Headlines: we have another stomach-in-throat drop coming, likely next week. Then a big bounce. The Hope Rally appears done. The air-pocket yesterday wasn't a mistake: only 30M shares traded in the fall, and no one can find a glitch. Fat Finger My Ass! cries ZH. Listen to the traders in the pit. We had already dropped 500 pts and when we fell like a knife there were no buyers. The only glitch was shocked disbelief.
Fear is such a well-defined state it makes the market patterns clear. Greed too, but then greed is like fear - fear of falling behind. Just not quite as strong. During panics of fear and greed the market becomes easy to track. It has a trend. It is those times in between, when the market is correcting against trend, that markets become exasperating. This should be no surprise, as during corrections the system is in a high state of entropy (in a chaos theory or information theory sense - balanced inputs going in and out), whereas during trends the market has found order. One can look at markets as constantly seeking order, and when they find it, they move surprisingly fast. As we just found out.
At the low yesterday, we had wiped out 8 months of gains in 3 weeks.
The Hope Rally was corrective. It kept going up on shrinking volume and a narrower base - essentially, five big financial stocks like Citicorp. It seemed impervious to correction, and yet it meandered up slower and slower after an initial jump off March 2009. This is not how a trending market behaves. The financial press was fooled by the height of the bounce, not comparing it to the depth of the prior drop. In the end the Hope Rally corrected the 2008 drop in the normal range of a 50-62% retrace, and after breaking the 50% retrace, stopped right on cue at 62%.
Thus it should not be a surprise that there is a large consensus among wave theory sites (Daneric/whose chart is below, Kenny, EWTrends, PUG, EWP, BlankFiend, Shanky/sort-of, among others):
- the top is in
- we are in a wave 4 trinagle
- a drop below the spike low of yesterday is ahead
The implication (well stated by BlankFiend) is a pop and drop on Monday. The top of the A leg, Sp1138, cannot be broken in the pop, and the top of the C leg, 1129, should not be broken. If leg D is done, leg E would normally go back to touch the upper trendline, which is about halfway to C or 1116. The apex of the triangle points to 1113. It may not be much of a pop.
There are of course a few optimists, such as Carl Futia, and a bunch hedging their predictions. That is to be expected. The bullish argument starts with the curious fact that we ended today spot on the 61.8% retrace of the rise from Feb5 (Sp1145) to Apr23 (1220). If this were a B wave of a zigzag, this is a normal outside distance for a correction, and the final C wave up to new highs should start on Monday. This argument treats the falling knife yesterday as an anomaly. Since no one has confirmed that a glitch occurred, it is better to treat yesterday as real but hard to believe. The buyers simply vanished.
After such a severe drop, it should be no surprise that a bunch of technical indicators have become oversold, signaling a rally is due. At the same time, during crashes like this, indicators can stay oversold for a while. Catching a falling knife is a dangerous game.
Give credit to where it is due: the Master got this right. EWI's Sinko-de-Mayo STU predicted a much deeper drop than all the others, including Neely, and we got it.
Just a couple of weeks ago Prechter had set forth the many technical indicators of a top in his EWT. You can read the key points online today from EvilSpeculator. For all the bashing he gets, his record on the big calls since 2007 is very strong:
- called the 2007 top in June, right before the July top (October wasn't much higher)
- called the 2009 bottom in late Feb, within two weeks of the Hope Rally
- did not call the June top as the end
- prematurely called a top twice after that
- called this top within a week (Apr16 vs Apr23)
Tonight's STU confirms the triangle wave 4 count and predicts the deeper wave 5 ahead to complete the first big thrust down off the top. After that we get a bounce, which could retrace quite a bit of the drop (the summer rally before the Summer of Disillusionment sets in). MarketPulse gives some guidance for where wave 5 could end:
If that wave 5 breaks well below the Feb5 lows (Dow9835/Sp1044) and stays below (meaning doesn't pop right back over), this will confirm the end of the Hope Rally.
The Hope Rally's hopes are hanging on a thin thread right now.
If we bounce above that level, this signals that a final top is ahead, likely back up to the Sp1250 +/- 25 range. This seems unlikely, given how decisively we broke through the lower trendline of the Hope Rally, even given some alternative ways to count it, such as this large triangle (chart courtesy WaveCharts):
If the pop on Monday breaks through the 1129 and 1138 levels, the triangle may be a larger structure. Neely suggests this could be the start of a wave B triangle before the final rally to new highs. A bit of a dramatic triangle, but a count worth keeping in the back of the mind as we see how Monday turns out.
The other possibility is that yesterday was an extended fifth wave, and is done at the Sp1066/Dow9870 level. A strong bounce would be expected, but not to new highs. A corrective wave cannot be a simple five-waves down. Typical levels for the bounce would be:
- 38% bounce to 1125
- 50% bounce to 1143
- 62% bounce to 1162
