not be poised to extend higher in a fashion similar to what was seen from mid-September 2010 on. Rather, something more strained might be in order. The possibility that, a "rising wedge" could form wave 5 of (c) seems entirely credible.

Also supporting this prospect is every other technical measure similarly weakening for months on end. The market's further advance in completing its counter-trend rally off March '09 bottom could be a good deal more restrained than otherwise might be thought possible. Humble pie the market appears poised to serve up to this unflinching bear might be made more of time spent levitating only at nominally higher levels (much as has been the trend over the past year) rather than any significant lift higher in major indexes.

Fast Money
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