The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, March 2nd, 2009.
Throw Mama From The Train - a funny and entertaining movie depending on who you are. But more so in terms of present circumstances in the stock market - a reflection of what we must live with right now as well. Mama was demeaning and aggravating in the movie, just like the market(s) in real life today. And unfortunately it's enough to make people throw their sensibilities away. In this respect everybody is so worried about missing a rally out of oversold conditions they keep gambling it's going to bounce, which does not allow for a sustainable squeeze higher. That's why stocks can't rally, because the trade is stubborn, complacent and bullish. This is of course a function of the spoiled brat mentality excessively good times for too long will foster. Thank you again, Mr. Greenspan.
All this likely also means we can throw seasonals out the window this year as well, because just a hint of increasing bearishness in the betting parlors would likely invoke a squeeze. I had mentioned a few weeks back seasonal inversions tend to occur in mature markets. So, with this being the most mature market(s) ever, it's not unreasonable to speculate we may witness such an occurrence this year. Lord knows we have the set-up for it technically. That is to say, stocks are approaching a significant intermediate bottom, one that will retrace a percentage of the entire move down from the highs witnessed in 2007. In terms of just how big a bounce we are talking about, history has shown we can expect anything from 52% and up given the present bear market is within the 'worst in history' category.
David Chapman has done an excellent job of putting the proper context on this in his latest. What last weeks plunge in stocks has done is to remove any question regarding the count. Using the S&P 500 (SPX) instead of the Dow, as it reflects a greater cross section of stocks, what we get is stocks finishing off a Minute Degree III, which leaves the possibility of a move down into the 6's still possible, as discussed last week with respect to Mark Lundeen's work. As you know from this discussion, if history repeats, the Dow should vex the 6400 area soon, like this week, meaning the SPX will likely break 700 temporarily, which will finish off the larger move (Intermediate Degree I of Primary C of Super-Cycle Degree), allowing for a bounce, believe it or not. (See Figure 1)
As you can see on what I have entitled the Grand Super-Cycle Chart of the SPX, technical conditions are very oversold and showing signs of a loss in momentum to the downside in the positive divergence present in the Rate Of Change (ROC) indicator. Of course this does not mean prices should be expected to reverse this week. No - both the observation that trend changes tend to occur with options expiries, along with the count allowing for a short-term bottom this week followed by lower lows next, tends to suggest those searching for a tradable low should be patient. Below is a detailed chart panel of the SPX showing that both Accumulation / Distribution (A/D) and On Balance Volume (OBV) indicators are approaching trend-line supports, which should sponsor the bounce discussed above all things considered. (See Figure 2)
So, the mindset here should be accumulation into equity positions with an intermediate-term time horizon as options expiry approaches on the 20th, if not before. Certainly once the 700 mark in the SPX comes into view I would be a heavy buyer on the basis all technical requirements save sentiment would be in place, including the Elliott Wave Pattern as well, where at some point not too far afterwards the scare of stocks plunging further will finally exhaust the bulls. In this respect the bounce higher will not be born out of the bulls waking up one day and turning bearish, as they are likely not intelligent enough to know why they should be concerned about long-term prospects for the stock market. Instead, and this is why these turns tend to occur at options expiries, the bulls simply run out of credit (and bravado) to buy more bullish bets, allowing for open interest put / call ratios to rise by default.
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Good investing all.