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S&P 500 – October 30, 2009
October 31st, 2009
Trend day down. Trend day up. Trend day down.
This is a day trader dream 
What happens really is that market sells with force and we get a nice down day. Then dip buyers come in at oversold conditions to roll their dice at glory, and we get a nice day up, but they do not do so on huge volume. Sellers re-appear and crush the dip buyers into losses. And it goes on until either sellers stop and join the dip buying party (end of correction), or dip buyers get the message and start looking for bounces to get out of mounting losses. The latter is the situation where oversold stays oversold and bounces never bounce high enough for those trapped because of their dip-buying excursions. Then, overhead supply builds and resistance levels mount and things get really ugly
So, if this is going to be just a correction, buyers should force it into a turn soon.
Regardless, judging by the volume of the recent declining days, and the force and fluidity of today’s dump, dip buying is something I’d rather not do at this point. Let the real champions pick the bottom!
This is a 15-minute chart of the index that I showed on my blog on Thursday.
The amazing 20-point run of yesterday had taken the index to a point where a perfect channel could be drawn. Today, all of that bounce was given back, and then some. The channel I drew yesterday held to perfection. Sometimes, we get it right 
Today felt as if Thursday did not happen. But wait a second! Didn’t I say the same thing last Friday in the blog post of October 23? Friday, October 23, also wiped off an impressive bounce of its preceding Thursday. Seems like people do not want to be stuck with stuff over the weekend
Anyhow, if the count in the chart above is correct, we may be close to a bounce for a minor wave 4. There may be a bit of residual selling early next week before that.
Note that I can count the above chart in other ways as well. I just went with this one because I like its momentum profile and MA alignment. But, as usual, I shall try not to get caught in short term counts and shall pay close attention to important levels and trend lines.
Speaking of important levels, bulls lost the 1041 level. They also failed to prevent a close below 55 EMA
Index also closed below the broken March trend line with an emphatic candle on expanding volume. It just does not look good for the bulls. Can they redeem this? Of course! They, as we have been saying for days, need to spend money across the broader market.
Daily volume was heavy. Breadth was ugly!
The last time down volume trumped up volume like this was October 1. That selloff proved to be the washout event and bulls came back albeit at pathetic volume. This time, breadth has deteriorated further and the lead up selling has been at higher volume that it was prior to October 1. So, the situation is a bit more hostile to the bulls. We’ll see.
McClellan Oscillator (MO) is mired in oversold territory
You need to go back to February to see comparable behavior from MO
This is one of my favorite breadth charts
Short term breadth is very oversold
Many a moon ago, I was saying that the bears of the last drop had no significance in the course of the market action, and that market needed new bears with capital and conviction, and that new bears would have to come from the ranks of well fed bulls. I repeated that almost daily and constantly advocated watching for signs of distribution. We have been seeing heavy distribution for days in a row.
So far, market has delivered two good bounces off short term oversold conditions. Both of them fizzled and market got even more oversold. But have bulls really changed sides? Have the fat cats finally said that it’s over. I don’t know. All I know is that, if there still are bulls and green shooters out there, they should deliver a rally soon with a chart like above. Failure to do so will be very telling. TRIN MAs moving like that can make the environment very unfriendly to bullish aspirations.
A study of S&P’s cyclical momentum helped me plan ahead for a possible peak. It also helped me take a short stance near the recent peak with relative confidence.
This is an updated chart
CCurve is at a critical juncture. It is sitting on its uptrend since July. I will regard a break of that trend line as a second piece of evidence for magnitude momentum swing failure at the recent price peak, and may plan to get more aggressive on the short side. If it turns and make a higher peak than the last peak before making a lower trough, I will regard it as an indication that another momentum up cycle may be in the works, and may become wary of the short side.
VIX finally broke out of its down-sloping channel
It is at a long term level of resistance, and I wouldn’t be surprised if it ebbed back. Regardless, if it starts an uptrend, it would be supportive of a downtrend of the broader market.
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Hypothetically, assuming rather foolishly, if the market has topped (at least for a good correction), what can I expect as a possible target at this point?
This is a weekly chart that I have been showing a lot recently
There is a strong technical support band around 930-950 that coincides with 50% retracement of the rally since March. David Rosenberg, in his daily musings, says that he regards 850 as value given current numbers, so, I am gonna say that somewhere around 850-950 (I know it is a wide 100-point band) may be good drop target for what I know now – all hypothetically, of course.
If market indeed starts going that way, I would not be surprised if we started hearing rhetoric in support of another round of stimulus money. Keep that in mind.
Nas100 had a bad day as well
Above average close below 55 EMA with an ugly candle.
It is still in the weekly box formed by some price points that I calculated in September
My price points have been my trading markers and I see no reason why I should abandon them
Bears need to break the techies down or all of this might end up being just another meaningless correction. For me, there is no way around it, if bears are serious, techies have to go, and go faster than the broader market.
Let’s Wrap Up:
Short term picture does not look very good at this point. I am operating under the assumption that a top is in, expecting an OEW mid-term trend change. Technically, everything that I look at tells me that, at the very least, a good size correction in underway.
Market prices and breadth are sufficiently oversold to produce a bounce. Failure to bounce in the coming week may be interpreted as a serious sign of bulls losing their grip on the market
Support is 1018 and 991. Resistance is 1041 and 1061.
Short term trend is down. Mid-term trend is up. Long term trend is down.
