MARKET APPEARS TO HAVE COMPLETED FIFTH WAVE --FINANCIALS AND HOMEBUILDERS LEAD STRONG RALLY -- TEST OF FEBRUARY HIGH APPEARS LIKELY

LINE CHART SHOWS FIFTH DOWNWAVE... Earlier today I wrote a Market Message supporting the idea that the stock market appears to be putting in a bottom of at least intermediate proportions. I also showed a number of short-term positive divergences suggesting that the market is due for a rally. I got a number of e-mails asking for an update on my Elliott Wave reading. While the market was consolidating during February, I wrote that I expected the market to have one more downleg. That's because bear markets usually take place in five waves. Chart 1 is intended to suggest that the fifth wave may have just been completed. That's why I'm using a line chart instead of a bar chart. On a daily bar chart, it looks like the S&P 500 bounced off its January low (forming a potential double bottom). The line chart shows that a new low was hit. In either case, it looks like this phase of the decline starting last October has been completed. [The second trough of a double bottom can also serve as a fifth downwave at the end of a decline]. That doesn't necessarily mean that a new bull market is in the offing. It just means that the market is due for a decent rally. I've placed the 12-day Rate of Change (ROC) oscillator below Chart 1 for a reason. The rising trendline shows the positive divergence between the rising ROC and the falling S&P price. Positive divergences take on more importance if the market is in its fifth wave down. And I believe that to be the case. As a result, I've turned a good deal less bearish on the market. [Please see today's earlier message for some advice on what to do with that information].

Chart 1

FINANCIALS AND HOMEBUILDERS LEAD MARKET HIGHER... The market had a spectacular day today. Good news from the financial sector, combined with a Fed easing of 75 basis points, resulted in big stock gains. Since financials and homebuilders have been the biggest drags on the market, today's 8% gains in both groups took an enormous weight off the market. Chart 2 shows the Financials SPDR (XLF) gapping higher on very heavy volume. The daily MACD lines failed to follow the XLF into new low ground this week, which represents a positive momentum divergence. Chart 3 shows the S&P Homebuilders ETF moving up toward its 200-day moving average. Its relative strength ratio below the chart shows that homebuilders have been market leaders since January. New upside leadership has also emerged in retailers, transports, small and midcap stocks. All of those had also been market laggards. The ability of banks to hold above their January low also suggests that the financial selling has been overdone. That's good news for the market.

Chart 2

Chart 3

UPSIDE TARGETS ... Charts 5 and 6 shows today's strong upside gains in the Dow and the S&P 500. The latter index gained 4.2%. Volume was decent and big board breadth was positive by a seven to one ratio. That's a pretty impressive day. The red lines on both charts show where I believe the indexes are headed. Namely, for a test of their February highs. Whether or not they can get through those highs will tell if this is just an intermediate rebound (which I suspect) or something more lasting. Bond prices fell as stocks rose today. I expect that to continue as well. As I suggested earlier today, it may be time to commit some new funds to stocks and take some profits in bonds. I would concentrate new funds in those stock areas that are showing better relative strength. A rally in stocks could also produce a bounce in the dollar which could lead to some commodity profit-taking. In other words, a strong stock rally could cause short-term reversals in all of the other financial markets. At the very least, I would consider taking "some" profits in stock market bear funds. Chart 7 shows the Short S&P 500 ProShares Fund falling 4% today in an apparent "double top" formation. Chart 8 shows ProShares Ultra Short QQQ falling more than 8% today. Its daily MACD lines are negative.

Chart 4

Chart 5

Chart 6

Chart 7