Right on Cue, Young Lazlo ~ The Risk Averse Alert

Tuesday, July 05, 2011

Right on Cue, Young Lazlo

In case you're wondering how I go from a couple weeks ago supposing five waves up from late-June 2010 were not complete, but rather in the midst of forming the fourth of five waves up, to now supposing the end of these came on May 1st, 2011, the simple fact is the market's performance these past two-and-a-half weeks rather advises this change in perspective.

First, following the launch off June 16th bottom, the market's June 23rd throttling (identified a capitulation) had the effect of decreasing the likelihood that, the fifth wave higher from late-June 2010 had begun on June 16th. This issue was raised in the context of comparisons to both the first and third waves previous. Neither of these early in their formation was ever so decidedly challenged.

Then, last week. Nothing more than was said on Friday need be added. The "something's not right" cake baked these past two years was smothered with icing last week. That today did not take a knife to it is of no consequence. Complacency revealed by still contracting volume is like a sharpening stone preparing the knife for a plunge whose effect all too likely will be devastating.

Not a whiff of fear is detected, however. All seem rather sanguine, if not oblivious, toward persistently building risk in credit markets, particularly of the European variety.

Back in 2000 there was Jeremy Siegel pumping Dow 36,000. Today there is James "the wild hair club for men" Altucher calling for Dow 20,000 within the next eighteen months(!).

There is nothing new under the sun, said King Solomon. Right on cue, young Lazlo. Right on cue.


With shoulder symmetry being prerequisite in the formation of a head-and-shoulders pattern, this according to Edwards and Magee in their "Technical Analysis of Stock Trends," we could expect a little more cheap love from Chicago coming New York's way before Wile E. Coyote discovers he's gone over cliff's edge.

However, rather than an anvil following the hungry hunter down, we should instead expect a locomotive leading a train wreck into the abyss. Seeing that, "Hedge Fund Giants Are Coming Up Small This Year," one might look forward with great anticipation this coming earnings season to what the ├╝ber levered have done.

SPX 15-min

More of the ingredients in the "something's not right" cake are seen via relative strength measured at short intervals (here, 15-minutes) over the entire duration of the market's advance last week. Definitely an Elliott third wave's character is revealed.

Relative strength today took out its low set during formation of wave ii of c [of 2 ... of five waves down from May 1st top], so wave iv of c might have completed today, thus leaving wave v of c for tomorrow.

Standing by my conclusion Friday, the market's initial turn down could be rather steep, yet downside penetration of the prospective head-and-shoulders top's neckline might be some weeks away.

Did you see what the CBOE Put/Call Ratio did today? Truth is long equity is not nearly hedged enough (yet an elevated put/call ratio does provide evidence that, neckline penetration probably is some weeks away)...

Fast Money
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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.

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