After the short covering rally of last week, which had an impulsive wave character, the expected weakness of this week is rolling. The impact comes from the TECH sector, as we assumed, and is a running theme throughout the earnings season. Nevertheless, weakness in financials can be expected as well, since a pullback after such a rise is mandatory and can be substantial. The 40% rise in the BKX will give back 50% at least – it's honestly hard to say. The impact of the new shortselling rules have some impact but we are looking for a week of rising volatility, close to 30 will be the bias when the NDX drops below the prior low of 1759, which is likely. Basically, the intermarket divergence turned now in favor of financials for the time being. But its not a safe ground, despite the assurance of Paulson the US banking system. It is far from being sound and even the better ones are expensive like JPM. But we are, after all, in a sucker rally not in a substantial turn of the markets. Yesterday, I read an interesting peace of research about the July 17 turns, which were most of the time wiped out weeks later. Wachovia's earnings will determine the bias for today and since we have a new CEO (from Goldman, the former Undersecretary of the Treasury), we can expect a little disappointment in earnings rather - the way Thain from MER did it when he took over to make a steep clean out and put it on the old CEO.
To put it into perspective, these kind of corrections have at least an ABC count but might turn out to be more complex. The current wave was the wave A and we switch into wave B, giving us target of 1225 SPX. The NDX is running on a different count scheme and should test the 1760 at least, but very likely will make new lows heading for 1670/1700.
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