May Day! May Day! ~ The Risk Averse Alert

Friday, July 01, 2011

May Day! May Day!

If you're up to it, a "Bad Moon Rising" will set the mood...

To say I am bearish is an understatement. That's because scarcely, if ever, have I been more sure that, a nasty turn lower could be imminent... $SPX Besides today's conspicuously meager volume only the more exposing the wall of worry non-existent, today's advance raises the matter of symmetry of a right shoulder versus a left in a head-and-shoulders top forming over the past six months: a view bolstered by the right shoulder's diminished volume in comparison to volume registered during formation of the head. Textbook distribution. All the more does this distribution appear complete in light of momentum's fade over the interim (bottom panel), with MACD lifting back up to its "0" line this week (after having been more negative than at any time over the past year) just as the right shoulder's top is reached. Given its strong lift this week, momentum likely will turn positive, rather than be turned back into the negative as first was thought. Yet as the right shoulder's down side imminently forms, momentum should quickly flatten out after a brief stint positive and then turn negative again. Although the "neckline" of this prospective head-and-shoulders top might not be penetrated for a few weeks or so, imminent decline's initial phase could be decisive nevertheless, thus rapidly halting momentum's strong rise this week. Now, observe the three [lower] peaks since May 1st top highlighted above, and contrast these with the Volatility Index measuring fear... $VIX Er, uh, rather, measuring fearlessness. This while the CBOE Put/Call Ratio remains in the same ominous position as yesterday ... a position similar to May 2010. VIX momentum, too, is a study in context (lower panel, above). Volatility appears well-poised for a sharp increase. $NYAD 10-day v 200-day MA Your mood for study now set, let's move right along to Elliott wave-related considerations. Five waves up from late-June 2010 bottom are our start. Consider technical conditions coinciding with each wave revealed by the 10-day moving average of the NYSE Advance-Decline differential above: typical Elliott wave behavior is seen via fourth wave versus second wave weakening, and a third wave proving (barely) most dynamic. So, then, what does this week's lift to a level higher than any reached since late-June 2010 mean? Well, let's step back a second. During the market's advance over the past year — this forming wave (c) of an a-b-c corrective wave up from March '09 bottom — the 10-day moving average of the NYSE Advance-Decline differential never bested its best in '09, when wave (a) up from March '09 bottom was unfolding. Yet per this wave (c) up from late-June 2010, are not third waves (which "c" waves are) typically most dynamic? This one has not been. Which begs the question: could the best of wave (c) higher from late-June 2010 bottom still lie ahead? This thought is stopped dead in its tracks, however, with a preponderance of technical evidence simply not on this possibility's side. In fact, quite the contrary. Furthermore, animal spirits remain notably subdued. Indeed, they're waning. So then, what of the lift of the NYSE Advance-Decline differential's 10-day moving average to its highest level since late-June 2010? If not signaling extension of wave (c) up, then what within the realm of the Elliott Wave Principle could it mean? Quite simply, this presents technical character typical of the second wave in a 5-wave decline. Often, underlying conditions at this point will better those seen going into top. So, there it is. This is shown, too, via the NYSE McClellan Oscillator. Its outsized gain this week demonstrates the same, typical character associated with second waves in a 5-wave decline. Contrarily, though, the McClellan Summation Index is seen challenging its former area of support (now resistance), and this as the market poises to turn south. Long noted has been the Summation Index's deterioration. Consider this in the context of a head-and-shoulders top forming, as mentioned at the start. Interesting. SPX weekly Unlike the 10-day moving average of the NYSE Advance-Decline differential, which did not reveal a dynamic wave (c) up from late-June 2010, the S&P 500's relative strength at weekly intervals most certainly did. Not only that, but its reach exceeded RSI in the period leading to wave III peak in 2007. A "b" wave being an Elliott second wave, increased relative strength demonstrated during formation of wave B up from March '09 bottom versus that leading into wave III peak evidences typical Elliott wave behavior, then. Thus is my Elliott Wave Principle-related perspective substantiated. Adding is the fact that, "b" waves often leave the analyst to conclude "something is not right" ... as in how could weekly RSI be pasted to the buy-side these past 2+ years, reach heights exceeding those going into 2007 peak, this on the back of a rally following the nastiest sell-off in a couple generations, and persist while the S&P 500 remains well-short of its 2007 peak? This seems an abundantly qualified example of "something is not right." Technical strength revealed in formation of wave B up from March '09 bottom is out of place: it is too early for relative strength to be evidencing a buying interest so sure — fearless — about the market's prospects. Adding more weight to "something is not right" evidence substantiating wave B up from March '09 bottom is the just discussed disparity in the 10-day moving average of the NYSE Advance-Decline differential. Its relative stunting during formation of wave (c) of B off late-June 2010 bottom versus during wave (a) of B is "not right" because Elliott third waves typically are most dynamic. Indeed, the very lack of dynamism in this measure (i.e. advances-declines) sets the stage for wave C down. Strong underpinnings — broadening participation; animal spirits — necessary to sustain an advancing market not present, a steep decline finds waning capacity to subdue its development. My downside target for wave C remains the range in which major indexes traded during the 1987-1994 period. A wealth of technical evidence suggests this decline, indeed, has begun. How ironic its kick-off was on May 1st... May Day! May Day!
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