Some ideas about the market's medium term future

Last Tuesday (in US it still was Monday) I've posted the projection on how the markets could behave with some US sectors and individual stocks during the nearest future in the russian part of the blog. The main idea behind this projection is the fact that US markets are entering the period of the broad top formation for the whole rally which started from the March '09 lows. In this context, there is high probability that many individual stocks have already put their cyclical tops in and are in early stages of decline. The same thing may be true even for major broad indexes (SPX, Dow Industrial). But what was clear at that point for me, it's that some important individual stocks, secondary indexes and even the Dow Transport were still strong ans able to refresh the new cyclical highs before the things really roll over. So, as for example, I've cited just few of them:
Russel 2000, XHB (homebuilders ETF), IYT (Dow Transport ETF) and INTC (Intel Corp). All of them seems to be on the road to complete the expanding triangle pattern:

Since that post, the defined  supports were touched on 3 of 4 (INTC missed by about 30 cents). Market has rallied  strong and many pundits have declared the correction over.
I'm not sure the things are so simple, especially for the broad indexes like SPX or Dow Industrial.
Let's take the latter. If we look at the candle charts, the move since late April looks more corrective than not.

 But if we take the close price only, things are much  clearer. And they will become even more clear, should we retest the last Tuesday's lows, especially closing near them. In this case we'll have a  5 waves decline on the close basis, meaning, from the point of view of classical Elliott wave principles,  that the trend for the Dow Industrial has changed. But, since many  other narrow indexes are still looking bullish , the rally in DOW will be long with a deep retrace.  May be, at the top, we will see the case of the Dow theory  non confirmation : new highs on Transport with the failed Industrial.

Risk aversion: another indicator

In a previous post I've already discussed one of my favorite risk aversion indicator in equity space : the Nasdaq to Dow ratio. Now I'd like to watch another important ratio: small capitalizations vs big ones. Small caps, as asset class, are considered to be more vulnerable to a recession, since they  have more difficulties to get an access to cheap financing. Therefore, if we, as I expect, are heading in the 2nd dip of W-shaped recession, the small caps should show some weakness.
And it's what they do on the chart bellow. The charts shows the ratio of Russel 2000 (2000 medium to small capitalizations)  to SP100 (hundred biggest US  caps).

As we see, the rally off its lows has started well before the indexes their-self  did it. And it has ended mid-September, a bit less than 10 months later. Since,we have drown a regular 1st wave down, signaling from the Elliott waves perspective the trend change.
If we apply the time the rally in the risk appetite has lasted to the SP500 or Dow indexes, we'll get the projection of their top for the year end, once again.

Watching the grass grow

While I've been expecting that this rally should last until the year-end  I didn't think it would get so boring. I definitely prefer the tops of bull markets, with their spikes as early bears get squeezed.
Nasdaq Composite goes nowhere since 2 months already.

Hopefully, there is DOW, the big caps are still desired.

And if you think we gonna break out on the upside, look at the high beta small caps Russel 2000:

And some of not so old leaders,

Homebuilders:

And Semiconductor Companies:

 Ok, ok, I know, the real story is about Gold. There is a lot of action. People are scared by coming hyperinflation and are buying gold as if there is no tomorrow. Personally, I'm far from being sure , most of them really understand why they need gold, but it continues to be the game du jour until it's no more.

The wind of change

So, the expected correction has finally started and, as for me, did the most of its job last week. In my opinion the trend change is  now  confirmed for semis, small caps, home builders and transports. For Nasdaq my scenario seems to be followed with an exception of starting point. The only broad group where the top is clearly not in are big caps with DOW Industrial and XMI as benchmark indexes.
For inflation related stuff  things are a bit trickier. On one side the GSR (Gold to Silver Ratio) indicates the bottom is in.

On another, gold price and USD index charts still looks uncompleted. The same story for emerging markets ETFs. They had such a strong momentum before the correction has begun, that I can't see them not to make new highs before we'll actually roll over.

Are small caps weakening?

As was expected, the big caps are the leaders of this new wave up.  The XMI - Major Market Index (20 biggest capitalizations) has  closed last Friday at new cyclical high, while others (Nasdaq, SP500) are a bit lower.
An interesting chart for small caps - RUSSEL2000. We're approaching the previously strong support level of 650. So looking at the weakening momentum, it seems to be a good shorting entry point.