Outside Up Day?

Today the market staged a major reversal.  We had a question on the October 13th Post regarding an outside down day and replied to the question with our normal loquacious style.  The answer described how the market might overreact at the end of a move and would create a reversal.  That overreaction would trade much lower or higher than the day before but then would turn around and manage to go in the other direction and push past the previous day’s high or low, depending on which way it was going.  

Today we saw a reversal day that is considered an outside up day, which normally is a very bullish thing especially on the volume we saw today.  The one lacking thing is that it really didn’t happen on the end of a down move, it happened in the middle of an upward correction.  In Elliott wave theory, this would probably be considered a C wave which is the terminating move in a correction.  

To simplify that statement, we have seen a good drop in the market from the first of the month and now is time for an upward correction to relieve some of the market’s oversold nature.  The way Elliott wave teaches is that the correction should be a three wave affair with a nice up move (the A wave) and then a pullback (the B wave) and then the final powerful last up move (the C wave).  For those of you who read technical material, that’s what they are talking about when they say C wave.

Today was a classic C wave in that we saw a nice A wave from the lows of last week, near 10,150, to yesterday’s high around 10,360, about a 200 point move.  Elliott wave theory suggests that the C wave could be about the same distance as the A wave.  I know this is getting pretty technical but from this morning’s lows around 10,230, the bottom of the B wave, we should experience about a 200 point move, the C wave, to complete the upward correction.  Well, the Dow closed at 10,414 for about a 185 point up move so we might have another 15 to 35 points to go on the upside tomorrow.  

We also consider that there are several other significant resistance points in the 10,400 to 10,500 range that should impede further progress on the upside.  Of course, we could be wrong, but we do think another day of trading in a small range tomorrow on fairly good volume would signal to us that this scenario is gaining in stature.  We think that the oversold condition could relieve itself on a day like that, too, and could lead to the next, very deep, down move that we expect going into the end of November.  

More technical stuff including more Elliott wave for some of you:  The move from the highs around 10,700 in the Dow to last week’s lows around 10,150 is about 550 points.  A normal Fibonacci retracement would we about 61.8% of 550 points about 340 points putting us at 10,490. The other idea is that both the 50 day SMA and the 200 day SMA are trending down with the 50 under the 200 and the Dow under both pulling them down.  Both of these represent resistance to the upside progress with the 50 day at 10,422 and the 200 day at 10,509.  

We have predicted a rally that would give us a good chance to get more skin the game and the market has given us that gift we talked about.  Selling into a rally like this can be a little dangerous if we aren’t a little careful so we have given some parameters for upside containment.  If the Dow decides to travel higher than that tomorrow we will report tomorrow night.  We are hoping for a good rendition of our forecast of the C wave completion to the upward correction over the next day or two.

Treacherous market right now.  Be careful.

Dow Industrials:  10,414.13  +128.87
RYVNX:  21.53  (took a hit today with this up move)
TLT:  90.35