Stock Market Analysis - Nov 28, 2010

Recap

Last week's analysis suggested that the market might bottom during the Thanksgiving week. Over the last week, market has gone sideways to down - tracing out a triangle or 1-2 formation. Triangles are normally followed by a final burst in the preceding direction.

Stock Market Analysis

Based on recent sentiment readings, historical perspective, indicator's analysis and Elliott Wave structure, it seems like market is tracing out a series of first and second waves before a significant decline in third wave. Detailed analysis is given below.

Market Matrix:

This Matrix gives a pictorial representation of the internal market strength, indicators and suggested turns. Based on the current picture, we have many neutral to bearish signal, as evident from Red and Yellow colors. These color codes are based on my historical analysis and market scores. This Matrix is used to come up with market related trading conclusions.

This market behavior resembles the stock market behavior of February 2010, but in reverse direction. In February 2010, market bottomed and then went sideways (traced out a triangle) before launching a two month rally. A significant development at that point was that as the market moved sideways, sentiment declined sharply. This decline in optimism indicated market's trend reversal, as market shook loose a lot of bulls before a strong rally. Similarly right now, market's sideways movement has resulted in a noticeable increase in optimism. This might mean that market's trend has already reversed and market is just shaking loose as many bears as possible before the decline. As per "History Does Not Repeat Itself...!! or Does IT?" history will only repeat when very few people are expecting and presently very few people are expecting above mentioned similarity.

Conclusion

There are certain cycles bottoming in mid December. Above analysis points out to the possibility that this market might be getting ready for a decline into the middle of next month, followed by the end of rally (Santa Claus Rally).

High Probability: Decline into a low next week or further continue the decline. Nature of decline will govern the nature of low (long term low or short-term low)

Low Probability: 1- Rise to a new high before decline. 2- Very shallow decline and then make a new high

Risk Management: Keep stop above high (in case market decides to turn up) or keep stops above downtrend proprietary Moving Average. 

"The best speech is one that is short and reasonable" - Hazrat Ali