Stock Market Analysis - January 17, 2011

Recap

Two weeks ago, I stated that the analysis is suggesting that the market might be getting ready for a rise into a top during the first week of January. Market made a high on January 6, 2011, within the pre-defined target, and then went sideways for 5 trading days before making a higher high. Last time, I also stated that there were several active fib relationships in 1280-1300 region. Interestingly, market is currently at 1293.

Stock Market Analysis

Based on current sentiment readings, historical perspective, indicator's analysis and Elliott Wave structure, it seems like market can continue higher for the next few weeks, albeit at a slow pace. This observation is in agreement with the new inflection point model. Detailed analysis is given below.

Conclusion

There are many flashing cautionary signals, suggesting that market is approaching a top. However, this top might be weeks away. But when this market will top, it will result in a sharp and scary decline because there are almost no short-sellers in this market. Short sellers are natural buyers, and in their absence, decline will be hard to contain. 

Market’s tone will be set by the next week’s earning reports including Citigroup, Goldman Sachs and others. In any case, as long as the short-term trend is up, one should not try to short a rising market based on bearish indicators. To summarize, based on the relatively strong internal strength, this market can continue to rise into mid February 2011. However, caution is recommended.

High Probability: Rise to a top in the 1340-1370 (SP500) area around mid February. This top will result in a significant correction, correcting the rise from July 2010 and probably even more.  

Low Probability: Market tops before mid February and starts the correction.

Risk Management: First indication of trend reversal will be a break below 1272 (closing), as of today. Based on current optimistic extremes and wave structure, one should get very defensive if such a break does occur. It might signal the Low Probability scenario is playing out. In this case, market will decline into a low by mid February.