Stock Market Analysis - January 23, 2011

Recap

Last week, I stated that the analysis is suggesting that the market is tiring but it might continue to rise at a slow pace. This is pretty much what has happened. Market continued to move sideways during the last week. 

Stock Market Analysis

Based on current sentiment readings, historical perspective, indicator's analysis and Elliott Wave structure, it seems like market can still 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 tiring and is near a top. However, this top might be a few weeks away. Recent sharp decline has not generated a sell signal so far. If the recent low holds then the market might be setting up for another up move. Due to relatively strong internal strength, this market can continue to rise into mid February 2011. However, caution is recommended. As long as short-term trend is up, one should not try to short a rising market based on bearish indicators. 

One important development to keep in mind is that optimism is still very elevated, which means that there are very few short-sellers in the market. Under these circumstances, if the market tops it can result in a sharp decline. 

If market closes below 1275 then market might see further selling. 

High Probability: Rise to a top in the 1310-1340 (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 has already topped and the correction has started. 

Risk Management: First indication of trend reversal will be a break below 1275 (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 that the Lower Probability scenario is playing out. In this case, market will decline into a low by mid February 2011.