by William Kurtz, CandleWave LLC
The Great Rally of 2009 came to an end on May 2, 2011. It was the greatest rally ever seen in the stock market. At its end, it had 
retraced almost 80% of the decline from the all-time market top of October 2007. The May 2 peak and subsequent reversal of trend marked a turn of enormous significance for the future of stock and Index prices. Since that time, prices have posted their first major decline, to the Low of October 4, 2011, in what will be an ongoing series of downwaves. Impulse waves in the direction of the main underlying trend are partially corrected by a countertrend move; and that is exactly what has happened since October 4: the Indexes have partially retraced the declines which occurred from their respective May 2 tops to their October 4 Lows.
The Indexes have accomplished that retracement variously – some have retraced more than others, some less. The Dow Industrials Index has led the pack higher; the S&P 500 less so, and the Russell 2000 even less than that.
Click on chart for larger image.
The chart of the S&P 500 Index shows that the 500 has retraced about 63% of that decline, and that it is again challenging, from below, the “Neckline” of a bearish Head & Shoulders Top formation. As you can see, that Neckline has proven in the past to be strong Resistance to further price advance. (Not necessarily an absolutely unbreachable Wall, but Resistance). It should prove to be strong Resistance again.
Click on chart for larger image.
The chart of the Russell 2000 Index shows that a Candlestick Bearish Engulfing Pattern emerged in May 2011 at the top of a long price advance; and true to form, prices declined, eventually to the Low of October 4. As in the case of the Dow Industrials and the S&P 500, the Russell 2000 has been retracing a portion of its decline from May 2 to October 4; but the Russell’s retracement has been markedly weaker – only about 54%, compared to the Dow’s 76% and the S&P 500’s 63%.
This tells us that the countertrend rally since October 4 represents a concentration of institutional investors’ interest in the large-capitalization stocks – the “cream of the crop,” the 30 stocks which make up the Dow Jones Industrials Average Index; while the “retail investor,” who typically focuses his interest on the lesser-capitalized stocks which are included within the Russell 2000 Index, may be less sure that the rally “has legs.” The Dow Industrials Index has been the locomotive, while the Russell 2000 has been the caboose.
I think that the rally is coming to an end. The Dow, especially, is greatly overbought. Our Indicators are suggesting strongly that a 
peak is very near. The 78.6% retracement level should pose resistance to further price advance in the Dow; and there are other internal resistances just above that level, as well. Dow 12500, or
possibly 12600, should be about as high as it should go.
When the tide turns, that will be the kickoff to a very long decline, probably increasing in strength as it goes, which eventually will drive the Indexes to a point below their Lows of March 2009, at the start of the Great Rally.
“Fasten your seat belts; it’s gonna be a bumpy ride.”
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