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The Week Ahead - September, 2010

|Includes: SPDR S&P 500 Trust ETF (SPY)
Beginning Random Thought:
While listening to an excellent interview with Mark Minervini, he makes the excellent point: never trade like a hobby, hobbies COST money, trading is no different.

The Market:
Recapping my last blog post, the market has gone above the zone I had outlined some weeks ago as a likely reversal area. Looking at alternate wave counts and indicators we are rapidly approaching another likely reversal point, most likely this week. Again, this is significant because long term valuations are high, the economy is clearly turning down, and the Elliott wave model is saying the next decline could be potentially huge.

Chart 1 - SPY - Daily Bars
Where We Are Now...

Some points: in my estimate this is probably the best Elliott wave count, we are rapidly approaching the 61.8% retracement level. This level is also close to pivot resistance. So in recent history traders remember this price level as a good price at which to begin selling long positions. Furthermore, looking at studies, we recently have a weak stochastic sell signal. Weak signals shouldn't be acted on by themselves, but what this does tell us is we are starting to get warning signals of faltering momentum while momentum is at the high levels that usually coincide with reversals.

Chart 2 - SPX vs NYMO

The $NYMO is also starting to get close to a top though it still has a bit of room. While it hasn't reached the high probability zone (over one standard deviation), I'm not so sure it will get there since this is the end portion of a corrective wave. Also not the divergent tops (circled) in breadth right before the wedge peaks. In the last few days as the market has ticked higher, the $NYMO has not confirmed the new highs. Volume in the last few days has also been almost non-existent. Lastly I would note the market is close to completing a TD-Sell Setup.

According to the latest COT report, smart money used this week to aggressively take profits, and finished the week holding a net short position in S&P e-minis. The dumb money, getting squeezed, covered short positions (near the top, as always), however they are still net short. Furthermore the $CPC (put call ratio) is relatively high for a market top, so the dumb money may require another week or so of gains to get fully washed out of the short side.

Chart 3 - Weekly ES COT
Dumb Money may require a bit more pain...

Indicators, are either in, or entering the topping area. The Elliott wave model shows a high probability that the next decline will be large, a decline of possibly  one to two thousand points in the next two months or so. The economy is showing clear signs of turning. The bearish sentiment of two weeks ago has been completely reversed and now the AAII shows above historical average %bulls, all the while the smart money is using this spurt of optimism to sell into strength. I will be watching closely this week for the initial signs of a trading opportunity to sell short.

Ending Random Though:
The Simpsons accidentally predict the next few years of the stock market.

Disclosure: Long SPY puts