On Monday, I talked about money flow, and how it was negative on that 3% up day, which indicates that the big money players were selling into strength, as opposed to accumulating positions. This is not at all consistent with a meaningful bottom in the market. The market cannot generate a sustainable rally unless the big money is buying, because obviously John and Mary Lunchbucket are not going to "move the market" this week by contributing eighty-seven dollars to their 401K.
For this reason, I would like to present a couple more follow-up charts on money flow. The first one is from yesterday, and on this chart you can again see that "da Boyz" were in distribution mode:
The second chart is presented for contrast. This chart is from October 5, and illustrates how the big players were accumulating stock after the last major bottom in the market:
I'm not going to show fifty-seven different examples of this, but it's a pretty consistent pattern. Even near important short term bottoms, the heavy hitters are accumulating shares, not distributing them. This would appear to be further evidence to support the preferred view that the rally is nothing more than a dead-cat bounce, and the primary trend is now down.
Again, the main question in my mind is whether the rally's over, or if there's more to it.
The rally consisted of three waves up, and as such, could be complete. However, there is an interesting Elliott Wave phenomenon at work in this particular case, because the decline counts best as an extended fifth wave. Extended fifth waves have specific retracement targets, and they often perform complex "double" retracements. There are never any guarantees, but there are reasonable odds that we have only seen the first leg up of this type of double retracement. A new high would also serve to turn sentiment around, and get more investors "bulled up" and believing that we just made an important low.
Unfortunately, there is simply no way to say for certain exactly how the correction will play out. By nature, corrections are much less predictable than impulse wave patterns. The market already made it into the blue retracement target box, so until I see more clues from the market, all I can talk about at the moment is further probabilities The chart below roughly depicts the two most likely possibilities. Either the top of the rally was made on Tuesday, and we head down directly from here -- or we have one more leg up in store.
My preferred target for this bounce remains the same as it was yesterday: 1209-1225. Specifically, 1222, but we'll see how close that comes.
In both cases, I am anticipating lower prices on the horizon. My first short-term target after the rally ends is 1130-1140. Medium term, I expect the SPX will head down toward 1000-1050.
Sustained trade above 1225-1230 would call this count into question, and if that happened, serious consideration would have to be given to the bullish alternate count, despite all present signs to the contrary. Currently, I remain in favor of the view that this rally is short-term. Trade safe.