July 27, 2012 Postmortem

I say "postmortem" because that's what it was.  If you were bearish, anyway.

Certainly, after a shellacking like that, the bull count and bullish case becomes more appealing.  But isn't that what C waves (or, in this case, Y waves) make you think?  Make you believe the previous trend has resumed? 

In the case of a C/Y/Z of B/2, the idea is to make you believe the correction (be it bull or bear) is over, and that the bull (or bear) market has resumed, leaving you unprepared for the larger C/3. 

This chart is a bit heavy with trend, channel, and intersect lines, and I do sincerely apologize to any color-blind readers I might have.  The black line (April-May highs) is of course a particularly important line, but worth noting is the intersection of a couple sets of lines that the black line happens to bisect near-perfectly. 

1. The blue line, which tracks all the way back to March, intersected the purple line (June 19 and July 3 highs) today at about 1396.  If we need a "gap up and crap," it is reasonable Monday might try to open there.
2. The green (May 8 interim low and 1374.81 "b" of (x) high) and red (May 18 and 23 lows) lines not only intersect today, but do so at just about the HOD we had.

The trendline intersections may indicate the top is in fact in at Big Red Dot, which is bolstered by the fact that we hit Y=0.618*W on both the SPX and the DJIA.  A disadvantage is the fact that the Russell 2000 still is particularly low on daily stochastics, albeit no longer oversold.  Alternatively, we may gap open up to Blue Dot and fall from there - this may allow the RUT to relieve some pressure. 

On the other hand, the VIX behaved rather unusually today, not falling very much at all despite the massive up day, which may be a portent.

We also have several lines intersecting each other over the next week.  At the very least this would seem to suggest some sort of consolidation is in order if not an outright reversal.  Given how overbought the indexes are now, even if the up move is still ongoing, I'd be hard-pressed to expect the rally to continue with the vigor it has for the past couple of days.