Contrarian View

[Mike]

I am thinking that we are nearing a possible market turning point. The rally in my view had high failure prone characteristics detailed in prior posts. I chose to sit this rally out. We have reached an overbought situation near market resistance points. Yesterday saw Doji's on the S&P500 and the Dow. These could be fortelling the top of the short-term trend. Really since the beginning of the year the intermediate-term market has been trendless but consistent with a major market top. The current rally has formed an expected right shoulder of a possible head and shoulders top. This pattern is not complete of course unless the market drops from near here.

We have some headroom prior to reaching resistance on many indices but I am paying attention to the Dojis and wondering if this is the place where the market will reach a cross roads. I choose the Dow Transports as the current leading index as it is the only index that has made a new market closing high. This index may have established a double top. I will watch this for further developments and may deploy some short taking probe positions if I detect market deterioration in the coming days.

If the indexes turn and run North my view changes quickly as this would imply a rejection of the contrarian view.

[jmbarnette]

Thanks Mike,
I share your longer term view as well. This past week has really trimmed down my short watch list though. Many former leaders are still showing nice topping patterns, but are showing strong accumulation in terms of EV. I have started a short position in CTSH, as its EV still appears relatively weak. I will add on a move back below the $74 level. Stop is $76.5. We shall see

[adam ali]

Mike,

This is more a fundamental thought but I adhere to the Economic Cycle Research Institute's thinking about how the 2011 economic environment is much different than last year's.

When we went into market correction mode last summer, you didn't have a global industrial slowdown such as what we're experience currently. In addition, last year, on top of a relatively stronger economic backdrop, you had QE2 kicking in. (Admittedly, the market really took off once it was announced and could again if QE3 is in the cards.) So while 2010's correction was resolved on the upside, I fear for the the two reasons enumerated above, the result might be quite different this year.

[jmbarnette]

General market thoughts aside,
Cant ignore the chart of ILMN. Very tight base, good EV accumulation.

[EB]

Thanks Mike, and well-reasoned as always. Based on price action over the last few sessions, including the overnight, I think if the market is topping, it will be with an expanding terminal (broadening megaphone) on the ES.

Below shows a 1020 minute chart, which separates the day and night sessions at the 9:30 am open (EDT). If that is the case, 1342.25 should be briefly pierced to the upside to chase the cheap stops on shorts and also trigger breakout longs.

[Mike]

The transportation index is up 1.2% today two hours before the close. This move is in the opposite direction of my contrarian view this morning and could point to more upside.

[EB]

I adjusted the upper trendline in the most recent pattern, but it indeed looks like an expanding terminal top. The prior one in early April, while not as dramatic, was quickly reversed.



[Edit: what was unexpected was how high the market was able to go, briefly piercing the May 10/11 highs in the low 1350's.]