Tuesday, December 22, 2009


I've noted before that contrary to popular belief the initial move out of a coil is often a false move usually followed by a much stronger and more durable move in the other direction.

Well it looks like the coil is going to break up this time. It is certainly breaking that direction on the Nasdaq 100.

Option traders have now gone ballistic buying calls. Usually not the best sign for continued strength over the next two months.

The next thing I will point out is the duration of this daily cycle. Today is day 35. The daily cycle rarely lasts much longer than 40 days. In `04 during similar circumstances, namely the topping of the second leg of the cyclical bull, the daily cycle stretched 45 days.

The market then entered a multi month correction that eventually served to separate the second leg of the bull from the third. The Nasdaq initially corrected much harder as it entered the seasonally weak first quarter.

I was hoping the coil would break down and give us a nice clean move before initiating the third leg of the bull. This break higher now lowers the odds of that happening significantly. It now becomes more likely we are going to see an extended complex correction similar to what happened in `04.

We should see some short term follow through to this breakout but as we are on day 35 and very late in the daily cycle, trading this breakout will probably be better suited to day traders or very short term traders as it's unlikely to last very long.

I'll have more in tonight's update.