The Indexes Grind Higher

Well, yesterday I suggested that the odds favored a break lower but I also indicated the developing divergences in the MCO and 10% Index. The MCO and 10% turned up sharply from yesterdays lows and the markets opened higher and held a positive tone for most of the day. In spite of an astoundingly negative Consumer Confidence number of 38, the worst since 1967, the markets managed to hold their gains rallying into the close. Also it snowed in New Jersey. Closing prices on the day.

Dow 9,065.12 + 889.35 (10.88%)
Nasdaq 1,649.47 + 143.57 (9.53%)
S&P 500 940.51 + 91.59 (10.79%

Since the markets obviously didn't break lower, this part of the decline is finished and I would expect the major indexes to move back up inside of the 15% envelope on the 200 day moving average. Since at the lows the indexes were 35% below the 200 day, the rally now occurring should provide some excitement for those still holding short positions. See the chart below for a general idea of the initial price targets.

The SPX daily chart with 15% Bands on the 200 Day MAVG
Click to Enlarge

The SPX 65 minute chart with positive divergences on the MACD and RSI
Click to Enlarge

Monday 10-27-08

The McClellan Oscillator for Monday 10-27-2008
Click to enlarge

SPX Intraday cycles

Well, the MCO blew up, taking a two day zig to the downside. Here's the 65 minute chart with the cycles which seem to be working and the symmetrical triangle which is forming. It looks to me like we zig zag lower into the election.

SPX 65min. cycles

A high TRIN occurs near a low it's an indication of panic, wholesale selling. Todays numbers were very skewed to the sell side, the up/down volume ratio was in double digits (depending on the data source) -- all of this makes me think we should get a bounce tomorrow.

NYSE ARMS Index (TRIN)

The market remains dangerously vulnerable to the downside.

Historical DJIA 2008 vs 1970

Advisor sentiment hit similar lows during these periods. The disconcerting difference in 2008 is how far the DJIA fell below its 40 week (approx. 200 day) moving average, at it worst the difference was nearly 35%. As a result a snap back rally could take on the proportions of a bull market, climbing 20% to 25% without ever crossing above the plummeting 40 week average.

Until the DJIA trades and manages to stay above the 40 week moving average it must be considered in bear market territory. Certainly at some point it will move and stay above the long term benchmark and the preceeding rally will have to be considered part of the new bull market. For now that is not the case.

The DJIA 1970 low compared to the 2008 low.
Click to enlarge.

MCO turns positive - short term buy signal

The MCO finished the day at +109, it is now above zero and a short term buy signal. The 10% Index is still negative at -269 the 5% Index is at -378. The 5% and 10% Indexes just moved above -500 today for the first time since the START of October. Please note: It is very possible for a one or two day decline to occur here with the MCO pulling back towards the zero line. It's not a requirement, it can also just continue moving higher. The market will fluctuate.

This is both extremely oversold and huge negative breadth momentum. Since the MCO is calculated like a MACD, it behaves somewhat the same and what we should see is a declining bottoms pattern in the indexes with a rising bottoms pattern in the MCO. This would create the classical positive divergence. So far for the last YEAR this has failed at every low to produce a divergence of any sort.

At the present moment we have NO CONFIRMED bottom established, this will take time, months not days or weeks.

However, the October low readings were so extreme I doubt they will be equaled again in my lifetime. In other words, a rising bottoms pattern, in the MCO and 10% Index, is a lock (well never say never but...) That means we will get some kind of a positive divergence signal at the next major low.

Looking at the pattern over the last year, the retests have been about 3 months apart which puts us in January. It's as good a guess as any but I think the best way to gauge it is by using the other price based indicators on the indexes. Also the 50 and 200 day MAVGs will be major resistance. I seriously doubt the indexes will get above the 200 day on the first try.

It is very likely that certain issues made absolute lows recently and that they will not be exceeded on the downside. At the same time, everything will zig zag with the indexes and we all have to decide whether or not to try and hold through the valleys. There may be more risk to doing this than before, it's a hard call because so much will depend on what the financial wizards do to try and fix the markets. Exiting when the SPX nears its 200 day moving average is probably a good strategy until it becomes clearer what the longer term outlook may be.

The MCO for 10/20/08, Click to enlarge

The following weekly chart of the SPX is a little messy but what I've draw in here are two channels using fixed slopes 1 point per day (blue) and 2 points per day (orange). Several other timing cycles point to the spring of 2009 for what I would consider the first real chance of forming some sort of bottom. This market remains in a steep downtrend and it is very likely all rallies will fail below the 200 day moving average (roughly 40 weeks, not shown)

SPX Weekly, Click to enlarge