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Is the Bull Market Back?

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A look at our four scenarios for the fourth quarter and what it may mean for 2010.

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So, given that picture as we entered the final three months of this year, what four scenarios were we looking at?

Scenario 1


Q4 2009 = close below 960.84, but above 903.25, so buy setup is interrupted but TDST potentially qualified.

Q1 2010 = no lower open, no lower low, so no qualification of TDST Down level, which means lows have been seen.

Looks very doubtful we'll close below 960.84. So in all likelihood this most bullish scenario has been ruled out.


Scenario 2

Q4 = close above 960.84, buy setup interrupted, likely that the ultimate low could be in and 960.84 is support.

So far, this scenario appears to be playing out, but I wasn't as clear as I should have been on the importance of not qualifying a break of 960.84. More on this in a moment.


Scenario 3

Q4 = close below 903.25, buy setup continues.

Q1 2010 = buy setup perfected.

Scenario 3, as long as the TDST Down level is NOT qualified, would be bullish. But that scenario is very likely out the door.


Scenario 4

Q4 2009 = close below 960.84 but above 903.25 so buy setup interrupted.

Q1 2010 = qualification of TDST level, which would imply a full countdown.

This scenario too has all but been ruled out barring a collapse in the final four trading days of the year.


Okay, so let's go back to the quarterly chart and see where we currently stand.

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As you can see, it appears we will interrupt the potential buy setup, close higher than the third quarter and, based on the qualifiers I use, close above the disqualified TDST Down level. Last week on the Buzz and Banter I noted the importance of this quarter's close compared to last. Let me explain that further.

In order to qualify a break of the TDST Down level, we must first have an up close, followed by a down close below the TDST Down level. Since the first quarter of 2009, we've had three consecutive up closes. In order to potentially qualify a break of the TDST level, we would then have to close below 960.84 in the first quarter of 2010 -- we would then need to meet the open restriction in the following quarter. So 960.84 is the level for bulls to watch.

Okay, so let's put some additional pieces together by going to the smaller time frames.

On the monthly chart, December will record bar 8 of a now perfected potential sell setup below the TDST up level. In order to achieve a sell setup, January must close above the close four bars earlier, 1057.08. With a sell setup very likely to record in January, it will be important for the resulting selloff to be contained by 960.84.

CLICK TO ENLARGE



The weekly chart is also helpful in determining our more immediate context. The qualified break of the TDST Up level in July told us to expect a full TD Sequential countdown. That TD Sequential 13 countdown recorded in late October but produced only a short response. An overlapping TD Sequential sell signal is now on bar 7, as is a potential sell setup. Again, given the monthly chart, we should anticipate a selloff in late January that bulls will want to see ultimately contained by 960.84.

There are obviously many ways to deal with 960.84 as an important level of containment. On the upside, using TD Absolute Retracement Up from the March lows low bar's close, 1105.71 has not yet been qualified as an upside break. A qualification of that level would add further confidence that bears will remain on the defensive. Using the low bar's low, the TD Absolute Retracement Up level was already qualified at 1078.87.

A brief rundown of other major indexes, the quarterly charts are all fairly similar. But the monthly charts are very interesting.

The Nasdaq Composite has perfected a TD sell setup this month. The Nasdaq 100 perfected a sell setup in November. We should expect those indexed to lead on the downside in the first quarter.

Finally, take a look at small-cap stocks. On the daily chart, a TD sell setup has recorded as of today, Christmas Eve, on the Russell 2000, but after a 1-4 bar pullback there's the possibility of a qualified break of an upside TDST level at 623.24. On the weekly, we have no signs of exhaustion and haven't completed a TD Sequential sell signal since a qualified upside TDST level break in May. The monthly is on bar 8 of a potential sell setup that, like the S&P 500, could record in January. Still, the context there isn't as bearish as other indexes.

Food for thought. Happy new year.
No positions in stocks mentioned.

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