Tuesday, October 20, 2009

Investors Beware - Numerous Warnings For Market Ahead

First, we should review a few key events. Off the October 2007 highs, price broke down in a major way, giving us a gigantic five-wave decline into the March 2009 lows. Since that time, the indices have been in a strong recovery. On the NDX, this recovery has carried price just below a 61.8% retracement of the five-wave decline, while the Dow and SPX have retraced a bit less than 50% of the same.

Given the proximity of the NDX to the "golden ratio" (a term for the all-important 61.8% retracement level), even this super long-term point of view provides insight into the importance of action from here. If we're in a larger long-term decline off the October 2007 highs, price will turn down from somewhere in this area on the NDX. Again, this long-term point of view only adds to the importance of what's taking place right now.

If we move in and focus just on the seven-month advance, we find a number of interesting clues. Most important is the fact that the advance could count complete. That doesn't mean it is; it just means that if a high was recorded, the price pattern could support it. One aspect of this pattern that has grabbed my attention is the nature of the move off July's important low (it's important because it marked the end of the only real pullback we've seen for seven months). Off that low, price has given us a move that is clearly three waves up.

So if price continues down off recent highs, this pattern off July's lows would be left as a wave three. I've looked at this from every angle, and I keep coming to the same conclusion: If the up leg off July's lows is left as a three-wave move, it would have to indicate that the entire seven-month advance is over and a large multi-month decline has begun.

And once again, if price continues lower off September's highs, the advance off July's lows would be left as a three-wave move, and that would look like a very bearish statement. Thus, investors should prepare for significant volatility and a potentially painful decline.

Every last degree of trend, including the multi-year trend, is closely watching the near-term pattern. That's because the opportunity is there for price to break down and leave behind an important high.

All of this can be broken down into key levels. If today's advance continues and price moves through 9700 Dow, 1055 SPX, and 1705 NDX, the downside pattern would be confirmed as a three-wave move. That would mean that an important high is not in. Conversely, if price continues lower off recent highs, and is able to move and stick below 9500 Dow, 1025 SPX, and 1650 NDX, it would indicate that we are looking at important high, and lower levels should be expected for at least the next several weeks.

In a market like this, having proximate key levels on both sides of the market is all you can ask for. Certainly, it would be a lot more interesting if we could already conclude if a high was in fact in or not. But we're not here to guess at it, and that's exactly what it would be at this point, regardless of what we wish were the case or what we might read elsewhere. No doubt about it, the potential is there for an important high, but until price follows through on it, it's anyone's game.

What should investors, money managers, and even institutions do? Take appropriate measures to hedge your investments at these levels. This is no time to entertain Mr. Greed.

Ryan Henry

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