The Hurricane Bounce

It’s been a couple of weeks since I looked at the Elder impulse chart. One thing that I have been seeing in the last year or so is that counter trend buy or sell signals are usually false alarms, and are more likley to indicate the opposite. Here we have a market that may well be right at the beginning of a trend change, since neither buy nor sell has given a good signal in the last couple of months. The last 2 buy signals resulted in weak bouncess, and only the last sell signal gave a decent gain. Now we are right in the middle of a cluster of blue bars, and might get another buy signal. If the market has changed trends, and I think it has, that buy signal will be a false alarm, and it weill be time to sell.

The Nasdaq has clearly changed trend, which is the primary reason I am leaning bearish now. It is getting a bounce in price relative, but for now it has to be considered a bounce.We could get a decent move off the 200dma here, but, again, any move up is seen as a selling opportunity.

The NYSE composite is doing exactly the opposite it did during the last correction: it is now out performing the market substantially. That is probably primarily due to the relative strength in the financial sector, something I don’t expect to continue is the market continues to be weak.

Here are the sectors ranked by RSI. XLF is holding up very well, but as I said, I don;t expect that to continue if the market remains weak. However, if the market reverses and starts a new rally, that might just be the sector to be in, a scenario which at this point I think is unlikely.

XLU is now the leading sector by RSI, and once that price relative line reversed, it was warning of a coming correction, which we got. This is not rising quite as fast as it did during the last correction, so we might be in for a mild one. But I would not bet on it.

XLK is now the weakest sector and that is not much of a surprise, as many of the earnings disasters (but by no means all) have been here. This is trying to find a support level, but any attempt to get in here is bottom fishing and in my view quite risky. We could see another good selling opportunity here in the next few days.

Hurricane Sandy may have cushioned the blow of what is shaping up to be a pretty severe correction coming. For now I am looking for a bounce, but i am not expecting a very strong one. However, I will be playing it by the book (O’Neil’s, that is), and if we get a follow through day, I will change my stance.

I will have the new highs update shortly.

2012-10-31 15:42:52

Source: http://samuraitrader.blogspot.com/2012/10/the-hurricane-bounce.html