No Game Changer ~ The Risk Averse Alert

Friday, October 07, 2011

No Game Changer

There's a good chance this week's rally more or less coming from left field could persist another day or two. Yet not the least altered is the market's unanimously weak underlying technical state. So, this week's turn from the abyss is seen only delaying the market's fall into it. Indeed, the prospective view forward presented last Friday remains entirely intact...


In projecting prospective formation of wave b of b of (2) a week ago its downward bias was assumed at risk of being more pronounced. This week's surge higher notwithstanding, this connecting wave's downward bias remains intact. Not that this disposition, in and of itself, is of any significance. Yet given what has transpired and what is projected, the market's negative technical state finds fitting weakness displayed in price action since September 22nd (when wave b of b of (2) began).

The a-b-c wave down from September 20th peak — this forming wave b of (2) — finds an interesting recent period during which the market's technical disposition was similar. Specifically, the May-June 2011 period.

Momentum's similarity (bottom panel) appears particularly ominous. The further depths to which the market is projected to sink is technically well-qualified by the fact that, momentum has begun a slow turn downward starting already in negative territory (i.e. below 0).

A negative relative strength divergence (top panel) occurring just prior to September 20th's peak appears to precede a second negative divergence developing right now, as the S&P 500 reaches a lower peak. All the more negative is relative strength's confirmation that, sellers remain in charge.

One thing in passing before I get to my final bit of chart read...

Back in early-August I noted when the S&P 500's relative strength reached the vicinity of what had been an "oversold" reading since March '09 bottom (around 30) that, back in early-June this same circumstance did not promptly lead the market to bounce. Rather, quite the opposite. The market continued to sink, while the S&P 500's relative strength hugged "oversold" readings.

Well, August is history, and most important, historic for the damage done. Yet in the context of the past 2+ years in particular here we are still stuck in fairly "oversold" relative strength territory. Much as June and August demonstrated "oversold" doesn't matter, further weakness on a grander scale should be feared with relative strength's continued weak disposition.

Finally, about the dots drawn above...


Black dots precede third waves down, be they a "c" wave or a wave "3." Duly noted is the elevated measure of short equity positions hedged with call options, this particularly in relation to recent hedging of the same.

With a "c" wave down upcoming we might expect a notable bump in call option hedging of short equity positions right before the lug nuts fall off.

In case you're thinking this week's rally was something to behold — a game changer diminishing prospect presented above — bear in mind that, on the NYSE this week there were 1581 advancing issues and 1559 declining (NYSE Composite Index +2% this week), while on NASDAQ 1487 issues advanced and 1243 declined (NASDAQ Composite Index +2.7%). More evidence that, all things are not what they seem. No game changer. Confirmation of underlying weakness.

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

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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