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Friday, September 30, 2011 - Short Term Update

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY), VTI

Apologies for missing Thursday, I'm entertaining visiting family this week.


Wednesday Recap:

The bias should to be down, looking for a low in early October that should be the start of a strong bear market rally.

Friday:
The market has been moving down, but in a choppy fashion. In my experience, near the end of a decline this type of fractured behavior is typical. Terminal fifth waves, compared to third waves, typically end with much lower velocity, weaker momentum, and weaker internals. They can sometimes end with many overlapping subwaves, in an ending diagonal. Ironically, despite the weakening power of the rout, the crowd actually gets more bearish than during the third wave. The Nasdaq has been leading the last few days, most likely because the weak hands have been coaxed into buying this "seasonally strong" sector by Cramer. Hedge funds, which have been overweight in tech coming into this quarter, have been happy to oblige, selling into this renewed retail demand. Just as the ECRI leading indexes have turned decidedly negative, virtually guaranteeing a recession. Let them eat i-PAD!

Due to the fractured market, I'm using the VTI for a better visual read on where the indexes are.

Trading Indicators:
VTI & 3 Day Advance-Decline Volume:

Notes:Getting oversold.


VTI & 3 Day $TICK:

Notes: Either getting oversold, or possibly showing a bullish divergence. 


VTI & 3 Day Trin:

Notes: Very oversold.


Swing Indicators:
VTI & $NYMOT:


Notes: Declining, not oversold yet, possibly setting up for a bullish divergence.


Summary:
Traders:
Continue to stay short, be ready to reverse soon. Most of the trading indicators are oversold or rapidly approaching that level. The McClellan oscillator is also approaching bullish levels amid significant bearish sentiment. My guess is the market finds a low in early October that should last several weeks. I am currently flat.

Investors:
The SPY closed below 120 this month, confirming a bear market in the long term trend model. That said, there is a significant bear market rally in the near future. At any overbought readings I would be unloading any left over equity positions and aggressively be raising cash.

We'll talk again Monday,
-Bill L.









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