S&P 500, Nov 4, 2008

charts courtesy of stockcharts.com

After yesterday’s slow action, today had some fireworks and some bang - but where is the volume?

We have mentioned that Market has been doing all the right moves to establish an intermediate low and set the stage for a good rally. Technically, my mid-term signals are all on buy. Fundamentally, the credit concerns have been easing nicely. Volatility, as measured by Average True Range (ATR), has been falling, still high by historical norms, but moving in the right direction. Psychologically, VIX has been indicating that nerves are easing a bit.

A reader kindly posted a comment and asked if I had turned a bull or not? To answer that, I should first ask what time frame it is that the question targets.

As a trader, I am neutral. I play my setups if they appear and bail as soon as I sense trouble. I have mentioned that I think it is getting a bit harder to short, but am still looking out for both short and long. I should also note that I am not a super active trader. If something lines up, I take a shot, if not, so be it.

Over the near to mid-term, I am seeing very encouraging technical signs. S&P has been successfully capturing some very key pivots. Breadth has been improving. Many sectors and industries have been deeply oversold and are now attracting capital. Seasonally, it is that time of the year where seeds of rallies germinate. We are also in the strong tech season. Some tech leaders like Apple and Research In Motion are badly bruised and now bouncing up. For the rest of the market to rally, it is imperative, IMHO, that large cap tech stocks, or Nasdaq 100 (NDX), do well.

I have been very cautious because I do not think that the longer term bear is over. That thinking has made me take my time committing capital into positions that I may like to hold for more than a market minute.

One very encouraging sign for me has been the fact that short term divergences has led to shallow pullbacks and not deep selloffs. As you can see from this 15-minute chart.

From an Elliot Wave point of view, this rally can be viewed as a wave A, or a wave 1 up.

I cannot decide on a degree at this point. It might be an intermediate wave or a minor wave. I believe it is part of a larger correction to an ongoing bear, so I lean more towards a wave A than a wave 1. I may be proven wrong later.

On this 60-min chart that we have seen before, S&P broke out of the congestion zone to the upside. Notice how VIX has broken the uptrend that it put into place mid September. As I have pointed before, I deem a change in the direction of VIX very important.

Trading is like detective work. We piece together as many clues as we can. In doing so, we form opinions. It is important to keep an open mind, and not to get too stuck with one idea or frame of mind, and be flexible enough to admit mistakes or adapt to new situations. We want to solve the mystery, not frame the suspect. So far, this has been a trader’s market. I am seeing signs of a swinger market being developed.

As for long-term investors, I am not sure how others invest, but for me, this is a broken market in need of serious healing, just look at this

Or this

Or a long term chart of anything you are interested as a long term investment, and decide for yourself if you are dealing with a bear or a bull.

I may take more than just charts into account while examining a possible investment for years to come, but long term investment is not really the focus of this blog.

Despite dramatic advances (S&P has advanced 150+ points in two weeks or so), this 4th wave scenario is still alive. I am questioning it because of improving breadth and momentum (we are seeing high momentum readings on 60-minute charts), but it is still very valid.

Long, sideways corrections are very interesting. They make fools out of both bulls and bears as they unfold (yours truly is no exception to that).

Market will soon run into resistance and embark on a pullback. We have a wave either complete or just a burst away from being complete. The structure and force of that pullback may show us the way for weeks to come. If the pullback is not very deep, if it is not very volatile, if it happens on low volume, if breadth does not deteriorate, if it does not reverse mid-term buy signals into sell signals, if VIX makes a lower high, etc, etc, then I may take the market for a swing.