This rebound has certainly been stronger than I expected. The extreme oversold conditions have now turned into extreme bought conditions and have been that way for a number of days. With that said, trying to short this advance has been suicide for many. One thing to note is that since the entire advance since March 2008 the 20 day moving average only crossed below the 50 day moving average one time and that was in July when we had the false head and shoulder pattern completing. When the cross happened the 50 day moving was still pointing up signaling that the cross would be a false. Now in early February and only the second time since March 2008 the 20 day moving average has crossed below the 50 day moving average although this time the 50 day is clearly moving south, in fact it started turning down 2 weeks prior to the cross. This cross certainly holds more weight than the cross back in July.
SPX has broken cycle support and will trigger a trend mode move if it fails to rally over that support move. This is a VERY important development as a trend move from these levels could look like the similar trigger shown in September 2008 on this chart if it were to occur.
After an impulsive 5 wave move down from the January highs, the Russell has experienced a strong oversold bounce. I see two possibilities unfolding here. The first case is we have an ABC move up, labelled in red, which was completed on Friday where we should see the start of a major 5 wave move down on Tuesday. The rising wedge pattern supports this view. The second case, which is not by any means strict EW analysis, is we are in some sort of double ABC wave move up which basically has the same outcome as a 5 wave move up which is what I labelled in purple, with a very strong wave 3 completing on Friday. Wave 4 would logically bring us back down to the bottom of the channel which coincides nicely with the yellow support line that marks a previous low back on December 17th and January 29th. Wave 5 up target is at the top of the channel also coinciding with the 50% Fib at about 615. We might see it run a few points higher just to squeeze and frustrate the shorts as the RUT loves to do. I think the odds favor a 5 wave move up because should we get a sharp 10 point pullback in wave 4, people will be falling all over themselves to jump in and get short at the bottom of the channel, which makes me think the RUT will squeeze the shorts one last time before we tank. One thing to note the indexes have not broken down below their 200 day simple moving averages so do not get caught holding shorts should the indexes blow past their 61.8% Fibonacci Retracements because if that happens the bulls may very well be back in control.
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