Al-USA

Friday Jobs Report Discounted: Why the Rally Will Continue

Ok, interesting article, now here's my two cents, which might balloon, with my IWM OTM puts, to much more than that, if what I say below comes to pass.

My study of Elliot Wave patterns shows each wave has a personality. The first wave down is scary but it takes a while for people to recognize that the market is in trouble.

The 2nd wave bounce (the rally from March 2009) convinces most that the bear market is over and good times are here again. The extremely high bullish sentiment of 88%, matching October 2007, is picture perfect sentiment for this rally. It has accomplished, from a sentiment perspective, exactly what it needed to.

The third wave down is almost always the strongest. It's called the "wave of recognition" as most people begin to recognize that the fundamental problem with the economy is far worse than originally thought and certainly much worse than what the hope-filled rally has been all about.

Tomorrow should be very telling. If the market drops hard, as it's potentially set up to do, it will be the signal that the top is in and I would look to short bounces for at least the next few weeks until we see what develops to the downside. If the market rallies instead (we should get a reaction one way or the other to the employment numbers) then another day or two of rally, watching for potential resistance near SPX 1014, should be all we'll get. Then be ready to play the downside.

Readers, if I'm right, we are near the end of the 2nd wave and about to start the 3rd "wave of recognition" down. Place your bets accordingly.