Market Giving Major Correction Signs
We're likely to see significant pullback in the market next week. Here's why.
This update shows a new chart pointing out prior "recovery rally highs" since the May 2011 1370 highs on the S&P 500. In each case, a major market correction unfolded when we had the NYMOT indicators at these levels along with Stochastics, CCI, and other Fibonacci indicators I incorporate at various times. Currently, we have the NYMOT indicators at a reading of 307. To understand this in context, it's the highest reading in the past two years -- higher than the 1292 S&P 500 rally high in October 2011 (from 1074) and higher than any other rally high in the past 24 months.
Adding to that, we have the Stochastics indicators at extreme short-term highs and the CCI index is nearing the levels it read at the recent 1363 pivot highs. Finally, further puzzle pieces continue to show divergences in the Elliott Wave patterns. The rally from 1267 to the current 1375 levels can't be interpreted in my opinion as a 5 wave rally (which would be bullish); instead it's an overlapping 3 wave rally in my views., or a double zigzag. These types of rallies are corrective rallies against a prevailing trend, which was down in to early June.
The rally to 1375 areas is actually in the zone I discussed a few weeks ago, and still in the 1386 or lower Fibonacci zone I've outlined as a C wave target for an ABC rally from 1267 June 2012 lows. My work still gives a model of 1422-1267 as 5 waves down, and 1267-current as a zigzag corrective pattern up. The market will soon tip its hand, I think, after this holiday week is over and we see a bit more volume return next week.
With all of this said, it is difficult to be too bearish given the 52-week highs in many blue-chip stocks as well as the strong advance-decline lines and recovery in some of the tech stocks of late. When we get a lot of conflicting signals like this, I try to fall back on a variety of indicators and clues to help clear up the clouds of the market.
In conclusion, near term I will be very surprised if at a minimum we do not have significant pullback in the market next week. The rally could sneak a bit higher during this holiday light-volume week, so let's look to next week for volumes to return and tell the tale. Taking some gains off the table in the coming one to two trading days is probably not a bad move.
Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.