Apple Al here
There is a condition that traders can succumb to that, for lack of a better
term, can be called “Bear Fever”.  I know all about it, I got ill with it in
the late 80’s after the crash in 1987.  It’s caused by the thrill of
enormous returns reaped in a matter of days during a market crash.  For a
trader, being on the profitable side of one of those events is exhilarating.
The problem is that it becomes almost like a drug, leaving a trader craving
for more.  It begins to color your thinking, you become convinced that more
has just got to be right around the corner, it’s just a matter of shorting
every likely opportunity and it’ll happen again.  It’s always easy to
rationalize these assumptions by agreeing with the bearish commentators who
are everpresent no matter the market and by heavily discounting any bullish
opinions.
Unfortunately for that mindset, market crashes are rare events.  I don’t
ever rule out the possibility of back to back events, anyone who has ever
traded knows that markets are capable of all kinds of surprises, but the
odds are long.  If you don’t believe me, find a chart of any major stock
index going back 100 years or so, and you’ll see what I mean.
The reasons for this are easy to figure out.  First of all, we are a country
full of optimists, it’s an inherent component of the American psyche.
Secondly, and most obviously, no one wants economic distress, so it’s in the
interest of everyone (except traders with “Bear Fever”) that the economy do
well, and of course that means bull markets.
I’ve seen a lot of Bear Fever in blogs since last year.  Often those bears
gear their thinking off of Elliott Wave Theory, with the thought that a Wave
1 down completed in March of this year, and we are now in Wave 2, with Wave
3 just ahead.  And of course Wave 3, which should be the strongest in a 5
wave sequence, is going to be an even bigger crash than what we saw last
Fall and Winter. They could be correct, however there is another way to
count the recent years:

http://screencast.com/t/NGUxZTBjM

This EW count assumes that the low in March was the conclusion of a C wave
in a flat that began with the Tech Bubble deflation in 2000.  For those of
you familiar with Prechter’s EW “bible”, this structure is “textbook”, i.e.
it’s close to perfect.  Also, in case you’ve mistaken my position, I am long
term bearish, which is one of the reasons I’ve labeled us to be in an “X”
wave rather than the onset of some decades long new bull market.  As with
anything market related, I could well be completely wrong.  But it seems to
me that we have some serious and deep rooted cracks in the economic
foundation that are going to take quite some years to resolve.  I just am
not inclined to believe another crash is imminent.  But time will tell.

WILL THE LAST BEARISH BLOGGER PLEASE STAND UP!

Yesterday was a day of mass capitulation, for a month or two at least, for many bearish bloggers. I’ve been wavering myself of course & posted at length the reasons why I was uncomfortable with the close over 1105 a couple of days ago.

I’ve been looking at the charts carefully since yesterday’s close & there are some reasons to think that we might be basing for another move up. The topping range chart is arguably eight closes into the current range, but there is significant doubt as to whether it is narrow enough to qualify as a range, and there is an uncomfortable resemblance to the false topping signal in July that I have marked up on the chart:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/6cc0404a-87c7-4192-8eb7-10fe17820c54

I’ve also had another look at my four week topping cycle chart, and the same uncomfortable similarity is marked on that chart too:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/af8ed410-fe14-45d6-8163-5057d9405758

Much of everything that we are looking at here comes down to USD. This has bounced strongly in the last couple of days and has travelled more than halfway at the time of writing from the last successful support trendline to what I would regard as the rally breakout point at 76.25. It is difficult to regard that as bullish for equities. If 76.25 is broken, that will most likely signal a significant equities correction of 10% or more while USD targets an initial rally objective at 81:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/8ebc3244-0a7f-4e61-a207-18ee784019fd

EURUSD, which is over half of the weighting for USD of course, has come down significantly overnight and is again trading below the main trendline for the rise since August. It is at 1.4865 as I write and may soon challenge key support at 1.48. If EURUSD closes below it, that will be a major support break:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/2c48ff5b-2bca-432d-93b2-d08aaf220818

Just to put the other side of that argument though, here is a chart of GBPUSD from a couple of days ago. Since then GBPUSD has fallen to 1.6633 & looks as though it is retesting the neckline of the inverse H&S pattern. GBPUSD is only 10% or so of the USD index of course, but the pattern clearly indicates to the 1.74 to 1.75 area, which is not bullish for USD.

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/e4e90b28-237d-495e-a0c0-c171ef668e8c

On the equities side I have been treating the Dow chart as the leading index chart since the last decline as it is the only major index remaining that did not break a significant support trendline then. It bounced off the upper trendline of the broadening ascending wedge, and then returned to break through that and test the upper trendline of the rising wedge for the rally. So far it has failed to break resistance there, but it has not yet bounced off it either. This looks cautiously bearish, though if it manages to penetrate and close over that line it will start to look more bullish:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/620d0bc3-b88d-4539-bbf8-98d3a3bb3be8

The other equity indices look more bearish. SPX has retested and been rejected from the rising wedge upper trendline twice, though it is still close. that line was always the obvious SPX target for this upswing, and the line now sits at about 1114, in more or lessthe same place as the falling trendline established between the bull market top in Oct 2007, and the first major upswing in the bear market in May 2009. This level is very serious resistance, and a close above it would be a significant bullish breakout. It has proved to be strong resistance in recent days however:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/b23552a2-192a-4a44-b40c-7ad6f302097e

The Russell 2000 index looks very bearish. Major support has been broken, retested, rejected, and the index looks poised to fall back to at least 550:

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/6ecd2cec-4957-4b40-9ddd-7d60a4d78183

The last chart of the MCSI World Index (ex USA). This also looks unambiguously bearish. Not only has key support been broken, but the upswing is failing to hold the lower trendline of the rally rising wedge, and a potential head and shoulder pattern looks to be finishing the top of the right shoulder.

http://www.screencast.com/users/springheel_jack/folders/09Q4/media/15e792ef-9ab2-403e-9ead-7d50854731f8

In summary the USD is bouncing nicely, all major equity indices seem to have found resistance in the expected area for a top, and the Vix, which I haven’t posted today, is still pinned between the same two trendlines that it was pinned between two days ago.

Without a significant equities move up, it seems likely to me that we have been putting in a protracted top, and that we are much more likely to fall than rise from here.

My line in the sand, as before, is a close over the SPX 50% fib retracement line at 1121, though I think that any close over 1115 would already be a major blow to the case that we are making a top here.

Good luck everybody!