The Correction Appears to be Ending

The US markets managed to reverse todays intraday losses and close on a positive note. While market breadth was negative with decliners outpacing advancing issues 2253 to 1584 it appears that the McClellan Oscillator has successfully completed a retest of last weeks low. Even though the last two trading days were fairly ugly from a price loss perspective, the 10% Index remained above the -500 warning threshold. While it's still possible for the markets to breakdown from here it does not appear that this will be the case as long as the 10% Index stays above the -500 level.

Todays MCO change was minimal at just +5.95. A small MCO change often proceeds a sharp move in the market within a few days. I expect a big rally Monday or Tuesday.
The McClellan Oscillator for Friday 2/5/10
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MCO update

The markets had a solid run for the first two weeks of January and are taking a pause to refresh. There's a good chance the old 55 day trading cycle is coming back in force with a potential low date on Monday or Tuesday.

Fridays trading action saw an attempt to reverse the decline in the afternoon, the McClellan Oscillator intraday was near the -300 level, but the traders who jumped the gun anticipating a reversal were kicked in the groin late in the afternoon. Regardless, the MCO suggests we have a setup for a reversal Monday or Tuesday. Even though the MCO is in the oversold area at -243, the 5% component is still positive. This is typical of corrections in a bullish market.

At this point before I get more bullish, I'd like to see a little zig-zag in the MCO or a bounce and retest of its low with the 10% component holding above the -500 level. After a bit of fiddling around I expect the SPX to tack on another 15% and move higher into the 1250 zone.

The McClellan Oscillator for 1/22/10
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Historical Blogger Sentiment
Source: Ticker Sense
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SPX Overview

Here is a chart of the S&P 500 including dividends (red) monthly. I've included the 7.57% compounded growth trend since 1950 with a pair of over and under percentage brackets. The heavy green line is the actual S&P500 minus the 7.57% trendline (scaled as percent to right). I would expect to see the market move in the range shaded in pink, under the 7.57% trend but above the lower envelope.

S&P 500 including dividends (red) monthly
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SPX.X Cycles

The trading cycles seem to be stabilizing. What may be significant is that the dominant period has shortened from 55/110 days to 42/84 days. The 21 day period is a little sloppier.

Individual stocks seem to be doing their own thing as investors rearrange their portfolios to position themselves for 2010 and complete whatever tax loss selling remains. My current expectation is for continuing choppy weakness in the market until the 1st or 2nd trading days in 2010 which should be a tradable low. All this assumes the MCO behaves appropriately for the next couple of weeks.

The SPX daily chart with time cycles.
Expect market weakness until after New Years day.
Click to enlarge.

DJIA Midday 12/1/09

The DJIA at the start of December
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