Wednesday, December 16, 2009

Fed Statement Today; Dollar Uptrend Intact; Stock Market Still Consolidating

The market rally is coming to an end and the fractured nature of various markets is taking hold. First the financials left the rally as measured by the XLF, then the small cap stocks left the rally (Russell 2000), now with the dollar rally the commodities are leaving the rally as well. The core of the rally is getting thinner and thinner. It's like Alexander the Great charging up a hill with his army only to reach his enemy and turn around to see just a few troops behind him. Even Alexander would eventually retreat under these circumstances. But Alexander hasn't turned around yet. So we still have to wait. Or maybe someone can throw a rock at his head so we can get him to turn around and see how mad he his for still running up the hill :)

The key remains the dollar. The dollar rallied big against the Australian dollar last night, finally catching up to the other dollar pairs. The trend is clearly up for the dollar with constant higher highs and higher lows the past several days. I attached an extremely aggressive US dollar (using the USD/CHF) wave count. But this count does not instill high confident because whenever an elliotician has to count a move as a series of 1s and 2s, it usually means it's wrong. However, I cannot come up with another highly viable short term wave structure at this point, so I'll use this until it's invalidated. If correct, it will soon undergo a wave 3 at various degrees which essentially means a straight line up. Only a break of 1.0230 would invalidate this count. No matter how aggressive of trader I am, I would not short the dollar at all, I would only be looking to go long, on any timeframe.

As for the stock market; blog reader JD brought up a good point regarding the fractal nature of the market now and back into the March 2009 lows (see discussion here with JD, as well as with Rob regarding the dollar's impact lately). I attached charts illustrating their similarities. Last year we had a consolidation lasting about 4 months that eventually led to a sharp drop lower to new lows which was quickly reversed and never looked back into present day. Today we've had similar consolidation, and as I've said before I would not eliminate a "blowoff top" from occuring before the wave 2 or B top forms. If history repeats itself, only inversely, then we'll get a sharp rally from this range we're in now, targeting the 1200 S&P area which will lead us into a major top and reversal. If it occurs, the rally should be short lived and completely reversed quickly just as it did into the March lows inversely.

Trading Strategy: If someone were to be conservative, I would think the best strategy would be to wait to go short the S&P on a strong close beneath 1085, preferably closer to the 1075 level. If someone were moderately aggressive they could also possibly wait for a breakout rally out of the range and start shorting when a reversal occurs with a stop at the recently established high. This would probably take repeated attempts to catch the top, but once someone can catch one, the rewards should be big. If someone were very aggressive they could get long on any pullback with a stop loss just below 1085. So those are the possibilities I see at the moment to trade.

Remember, at 2:15pm EST, the Fed will issue its statement and there tends to be a lot of volatility in the markets surrounding this. So I recommend everyone double check their stops and limit orders are in place, and are the ones they still want in place. The actual Fed statement is not important to us ellioticians, what's important is the wave structure that surrounds the statement, and also the reaction in the following hours and days after the statement's released.

Good luck to everyone! I'll be back if something significant develops after the announcement.


adan said...

i tell ya, i'm dollar bullish (not just for my holdings, but for our country) - but your dollar bull charts scare even me!

but in a good way, like at the fun house carnival ;-)

Rob said...

Todd, thought you might be interested to know that DailyFX has made a very aggressive dollar forecast similar to yours ... theirs counts EUR/USD, which has formed a pretty nice-looking wave structure so far:

And many thanks for sharing your thoughts re the dollar-equities relationship.

Todd said...

Lol, good one Adan! That bull count on the dollar is a low probability, but we'll know soon enough if it's correct because the dollar would have to soar in a straight line up soon if it is in fact correct.

Regardless, the dollar is bullish for the next several months in my view. It's just the short term wave count that's in question.


Todd said...

Thanks for sharing that link Rob. I like Jamie Saettele with FXCM, he offers great analysis, and it's free! The action in the dollar and the stock market in the coming hours/days after the statement release is what's really key. I'm aggressively long the dollar with tight stops right now, and also have buy stops above the recent highs to catch any large surge that may occur if my very bullish count is correct.

Thanks again for sharing!


Rob said...

EUR/USD has broken under 1.45 ... for the first time since October 2. Let's see how far this goes.

Todd said...

Yeah, and the EUR/USD has now broken under 1.4400. Looks like folks in the Asian session are covering their dollar shorts. I'm riding the dollar momentum higher with a simple trailing stop and the most recent swing lows strategy. So far it's worked very well as the series of higher highs and higher lows is virtually unbroken.

Sustained dollar strength will be a major obstacle for equities. They may be able to hold out for a little while, but if the dollar stays bouyant, eventually equities will cave in to the pressure.