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October 08, 2006

Runaway Train!
by Dominick

Another powerful week! There is no letting up on the short squeeze going on for any early bears.

Last week I stated:

Once again, as of Friday night, there is no confirmation that a top is in. Actually, there is good reason to believe another move is still in the cards, even if only a slight new high. That would set up a perfect reversal pattern. If not, we have clear levels below the market to monitor that would suggest a top was in place if penetrated.

At this point it sure does seems as the real number that the SPX wants to challenge is my two month old target of 1360. Amazing to watch this train run everyone over as it's destined to reach it. We have not been able to issue a sell signal yet! I won't complain about that as many shorts have really been hurt here. Truly not a thing I like to see within the trading community.

When looking to many traditional sentiment indicators, you don't see the over bullishness that I'd like to see when trying to pick a top. I have 2 strong reasons that say this is not the case here. First, many bearish traders that I know have been caught by surprise on this move and now are becoming bullish as the Dow goes into uncharted territory. Second, our friend Jake Bernstein has supplied me with his Daily Sentiment Index. It has reached to a whopping 95% bulls this week, a reading that hasn't been seen for years! Considering the two, should we expect the markets to begin a parabolic move, or are they about to derail?

Next week we will be glued to the screens watching what happens at 1360. Do they vibrate around it for a bit or just reverse from it? There is also the possibility that all this energy runs over the target. I don't see that as of Friday's close, but no reason to be cute here. Having all our members aware of this number is a big accomplishment. We will have plans on how to trade around this important area; make sure you do also since the markets will become even more excited.

Since there isn't much to be said about the markets until this area is challenged, I want to show a big picture view of a nice trending market. I am going to reference a chart that was in my first update made here in February of this year.

In that update I stated:

The chart shows a combination of Elliott work combined with long term Fibonacci studies. The IDEAL setup would be that we go up to the target at around 3900. Unfortunately, there is a small case to be made that the January high was the top, so some caution is advised. I would imagine that one of the counts will show itself within a week or so. IF the top is already in, I would expect a more serious decline to have started and not the up/down we are getting. Until we get confirmation that we may have topped, I will be looking to achieve the target at 3900ish in the Dow composite.

Here is the chart from that update.

The updated Weekly chart below shows the Dow Jones Composite climbing to 4023 in May, where it made a reversal along with all the other indices. We had made a call for a large turn due in the SPX at 1320, on or about May 8th to 12th. We got exactly that. All the markets sold off, but found support in June. I have watched this market very carefully, as it appeared to be forming a triangle and not the choppy advance that all the other markets were forming off their June or July lows. Many know that after the lows were made in the SPX, I went bullish with a target of 1360. It was hard to present that target to my Forum since it seemed we were ready to collapse into the awaited 4-year cycle. Looking to the Dow Jones Composite for a reason to pull the trigger was easy. It was forming a 4th wave triangle that would eventually break to the upside and produce new highs.

Well, here we are forcing every short trader in the country to cover their short position as the thrust out of this triangle has put upside pressure on many markets. Here also, I used my Fibonacci techniques to come up with a target that needed to be reached as many had been selling the markets for 3 years. The only time the Dow Jones Composite had a chance of topping was in May. Realizing that it was building a triangle instead of any impulse from the May highs helped me turn bullish towards the SPX.

At the moment, the Dow Jones Composite has achieved the original 3920 target and is in a typical throwover of its target. The Dow Jones Industrials have also made new record highs this week as it traded over its 2000 high. That was not the case in May. These markets seem to be making new highs as the SPX is points away from the 1360 target.

I don't expect us to start another large move off this target, but will give its due respect. Shorting anything above that target would be a huge financial mistake. As you can see, we are also getting non-confirmation of this move from the MACD.

Going forward, the most important things to watch for will be the Dow Jones Composite falling back below 3920 and the reaction to its trend line that has been in place for four years.

STAY TUNED!

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Dominick,
a.k.a. Spwaver
TradingTheCharts.com

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual. Check with your licensed financial advisor or broker prior to taking any action.

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