A Chartfest at the Turn

We are right at the Oct5 turn window. As the market continues longer in its trading range, the odds of a top increase. We are closing on the point where the rise from the beginning of September to now becomes slower than the rise off the July 2 bottom. Let me run through a series of charts with a discussion of whether we are in a topping period which is about to end.

Bullish Arguments

The market today opened down and ran to the 1131 level, testing a bottom hit a week ago. Both the Dow and the S&P broke below last week's bottom, intraday. The bounce off it comforts the bulls by closing above a serious support level, but looking a week further back shows we are close to bifurcating below a two-week trading range. The prior test of 1132 bounced immediately in a V, but this one is stuttering along the bottom of the trading range. See chart courtesy Contrarian Advisor:

  

Carl Futia draws trendlines around this range in the e-mini and predicts a drop to the lower trendline (es1127) followed by a bullish bifurcation up. 

SlopeofHope has a fascinating guestpost showing a potential fractal pattern with the runup to the 2007 top, where we plateaued for a while before bifurcating up:

In a Fractal FInance view, the market is an order-seeking mechanism which runs in a thrust when it finds order, then pauses in a plateau as it seeks the next level. After the Fed's late August meeting where QE2 was made more likely, the market thrust up over three weeks then paused at 1148 on Sep22 and has sat in a trading range between 1150 and 1132 for the two weeks since, with one false break below to 1123 and another above to 1157. We have hit the upper range four times, and failed to break through on the fourth try. In a chaos theory sense, energy is now leaving the system.

Bearish Indicators

The SlopeofHope post notes that volume is not confirming the rally, and is more indicative of a distribution pattern than accumulation. Others have noted how the MACD is rolling over, a bearish sign:

The bearish consensus view, which you can read at sites such as EWTrends, is a break of 1123 will confirm the change of trend. If you look at this closeup of market action, you can see a potential bifurcation down forming. From a Fractal Finance point of view, it only needs to thrust below 1132 and stay there for a few days to confirm the change of trend:

The most telling technical indications come from the divergences across the major indexes. MarketThoughts takes on the 'pause before the next top' argument by looking at how the Nasdaq has already broken below the trading range: 

The STU tonight goes farther, and points out that the Nasdaq 100, which includes the most important Naz stocks, has closed at its lowest level in two weeks. Could be that the tech stocks, which have helped lead the September to Remember charge, are now signaling the October Surprise. 

The most important bearish indicator is in the Currency Wars: the Euro has now hit a level which the STU highlights as a "beautiful picture" of relationships for a top in the Euro. At an overnight $1.38, it has retraced 61% in both time and price from the April low of $1.19, and is right at the fourth-of-the-prior-third level (of the extended first wave down off the $1.51 high in 2009), a common turn point. With only 3% Euro bears, sentiment favors a turn. The change in the Euro's fortunes will of course reverse the Dollar's slide in the Dollar index, where sentiment is also decidedly ready for a turn, with only 5% bulls. 

Neely also favors a turn down in stocks. Neely sees us in a bullish wave up, but in need of a deep corrective wave. He has been counting the whole move off the Feb5 low as an ABC corrective pattern, with the A wave to the April highs, the B wave to the end of August, and the September to Remember Rally as wave 1 of the C wave. Time and price suggest a reversal here and a deep drop of at least 50-62% of the rise, but not to new lows and not below the lows at the end of August (1040). He speculates that wave C may take the form of a Terminal, which in orthodox wave theory means an Ending Diagonal - a five-wave pattern that breaks as an ascending triangle. 
 

Comments

[Columbia1]

Hey Yelnick, I have one chart I would like to add for the bears case
http://ewtrendsandcharts.blogspot.com/2010/10/so-you-want-to-be-bull.html

[yelnick]

Columbia - nice! Besides MACD, RSI and STO trending down. Looks like Columbia rules the waves! Thanks for sharing

[Wags]

I find it rather comical how the Bears still cling to the "volume is low" card in order to make their point about a rally being suspect, when in fact there has only been one single month this year where monthly volume in 2010 has beat out the monthly volume of 2009 (which was in May). If you traded VOLUME instead of PRICE over the past year, you'd be bankrupt pinning your hopes on a bearish case and have missed out on a ton of upside price action.

By the way, the WSJ had a lot of interesting "factoids" in the C-Section today in regards to volume and volatility. In fact, according to the TABB Group "High Frequency Trading" has dropped to only 53% of US stock trading volume this year, in contrast to 61% last year - - - far from all of the claims by the Bears in the blogosphere who have been touting HFT accounting for 70% of trading volume.

Also interesting to note, the average number of trades at TD Ameritrade fell to about 309,000 per day in August, from 484,000 per day in May. So much for Mr. Retail Investor being sucked back into the market and this current rally . . . Not!

In fact, Investors have pulled a net $69.4 Billion from domestic equity mutual funds since the end of April, according to the Investment Company Institute, a trade association for fund managers.

Over the same period, nearly $123 Billion has gone into bond funds, boosting the average daily volume in trading US Treasury debt by +26% this year, from a year ago. At nearly $500 Billion a day, Treasury trading volume has more than doubled in the past decade.

Just the FACTS folks.
Just the FACTS.

[yelnick]

Wags, interesting facts, but how do you explain then the fact that the market is sitting where it was almost a year ago? One year long trading range. Sure, an adept trader can try to skim pennies on the swings, but this does not look like a new bull has started since March 2009.

[EZ]

Carl Futia for the win on this one.

[Account Deleted]

Futures chart before opening bell : CLICK HERE

[Wags]

Yelnick,

The "market has been flat" argument that I continue hear the perma-bears in the Blogosphere defending themselves with is absurd. These are usually the types that believe there to be a strong correlation between the Economy and stock prices.

Funny how if you were to listen to the typical perma-bear, they can't figure out why the S&P isn't trading dramatically lower, down in the 900's because the Economy is so "weak", yet they have no problem at all discounting and dimissing where the market is today (all the way up here at 1150) saying that the market is basically "flat" since a year ago.

Sorry Bears, you can't have it BOTH ways. Nor is it the kind of comment that comes from someone that wants to make money, trading.

Apparently, the Blogosphere is filled with people that don't trade, but who would rather "pontificate" about academic type theories.

[vipul garg]

The very premise that longer index stays here and the more the chances of top is wrong. that is true at a top.at trend highs.
i think its 1200 non stop as argued earlier.

[Chuang Tzu]

I nailed it!

Posted by: Chuang Tzu | Monday, October 04, 2010 at 06:59 AM

Market pro's trying some scare tactics this morning with some shake and bake, I think the move up is going to fast and short.

May not make 1170, but 1160's here we come.

[Chuang Tzu]

Market pros got alot of people to "fold" their long positions or got them short yesterday making the market look terrible when in actuality was suprememly bullish underneath.

Its a game of poker the pros play well...

http://www.youtube.com/watch?v=FiH3Q6pg40k

[Mamma Boom Boom]

Chuang Tzu, you have to be careful. The peanut gallery will accuse you of 'bragging'.

[Chuang Tzu]

Posted by: Chuang Tzu | Monday, October 04, 2010 at 06:59 AM

Looking for the SPX to top out October 5-6 around 1170, +/-

Sell, sell, sell. Selling and taking profits into this strength.

[Michael]

Hey Vipul,

Did you see where EXAS is trading at this morning . . . Can you say $7.50!

"Stock of The Year"

:)

[Chuang Tzu]

you have to be careful CT. The peanut gallery will accuse you of 'bragging'.

My humble apologies. :)

But I am fist pumping over here, I knew this 10 week New Moon rally was somewhere out there.

[Chuang Tzu]

I'm gonna brag more if SPX can hit my 1170 by 11:30 am tomorrow.

Still holding some longs for tomorrow's open.

[Mamma Boom Boom]

>I'm gonna brag more if SPX can hit my 1170 by 11:30 am tomorrow.<

Ok, but don't say I didn't warn you.

[Mamma Boom Boom]

Hey DG, where's this market going now???

It's at a critical crossroad, tell these folks what to do.

[Grand]

Yelnick

Thanks for the plug. I didn't get a chance to respond to you last night with a different thought that is playing out now.

http://waveprinciple.blogspot.com/2010/10/10510.html

last night's thoughts on a back-to-back running flat

http://waveprinciple.blogspot.com/2010/10/10410-back-to-back-running-flats-and.html

[Roger D.]

Enjoy it while it lasts guys,the end is near. Maybe this week it ends or next but this rally should be sold into.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/799ef49c-fb15-4e19-9c1e-a221421de456

[twitter.com/DrBubb]

I am getting HAMMERED on today by the Gold Bugs - on my own GEI website! We are seeing the upside break of a trendline, and they are all over me saying they want me to "admit I am wrong," when I am still long gold, and have been speaking about a seasonal top in Gold on or about the 7th of October.

Why do some people want you to admit you are wring BEFORE a day arrives? Is it because they are desperate for confirmation of their position?

I take this as further evidence, that a TURN may be at hand. In stocks and in gold too. That means the Dollar too, folks. And, yes, I could be wrong.

[Chuang Tzu]

Yesterday looks ALOT like an X wave...

[yelnick]

Wags, as the USD drops stocks can float on air. Here is the S&P priced in gold: 

[Chuang Tzu]

This rally isnt done...its got about 2 more weeks.

Raising my target to SPX 1174

Yesterday's X wave was the key for unlocking this 11 wave Neowave pattern we are in.

[yelnick]

Dr Bubb, it is a fool's errand to try to pick a top. Fractal Finance says wait for the bifurcation out of the trading range. We haven't had it yet, either direction, although a CLOSE today above 1150 will be telling for the bulls, especially if it stays above for the rest of the week. Gold has not bifurcated down, and although the USD looked like it was bottoming yesterday, everything snapped back overnight. Euro may get to $1.41 first. 

Interesting piece over at The Big Picture today about gold:

http://www.ritholtz.com/blog/2010/10/who-is-john-galt/

Point: if the Fed decides to liquidate the excessive debt by issuing gold-backed securities, it would have to price the Dollar around $8250/oz to cover the monetary base (now over $2T). This gives you a fundamentalist level for the eventual value of gold. 

[Mamma Boom Boom]

DG, another hour has gone by and no guidance from you. Why are you hiding??? Is it because you don't have a clue???

[Chuang Tzu]

Follow me mamma, this chart is gold in the bank...

http://img827.imageshack.us/i/neotie2.png/

Final wave E hits on the Sun trine Neptune.

- signed Neo-Tzu

[yelnick]

Grand, thanks for the update! I check your site out several times a day. Like the calm, considered wave counts - without the attitude so to speak. You looking for a top around 1161?

[Mamma Boom Boom]

Thanks for the offering, Chuang Tzu, but I think DG should accept this responsibility. He gets so jealous when somebody else runs with the ball.

But where's he hiding? Another hour has gone by!

[TeddyK]

GOLD, bitches!

[DG]

"

Chuang Tzu, you have to be careful. The peanut gallery will accuse you of 'bragging'.

Posted by: Mamma Boom Boom | Tuesday, October 05, 2010 at 07:59 AM "

No, because he wasn't saying the market train was leaving the station while it sat still for 4 months, unlike you. He came in a few days ago, said it's going up and now it's going up.

"

Hey DG, where's this market going now???

It's at a critical crossroad, tell these folks what to do.

Posted by: Mamma Boom Boom | Tuesday, October 05, 2010 at 08:45 AM"

Path of least resistance is up. I already posted my chart on the likely topping levels almost two weeks ago.

http://yelnick.typepad.com/yelnick/2010/09/market-removes-false-break-neely-goes-bullish.html?cid=6a00d8341c563953ef0133f495228f970b#comment-6a00d8341c563953ef0133f495228f970b

The time for going long longer-term was late August. A person could go long now and have a stop under the Weekly low of the week of September 24th, but ideally that would be someone's stop who'd went long 3 weeks prior. Two other places for objectively putting a stop would be 1153.35 and 1133.63 (Since you're so smart, I'm sure you can reverse-engineer how I got those levels). Will either of those get hit? I don't know, but there are reasons not to be long any more if they do.

If a person wanted to take a position of fewer shares with a wider stop, the late August low would serve well. If the market is actually in an uptrend now, that low should hold.

There are no shortage of options for a bull.

For someone of a more bearish cast, there will be shorting opportunities as well, but I personally would probably only short off of new recovery highs, as measured from the August low. It's tough enough shorting an uptrending market without shorting based on the assumption that there will be follow-through down after a break off a new recovery high. That was what killed Neely last summer on the short side.

[Bill C]

My count updated: http://bdroppings.blogspot.com/2010/10/five-waves-completed.html

[Monster]

Yelnick, if Neely is correct, does it mean the bear market is after us?

[yelnick]

Neely currently is seeing an Terminal or ED to end wave C counted from the start of Sept (wave A was Feb to April, wave B was May to Aug). The shape of it is becoming clearer. HE had expected leg T2 to be a deeper drop, but it has been instead a flat correction and relatively shallow. He had to change that view since T! (Sep to Remember rally) has now slowed down too much and is slower than the Jul-Aug10 rise. Hence T1 ended and T2 so far has been a flat correction. This means T3 should go towards 1200 and T5 may break above the April highs. (Draw a wedge shape off the Sep rally start to see this.) In a Terminal with a strong T1, the next four waves should be ever shorter in time and length.