Should Bulls Expect Massive Hangover After This Party?

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"The market had an impressive rally, but a reversal is possible."

Although the market had an impressive rally, amidst strong large-cap earnings, I continue to fear a reversal to the downside. Keep in mind that the upside MAX objectives I gave out on July 14th last week here, on Kitco and other sites were as follows:

NASDAQ 2295; DOW 10450 and SP500 1104–1115

The DOW pretty much hit 10450 objective and dropped a bit from there today, day #13 of the countertrend rally. The SP500 got about to 1104 as a max, which is a Fibonacci # I had out well over a week ago. The NASDAQ came back up, hit its gap at 2250 it left from the July 16 gap down day (last Friday), and went a bit higher to retest the highs of the prior week.

In all, this still qualifies as part of an A B C correction to the upside after a massive 8 week drop to 1011 on the SP500 for example from 1219. We have had about 3 weeks or so of counter-trend rally, which is also a Fibonacci number of weeks colliding with a Fibonacci 13 days of upside correction.

Bearish wedges are forming on various indices, and Head and Shoulder tops are still all over the place.

The market indices will have to plow through my max top prices for me to turn bullish and call the Correction over at the 38% retracement figure of 1011 SP500.

FWIW, over at my ActiveTradingPartners service we closed out a profitable BGZ Bear position right at the 1058 SP500 pivot low earlier in the week at about 16.50, and that ETF tanked to 14.50 by the end of this week. That was a Fibonacci Pivot, and a likely C wave up from there was possible so we fortunately timed it right. I also had advised shorting the Emerging Market indexes, but we worked into a 1/2 position there and halted adding to it a few days ago fearing the EEM ETF may rise to $41.20–$41.95 first, and we would wait to double down our short there. Today EEM hit $41.19—one penny off, and then fell down into the close a bit.

The strongest index was the Russell 2000, rising over 12% off its recent lows, an impressive rally for sure.

Gold continues to stumble below US$1,200 and I see it next at $1,129–$1,140 on its way to $1,040 to $965 down the road perhaps.

Now what? I suspect that beginning Monday the clouds could start to gather and the remaining vestiges of this rally will wane. Given all the great news from Europe Stress Tests, the strong corporate earnings, the financial regulations reforms, the unemployment being extended, Goldman Sachs settling, the BP oil leak getting capped. . .what is left for the bulls?

So with all the above said, here is my opinion. If those Max figures do not get taken out materially, then the best trade near term is to be shorting the various indexes. I suspect buying some BGZ in the last 1/2 hour of trade today around $14.50–$14.70 was a possibly very nice trade entry for next week.

I continue to expect a retest of 1011 on the SP500, retests of lows on other indexes, and the Emerging Markets to break down as well. Will I be correct? Sure doesn't look that way tonight does it?

Can the market bottom after only eight weeks of correction and 38% retracement of a 13-month rally? Possibly yes—and for sure I am a long-term bull given the larger wave structures. However, the probabilities are slim that that was the bottom in my opinion.

Next week we will find out if I was way off base, or if my warnings were worth the time to type them. Please check out my market forecast website at www.TheMarketTrendForecast.com for samples, testimonials and options to subscribe.

Dave Banister

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