Fearing the Worst ~ The Risk Averse Alert

Monday, June 27, 2011

Fearing the Worst

I suspect that Friday's perfect absence of any follow-through whatsoever to Thursday's strong upside reversal following that day's rough start had a lot to do with the Russell Reconstitution. Likewise today's seeming casting to the wind any residual fear born of Thursday's whipsaw and Friday's disappointing letdown: a technically driven affair in a world where indexing is outsized business.

So, any "message" tech is thought to be sending, then, certainly seems better understood in the context of machinations surrounding Russell index re-balancing, rather than anything involving such sophistry as today claimed the euro-zone's debt crisis was stabilizing. One big tip-off that, today's rally was largely technical in nature was the moribund Microsoft leading the way (+3.7%).

SPX 15-min

You can see where I am going with the similarity presented above. The only thing in doubt is whether a further move higher tomorrow might be premature, being that last Thursday's bottom was confirmed (to the negative) by RSI at 15-minute intervals, whereas bottom the previous Thursday (6/16) was accompanied by a [positive] relative strength divergence.

Honestly, if last Thursday's presumed capitulation is followed by what appears conviction that, weakness since May 1st has run its course — an advance leaving last Thursday's low unchallenged, without any [positive] relative strength divergence first being registered — then maybe we should start fearing the worst.


Considering the prospect that, the market's counter-trend rally off March '09 bottom ended on May 1st with completion of wave (c), a preliminary Elliott wave count detailing the market's decline thus far might rightly find the first leg down gaining support at the 200-day moving average. Watch momentum (bottom panel) during formation of wave 2, then. It should remain on the sell-side of its range (below 0) while the market retraces some part of its initial decline off May 1st top.

With QE2 expiring, the euro-zone coming unglued and the President a sitting duck, what's there to hold the market up? With even the circus bankrupt, everyone's attention could soon turn in a direction largely unexpected, where, indeed, the President's sudden removal, one way or another, moves front and center.

Fast Money
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