Buy the Dip Begs a Bigger Fleecing ~ The Risk Averse Alert

Friday, October 19, 2012

Buy the Dip Begs a Bigger Fleecing

What to make of a NYSE Composite Index falling 1.41% while the NYSE Bullish Percent Index rose 1.19%...

How many times today did someone take to the airwaves and advise we buy the dips? Well, it looks like someone did. Yet now this also looks like bad timing, not to mention bad advice. Following today's gassing the corrective wave thought forming since September peak rather seems to point the market lower here, and stat. Bad advice because the collective howl to buy the dips seems likely to grow as a rising wedge forming off October 2011 bottom completes over upcoming weeks, ending the market's counter-trend rally since March '09 and ushering in what is expected to be a nasty fall immediately thereafter (beginning a trip lower targeting major indexes to levels last seen in the 1987-1994 period).

By the thinnest margin did the S&P 500 close the week below its 50-day moving average. This is an ominous development in light of a CBOE Put/Call Ratio and Volatility Index whose respective momentum measures are both positive and pointing higher. Volume's modest pickup likewise is ominous, as well as fitting. Today prices fell by more than their own weight. There was a decided move for the exit. Nothing overwhelming, no doubt. Nonetheless nothing welcome, either, particularly when hanging in the balance is a precariously levered banking system, e'er in need of happy meals served at the Fed by the billions per month. All is fitting the moment from the perspective of an Elliott wave count whose bias should find technical evidence of exhaustion but further increasing.

One subtle way we see this the more now is evidenced by both major NASDAQ indexes today falling below respective rising trend lines extending from October 2011 bottoms. Both $COMP and $NDX, having risen above their 2011 peaks this year—twice for good measure in fact—quickly are fading and this rather precariously. Yet the NYSE Composite Index is nowhere close to penetrating this same trend line and in fact is holding well above it. Still, though, has $NYA so far this year failed to rise above its 2011 peak. This in spite of an NYSE cumulative advance-decline line otherwise still relentlessly increasing. All the while, too, NASDAQ's cumulative advance-decline line remains in its death spiral. Little wonder, then, NASDAQ's majors would so soon be precariously fading, while the NYSE Composite's juice shortage in the face of so much love rather stands judged, as ever, and even increasingly so, the poster child of a truly exhausted market whose anathema is any sentiment resulting in a pickup in selling.

How, then, to read today's decided "buy the dip" evidenced by the NYSE Bullish Percent Index' unusual increase occurring in spite of a declining market producing one of the worst NYSE advance-decline readings since early-June? Does this not seem a manifestation of that ages old question asking, when everyone is in, who else remains to bid the market higher? "Everyone is in" finds "everyone" buying the dip at what could be for the moment the worst time.

If I had to pick a "you are here" from the recent past, then look to early-April. It was then, too, that 50-day moving averages were being challenged from above, while [fading] momentum was poising to turn negative. Not coincidentally, then and now also are seen respectively marking the early phases of the two corrective waves within the 5-wave advance forming a "rising wedge" off October 2011 bottom. Still early in the transition to the 4th wave we rightly find a notable measure of positive underlying sentiment emboldened in the shadow of the completed 3rd wave and inclined to buy the dip. Although not yet likely to be proven entirely misguided, soon enough might this sentiment become a growing chorus and serve only to freeze many a money manager in the wrong mindset even as wave C down from Y2k peak begins its destruction as soon as sometime over the next six months.

Word on the Street
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