Let me say, it's a tough call here. We are very oversold short term but medium term (over the next month or so) we still have some room to sell off for awhile. To threaten the longer term trend that the market is still in rally mode and this is a correction, we'll need to get down and under the 200dma at 1249ish.
Before moving on the charts, let me also say this might be one of those sell offs that just ends up looking more and more and more and more oversold. You really think it's ready to bounce, but the bounces come in small spurts and it just keeps sliding. The reason I say that is because I've been caught in that trap before. You short the market at a top and everything looks so oversold you figure it has to bounce, so you figure why not take some profits and then wait for the bounce to get short again. Well, in my experience, that results in the market running away from you to the downside and you're stuck on the sidelines.
So while I think a short term bounce is very likely here, I just want to point out that my experience is telling me this is one of those situations where oversold becomes more oversold which becomes more oversold. For that reason, I am not exiting my short position at this time.
Lets start with a chart with some Fib retracements, 1286 is the 23.6% retrace of the rally from July of last year until now. So i expect there to be some fight there. 1286 may end up to be where our oversold bounce starts;
The next chart is a daily 4 month chart. Whether we bounce here or bounce from somewhere lower like 1286, I do not think this correction (if that's what it is) is over. I think we'll touch the 100dma from underneath and then embark on potentially the last wave down;
On the shorter term basis, this is a 60 min 5 week chart. You can see here why I think we may bounce here besides being oversold. We closed right at the bottom of the short term channel on Friday. So it held support within the channel. If we lose that channel tomorrow, then obviously we have more work to do immediately to the downside;
Where this "correction" ends is critical. There are many possible longer term elliot wave counts. Taking out the 200dma would point towards calling the end of the rally from March 2009. Anything above the 200dma has the potential to again rally to yet new 52 week highs.
The financials are really waving their arms here yelling that there are major issues dead ahead. The XLF is not that far away from a potential death cross. It's much closer than any other index or sector. The market cannot rally to new highs with the financials tanking.
If the market is/has been rolling over, it will take awhile and it will be one step at a time. We are under the 50 and 100. Next is the 200. We have to get under the 200 to have the potential of a death cross (the 50 crossing under the 200). Even if we tank hard here, we are months away from a death cross. So these things take time to confirm.
Hope you all had a good weekend, GL tomorrow.
CJ
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