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Sept 21st, 2010: Update 5 – McClellan Osc Warning

Posted by pugsma on September 21, 2010

6:05 pm EST:   OK everyone knows I’m bullish on the market intermediate and longer term.  But I have to show everyone this Daily SP-500 Candle Chart tonight.  This chart is some MAJOR EYE CANDY for the Bears.  The McClellan Oscillator (NYMO) is showing significant negative divergence with the SP-500 price action over the past 2 weeks and more importantly over the past 2-months !!!  This is a big time reversal warning signal for the SP-500.  The last such 2 month-long negative divergence between the SP-500 and NYMO occured from March to April 2010 and produced the late April 2010 top and a subsequent 210 point (-17.5%) drop  into July 1st 2010.  If this similar McClellan Oscillator negative divergence  plays out the same way, we are looking at 210 point (-18.2%) drop from 1149 to 939 for the [C] of P2 wave.  Remember that 943 is one of the P2 targets, as it’s a 50% retrace of P1.   Also if this happens, then P2 will have lasted 6 month or 46% of the time of P1, which lasted 13 months.  This deeper P2 corrective count is shown in red on my daily chart.

Another major warning sign to the bulls is that the bullish sentiment reached a level above 50% last week.  With the significant McClellan negative divergence and the extreme bullish sentiment, it could be about to get ugly for the bulls.  They key will be how the market participants react to the next significant pull-back.  If the key 1090 to 1107 pivot supports hold (also the same area where all the key moving averages are now clustered), the bulls can mount a charge to 1251 going into year’s end.  If the supports fail, then look out below.  The 939 area for [C] of P2 could be reached just in time to make sure the Democrats are crushed in the mid-term elections.  Hmmm…food for thought.

My advice to the bulls is to be very careful out there the next few weeks.  Don’t feed (i.e. panic selling of longs) the bears and keep you children (i.e. stops) close  (i.e tight).   😉

Also, realize a negative divergence (like this on the McClellan) does not have play-out as a full-blown 210 point (-18%) crash.  It could play-out as a mild 30 to 40 point (-3 to -4%) drop, as I’m expecting for the wave (2) of 3-[1]-P3 primary count.

SP-500 Daily Candle (EOD):

SP-500 Daily Chart (EOD):

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