Wednesday, October 28, 2009

Technical Update – An Important Juncture…

It’s time that we reviewed the longer term charts to take a look at the rising wedges within the ongoing bear market. All the indices produced those rising wedges, they are a bearish pattern that normally will retrace the ENTIRE move back to the base of the wedge, or more. That means that the odds favor us revisiting the lows, or more. Additionally, sell offs tend to happen in half the time of the advance...

Below is a current 2 year weekly chart of this bear market to date in percentage terms. While this bear market wave B has been historic, you can see that even a 65% rally leaves us one third of the market below its peak, and that’s WITH substitution bias (companies that fail are replaced).

All of the indices except the DOW have now broken their rising wedges, although the SPX just barely as of the time of this writing. The SPX is sitting right on its 50 day moving average after breaking its rising wedge. The break on the SPX is not convincing yet, it needs to get below (and close below) that 50dma for me to be convinced that the rising trend has shifted back to a declining trend (a new low will be made below 1,020).

Next is a 2 year daily chart of the SPX. You can clearly see the rising wedge and that we have just now broken the lower boundary – as I said, not convincingly yet. The red downtrend line is the bear market trendline that stopped the advance. This same trend line was broken several times during the Great depression, so far in this Depression, it has not been. The odd looking green rising trendline is the 20 year rising trendline of the market – approximately. It was resistance on the way down and for now seems to be attracting prices to it. The 200dma is now rising and is currently at 920ish. The volume (not pictured) is divergent, but now rising on the decline. The daily stochastics fast is now oversold, but the slow has a way to go still. The RSI is clearly divergent from prices, something that was also seen at the ’07 top:

A quick note about these charts… I am using them with the logarithmic scale turned off. If I turn them on, then the wedges come to a sharper point and the SPX is even further away from the uptrend line.

The DOW is the lone hold out for now, but you can see the same picture in play. Note that I’ve included the entire bear market Fibonacci levels, along with possible retracements if the top of this rally has been put in:

The Transports are diverging bearishly from the Industrials. They have convincingly broken the wedge after putting in a nasty looking double top. This chart is very weak, very bearish looking. The Transports bounce was completely disconnected from the fundamentals seen in shipping statistics:

The NDX ran up into its 61.8% retrace and failed there. It has now also convincingly broken its rising wedge:

The Utilities are the weakest of all the indices, having not even managed a 31.8% retrace. It also didn’t even manage to build a rising wedge and looks more like a rounded top:

The XLF is also very weak, having failed to retrace even 31.8% of the rally. It has been hailed in the mainstream for leading the recovery, but has in fact been trailing. It is only leading in percentage rise terms which are very, very misleading with a bottom that is in single figures. Of course the financial sector is dead, it has merely been zombified and swept under the rug so that we can’t see what’s happening. What’s happening in reality is that the large banks in particular are rife with leverage and toxic derivatives which, if marked to any semblance of reality, would wipe them out many times over. Frankly, there IS NO HOPE that the situation in the financials will improve until and unless we alter course drastically and immediately from the path we are on:

The VIX is rising into the mid 20s. Watch the 29 to 30 level where we double topped before. Triple tops are so rare that it's almost safe to say they do not occur. Therefore, if we reach that level I'd expect it to break (3 month daily chart):

Speaking of double tops, here's a 3 month close up view of the Transports... a clear double top with a new low, a very bearish formation:

The RUT is also very bearish. It, too, has a perfect double top and is making a new lower low. The rule with double tops is; the wider the double top, the more pronounced the subsequent decline:

The Dollar ran into the lower boundary of its descending wedge (one year chart here) and is bouncing hard back up into the upper boundary. In fact, it’s poking into it or even through it now. A clean break above this wedge will also signal a change of direction:

Now, all these charts are pointing to the bear market rally top being in, but the Elliott Wave count still allows for one more push higher. If that is going to happen, it needs to happen immediately but definitely before SPX 1,020 (a new low) or it can be assumed that the count is over for wave B and that wave C has begun. So, do not be surprised if we attempt another leg higher from here – if we do, it can go on to new highs, or it can truncate short of the top of the rising wedges. These retests are a part of the psychology, they allow for distribution to the ill-informed, something that I’m seeing now.