Wednesday, December 16, 2009

Asian Session Sparks US Dollar Short Covering Rally; S&P Futures Print 5 Wave Decline

The dollar spiked higher as we went into the Asian session following the Fed statement today. Perhaps the dollar shorts are getting a bit nervous now. This nervousness and short covering should be a contagious action that will build in momentum in a relentless spiral within itself, raising the dollar higher and higher for several months. Of course, with the short term wave count unclear, a snap back wave 2 type decline can occur any time though. But the evidence is quite strong that a significant US dollar bottom has formed, and surprises and the least resistance should be to the upside. Until the series of higher highs and higher lows is broken, the short term trend remains up. Any significant drop that stops me out will only have me looking to re-enter on the long side at a better price.

The dollar bullishness has put some pressure on the S&P futures tonight and has created a textbook EWP five wave impulsive decline as you can see from the attached chart. So it's possible the current decline may be the start of something bigger, but we'll have to see how the wave structure unfolds from here. The S&P bounced off the top of its range today, so with this 5 wave decline tonight it appears that at least in the very short term the trend is now down for the stock market.

So that's all for tonight. Just wanted to write a quick post on this interesting action I noticed.


Rob said...

Today seemed like a nice win for the bears, especially the mini-selloff (vs usual rally) at the close. We hovered and closed near the trendline running from the 1029 low through last week's lows, which could mean a turn back up. But I'll take today over the huge post-FOMC spike we had last month!

I also find it interesting that that same trendline touches the 1068 futures lows from Thanksgiving. It makes me intrigued by a count Columbia posted on his site:

Ever since we had that 1068 futures low on Thanksgiving, yet never approached it on the stock market after the latter re-opened, I have been musing about how Elliott Wave Theory might reconcile that divergence. Prechter and Frost has little discussion of futures, save for saying that futures can undergo sharper short-term price swings due to their high leverage. But looking at the tape as a recording of investor sentiment over time, I would think the futures wave count over the past month is probably the better one to use. Just curious if Todd (and others) have an opinion on this ...


Todd said...

I think it's always good to search for the bellwether that forecasts where the larger market is moving at a given time. One market will not always lead the way. Oftentimes the Nasdaq or small caps lead the way, other times it may be a sector like commodities or financials. But sometimes it is also the futures. Because the futures have access to everyone 24 hrs a day, it can act as a good crowd psychology measure. However, like you said, the high leverage can put a wrench in a good measure of social mood, as well as the fact that not as many people trade the futures and that there are several hours a day where the futures volume is so light that wild swings can really screw up a wave count that isn't representative of the collective crowd.

But in general, I personally think it's good to stay nimble and look for the leader at present time and not stick with one market because it worked well in the past. I'm not saying that's what you're doing Rob, I'm just talking in general. If the S&P futures keep declining in 5 waves and fail to make new highs while the cash index is inching new highs and printing overlapping waves, then of course we'd turn to the futures for leadership. Right now, I feel it's the Russell 2000 and the XLF providing that leadership.

Good comments Rob, thanks!