Thursday, October 1, 2009

Market Falling as Planned, Internals Support Wave 3 Possibility; October 1, 2009

The market closed on its lows and sold off sharply in the last 15 minutes capping an extremely bearish day. The evidence is piling up that a top is in and a new trend has formed; a downtrend. Let's review what happened today that made it so bearish:

1) (most obvious) The market sold off sharply with the Nasdaqs and Russell 2000 getting hit the hardest at over 3%. These are high risk indices and it illustrates the fear out there to dump the high risk assets here.

2) The financials have led the market lower and higher so it's key to watch them for direction. Today the XLF sold off almost 4.5%, and it did so impulsively.

3) The S&P, Nasdaqs, Russell 2000, DJ Wilshire 5000, and others all confirmed the Dow's new low yesterday, eliminating the bullish non-confirmation I spoke about yesterday.

4) The internals of this selloff were extremely weak. As you can see from the above snapshot from Scottrade (click on pic to enlarge), almost 95% of all volume on the NYSE was to the downside, there were 5 stocks down for every 1 stock up, and the S&P had only 22 stocks trading to the upside. This is extremely bearish and fits the internal characteristics we'd expect from a wave 3.

5) Today was a broad based selloff with everything declining essentially but the US dollar.

The possiblity that a major top to wave 2 or B is in has increased signficantly after today's action. With the market tanking into the close, it's quite possible we'll see some follow through early tomorrow morning. If wave 3 or C has started, rallies may not be big and/or long, so playing for a bounce is not wise.

I'm working on key levels that will confirm wave 3 down and will post them as soon as I can. Nothing has changed as of yet as far as risk levels at this point, 1078 should not be broken any time soon, let alone 1070.

Be back shortly....


Michael Eckert,aka-Columbia1 said...

Don't forget the trendline breaks, technically that is a very big event :)

Gustavo said...

I am seeing in the short time the supports of C in 4.11, and 9277 in the dow how important if we can go under this levels.
Great work in your blog!!
Can you post an Elliott count for the time frame 1 day in the USD/JPY?
In the last time this pair moves usually in the other direction what the dollar index moves.
Thank you.

Todd S said...

Thanks Michael, I posted a trendline on the daily S&P cash chart today.

Todd S said...

Hi Gustavo, unfortunately I don't track the USD/JPY and the decline doesn't look impulsive really. The pair is not a good mirror for the US dollar as a whole because the JPY tends to strengthen on stock market weakness, pushing the USD/JPY down when the other dollar pairs rise. I recommend shorting the EUR/USD or going long the USD/CHF if you want to go long the dollar.


Gustavo said...

Thank you Todd:
I am still long the USD/CHF, but I am reading the problems in the automaker Toyota, where one important directive talk about the extreme level in the USD/JPY, and I think is very probable one intervention of the bank of Japan, because this level affect seriously the industry in this country.
May be the relation with the stock exchange or with the other pairs can change in the future, I don't see why the future will be the same what the past.

Todd S said...

I wouldn't trade based on what the Bank of Japan MIGHT do. FXCM has said for a long time that the USD/JPY is thrusting from a huge multi-year triangle and should reach 80 before any bottom forms. You can follow their analysis under the "Daily Technicals" column at:

Gustavo said...

Thank you for your comments!