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Friday, October 30, 2009

Ok, This Time It Really Is A Correction. No, Really.

A big down day on high volume, a bigger bounce on low volume, then an even bigger drop on higher volume. It's sort of hard to draw any other conclusion: It's time to bail out. The dollar rise again today, matching nearly tick for tick the inverse of the SPX. Oddly enough, I noticed GLD rallying in the last hour of trading, I have no idea what that was bout, but the SPX severely hit the skids. We now have 2 short term trendlines broken, and the long term trend from the March low is gone (not shown here).

On the weekly chart the SPX had it's biggest drop in a long time, on higher volume than we've had for a while. Unfortunately for the bulls, In the last 6 weeks the big volume weeks have been sharply down, the low volume weeks the 2 up weeks. Not the stuff that bull markets are made of. Obvious weekly support is at 950, resistance at 1100, and the midpoint about 1025. The 10 week line is broken, stochastics are headed down, and there are about a million short sellers who have been chomping at the bit for this moment.

The Nasdaq traversed half it's weekly range in one week. Stochastics crossed 80, a usually reliable sell signal. CMF is still pretty high, though, and with the big money boys selling into strength, I'll be watching for signs of them buying into weakness.

The Dow industrials are the only major index to have it's march trend line still intact. It is also still in the very upper part of it's range. Stochastics are pointed down but not giving a sell signal. It would figure that this is now the strongest index, as this will probably be seen as being defensive, por at least highly liquid.

The Russell 2000 is the worst place to be when the market turns bearish, and this was the first to crack, first by failing to get to a new high, then leading the charge downward. Stochastics have given a pretty decisive sell signal. The March trend line is long gone. This should get some support around 525, where it will meet the 40 week line. Unless it doesn't.

Here is a weekly of the Dow transports, which may become a weekly staple here. This, along with the Russell, signaled trouble by not getting to a new high, and like the Russell, is leading the way down.

There isn't much doubt now that the correction I've been calling for months now is finally here. Whether this will be a bull market correction or the start of another bear remains to be seen. However, by carefully watching the patterns of price and volume, we may be able to differentiate between another buying opportunity or the shorting opportunity of a lifetime.

I will have the new highs update in a bit.


Anonymous said...

i absolutely MUREDERED the nasdaq, and went long the uup (Dollar), yesterday before the close with bear spread and straight in the money puts.
I did some basic run of the mill multiple time frame candlestick anaylsis. I might close it out monday and then wait for a swing high into the 8ema and do it again. Thanks David
Eddie B

David said...

Hi Eddie,

Good to hear that, yesterday turned out to be the shorting opportunity of the week. I bought some TWM back when the Russell failed to get to a new high, but put a tight trailing stop on it yesterday and got stopped out after a decent, but modest, gain. I thought about buying it back when the Russell rallied yesterday, but was afraid of running afoul of the pattern day trader rule (I keep less than 25k in my account) so I didn't and missed today.

I bought some UUP calls in my simulator the other day, and get som puts on GLD yesterday, they were doing great today until GLD rallied in the last hour. I never did figure out what that was about.

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