Hi Hobsters!

Like I said this morning I felt that we open lower chop around and close slightly higher or possible doji. So yes it was like watching my toenail polish dry. Maybe watching that is more exciting

Tomorrow I feel we make new highs!  If we close above 1121 then our next stop is 1150. Until end of the year, I  buy the dips. I also have said since last week that this week we would end higher most likely to that 1121. So far so good.
The dollar ended higher but didn’t seem to impact stocks, which I was saying before the open this morning this kept me long and lean.

I added a APPL Nov 200/210 call spread.  Removed the SHLD for a small profit.

I am thrilled that now we have Richard, Kemal and Jack as contributors gosh am I a lucky gal or what? And now add Apple Al as well.

Anna here  Just my take for the day………… dollar has retraced almost 38.2 RL and the futs are just barely down. I think we open slightly lower fill the gap and chop around mostly ending slightly higher or a doji today.  Trade carefully Hobsters!  G/L to you all
The Bear Case – Last Chance in 2009?

I wanted to share my thoughts with everyone from looking at numerous charts yesterday night:

Kemal_1’s EW count has us topping here, and his remarkable track record from all of his predictions that I have seen play out over the summer and fall is one that I take very seriously indeed. McHugh’s count also has us finishing the rally here, or hereabouts, and he has been right about everything important in the last few months, unlike EWI, and I would also take his view very seriously.

Even if the rally is not finished, or indeed if this is a new bull market from March, markets don’t rise or fall in straight lines and equities are very overdue for a significant retracement, even if we are not about to embark on the third primary wave of the bear market (P3) as many think. The main alternative targets of that retracement from an EW perspective could be 875 or 780 (most likely targets IMO) if we put in a wave 2 of a three wave rally sequence (if we are just finishing a long first wave from March), or as low as 957 if this retracement was a wave 4 in a five wave bull market sequence, and we are just finishing wave 3 from March.

Regardless of which reading is the correct one, a significant retracement looks very overdue and I think Kemal_1 and McHugh are right. However there is often another perspective worth considering and there is very much another reading here which we should be aware of from a patterns and trendlines perspective:

Having met the key targets for this upswing already last week, we have returned to them today to retest them. That doesn’t mean they will break, but it does raise a much more significant possibility that they will.

All indices that I watch ended Monday having touched or sitting on key trendlines. That made this the perfect entry to short from a risk/reward perspective and I shorted accordingly, but it leaves the possibility that if they break through these trendlines on a closing basis, then the door may be opened for another major continuation phase of this rally.

USD bounced off the rally trendline again at a slightly lower level as the trendline is declining:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/ab3258e1-f531-4ad6-9298-e413ecbbd160

Transports touched key resistance and are sitting just below. I was looking at the IHS on this chart last night & it was of worryingly high quality.

Richard Russell of Dow Theory Letters made the following statement about the Transports close after the close: ‘Today the Transports finally closed above 4045.11, thereby confirming that both the secondary and primary trends of the market are bullish’. Needless to say this was not what I was hoping to hear from the world’s longest established expert on Dow Theory:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/d4111bee-742d-4eff-8f66-6d0d3f1eb0d8

The Dow, which also has one of the better IHS patterns, broke the upper trendline of the broadening ascending wedge and tested the upper trendline of the rising wedge:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/a9c1d19d-befd-42bf-8ac3-a00cb3a4b4f0

The Russell 2000 is retesting the broken rising wedge lower trendline:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/9a0cf52b-f0c8-4a53-863b-478de1c267ec

The Vix is pinned between two key trendlines:

http://www.screencast.com/users/springheel_jack/folders/Jing/media/70c33713-a8fc-423e-a827-05551712b9bd

Possibly the most worrying chart however is that of the topping range closes chart, where the close was still just about at an acceptable level, but was definitely testing the upper boundary of acceptability:

http://www.screencast.com/users/springheel_jack/folders/Default/media/8324aba9-04a7-4182-b2e8-47fa22b20e8e

The particularly worrying thing about the close was the degree of resemblance to what happened at the one failed range topping signal in August (marked up in blue). After that failure the SPX continued up another 25 points or so after a close not unlike this one, to an interim top, and then having made that top, declined to the level of the failed top, where resistance was turned into support, and the next phase of the rally began where the broadening ascending wedges have dominated all of the equity indices.

I am concerned that if we close much higher than 1110, then we could see the same thing happen again, and I would draw my line in the sand at any close over the SPX 50% retracement of the bear market at 1121.

If we close over that level I think that there is a distinct possibility that the inverse H&S patterns on the equity indices will finish playing out, which would take us into the early 1200s on SPX, and close to the 61.8% fib retracement of the bear market at about 1230. I think that Anna mentioned that as being her target by the end of the year today.

I am still bearish until then, but after that I might need to think again.

For this bullish scenario to play out, all of these many rising wedges and broadening ascending wedges on the equity indices would need to break out upwards. That is quite possible of course. Bulkowski’s stats give a 69% chance of a downward breakout for rising wedges, and therefore a 31% chance of an upward breakout. For broadening ascending wedges that figure is 73% for a downward breakout versus 27% for an upward breakout. From a patterns perspective upward breakouts would be much lower probability but still perfectly valid outcomes.

I’ll be posting a ten year SPX chart to really illustrate this later. I did do one this morning, but stockcharts failed to save it and it was lost until I redo it.

Here is an excellent chart from Joe8888 that he kindly allowed me to post to illustrate why this level is so key for the bears:

http://www.screencast.com/users/chartwiz/folders/Jing/media/13051c88-9671-4027-95fe-5630bdc0e196

One of the most disturbing charts that I have looked at in recent days was one of my favorite swing indicators the $NYSI:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/5f9d3716-6840-4c80-9fae-5a4b2bc030a2

Now this swing indicator has been on a sell signal since September, and that’s because like any indicator, it doesn’t always point in the right direction, but it is a very good swing indicator as you can see looking back over the last year, and it has just moved to a buy signal on RSI and is marking the current area as a significant low, which is disturbing. Since I did this chart on Sunday, the $NYSI trendlines have also done a bullish cross yesterday. The RSI buy signal could alternatively be read as a negative divergence, but that isn’t the normal way that I would read it.

The bear case still looks very compelling here, but we are now in the traditionally strong last few weeks of the year, and we are up against a lot of trendlines that may open the path for the rally to continue much further if they are broken. If we do break them, the bears may need to go back into hibernation until 2010 IMO