Trader Talk
The short term momentum oscillators remain negative, confirming the bearish stance of the AlphaKing Trading indicator. The accumulation/distribution profile remains negative, with no high volume follow-through advances to confirm any of the big up days since the crash landed in September and October. The leadership profile also remains very bearish, with 46 stocks making new 52 week highs versus 2,576 stocks making new 52 week lows. The 4% rule remains negative, while Federal Reserve policy remains positive. The VXO volatility indicator closed the week at 76.2, starting a new spike up in fear, though still shy of the spectacular number that suggests this bear plunge is over. The primary Elliott wave count suggests a wave 5 meltdown remains underway, with today's pop a minor wave iv of an expected 5 wave move that should see recent news lows breached on a closing basis. What should follow this wave 5 plunge (to end the giant wave 3 that started in May,) is a mega rally to start a giant wave 4. In other words: still lots of bear to go, though getting ready for a big bounce much larger than we've experienced so far this year.
Traditional seasonal trends have us looking for a rebound following a capitulation collapse in the 4th quarter, while the Presidential cycle remains bullish for the remainder of 2008. The Benner-Fibonacci cycle will remain bullish until 2010, though this prolonged time period may include one or more cyclical bear phases. The AlphaKing combination cycle sees a bear market slump running all the way into mid-December when the next major turn-date is slated to land.
Summary:
This week saw the capitulation melt-down we wrote about last week commence for real, and today's snap-back appears simply a partial counter-trend rally within than larger melt-down run. While this melt-down run can see much lower prices for the stock indexes, this is the time to be thinking about where to buy, rather than following the dumb money in believing the financial world is about to end. Indeed, our biggest fear should be missing the entry boat on this very well telegraphed plunge - and thus the stock market take off without us on the expected mega rally headed our way fast - rather than trying to milk every last dime of profit on short positions.
This market has opportunity written all over it. Want to make 20, 30, 50% on your 401K? Then this is the kind of technical set up where that can be delivered, and in very short order (as the shorts get creamed on the recovery bounce soon to come.) So get your mind together over the weekend as to what you want to do on the long side. Staying in cash while the AK Trading indicator remains in sell mode is not the dumbest thing one can do - those bulls who stayed long this year while the AK indicator was in sell mode have that covered - though we plan to move the AK portfolios to the long side on any move to new lows next week.
We have studied bear markets, and there is nothing about this one that says it will break from its traditional breakdown followed by recovery pattern. Wave 1 and 2 were the topping action earlier in the year. Wave 3 was the meltdown that landed in September/October/November (which is still playing out), and thus what should follow the sharp spike down below the October 10 lows is a wave 4 sideways churn trading range pattern with Dow 7000ish as the bottom, and Dow 10,000ish has the top. Do the maths. That's a near 50% rally for the Dow (and you can bet we'll be buying something with a little more Ommph! than the Dow.) Since wave 4s are M shaped rally, pullback, rally, pullback moves - within a very wide trading range over the prolonged periods of time - these near 50% moves should land multiple times before wave 4 is complete. Yes, this will likely end very badly for the bulls - as this great bear is for real - though wave 4s of this magnitude offer tremendous amounts of profits for those looking ahead with a wary eye on what comes next. We expect to act very early next week, possibly as early as Monday. The more red ink we see the more comfortable we are in buying long.
Have a nice weekend.
Kevin Wilde, Chief Trading Strategist, AlphaKing.com
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