Bear case losing ground...again.

The bear scenario laid out in the previous blog post (in blue) is day by day losing it's probability of occuring. After today's move we are at a do or die point (which actually makes for the best trading opportunities). A straddle at today's close would help capture either one of these scenarios which both call for significant moves in the upcoming weeks.

Bottomline is a downturn must occur as soon as possible (tomorrow or Monday). Any significant move up will likely put the bear case to bed and result in new highs. Right now it is up in the air if the market will continue up to new highs in a final 5th wave or if the bear market will finally begin again (yes, I have been waiting for it for awhile).

The other option (not on the chart) is that this move down and now smaller move up is an A,B of an A,B,C which would suggest eventually the market moves lower (but only in a corrective mode before moving on to new highs).

Good Luck

Where I think we are in the grand scheme of things

Well, the rally from the March 2009 lows has certainly been impressive. I think it has taken many "bears" by surprise, including me. The top in April 2010 was definitely a spot the market could have turned south (as it did thruout the summer). However, after the August decline, which could have easily been the start of our next major move down, the market did not continue down further. It decided we needed another elongated move up. This was about the time of QE2, which may or may not have had a positive impact on the stock market and "worked" from that perspective.

I will drive myself crazy if I tried to figure out all the possible reasons for the elongation of our cyclical bull in our secular (11 years now) bear. All we need to know at this point is it happened, so what's the next move? Keep in mind that it took 25 years for the market to make new highs above its 1929 price and Japan is still trying to get there after 21+ years now.

After 9 months of seemingly unabated uptrend, the market is once again at a turning point. The real question now is, are we in a 4th wave correction or was the Egypt and then Libya conflicts the topping point?

The attached chart shows my current expectations in blue with a close alternate in red. The next few days and weeks will let me know. Any break below $1220 on the $SPX really raises the probability of a continued, larger move down. The alternative is that the move up from the July 2010 lows was not impulsive and was an A wave of a larger A,B,C (with the C needing 5 waves for completion - shown in Red).

This is a lot of technical jargon to swallow, so the key takeaways are drawn on the chart. In blue, the market has topped and is just starting its long, hard fall. This expectation assumes most other asset classes will also fall (as the dollar rallies) since markets almost always are interrelated. Also, there are numerous technical factors supporting this including volume, momentum, and the fact that we haven't had a good sized pullback in almost a year.

The alternative which I will look at as viable until disproved is shown in red and assumes at least a new moderate high is made before a decent decline.

The $1220 area remains key. If it is breached then the likelihood of a continued decline raises significantly. If it holds then the red alternative becomes my primary expectation.

Good Luck.