Thursday, December 3, 2009

Markets Fractured and Sloppy, on Many Levels, Among Various Indices/Sectors

I have a lot of charts and comparisons to go over and I'll try to do my best conveying my message with out it getting all "spaghettied" and confusing. The bottom line is that the markets are very fractured in the larger timeframes (daily), and now they are showing a fractured structure on the smaller timeframes too. The market is not healthy, and the underlying fracturing is weakening the market, despite the window dressing new highs in the Dow and S&P lately.

First, let's look at the top chart which shows an updated 2 hour chart of the Australian dollar vs. the US dollar (AUD/USD). Today's rally carried to the 100% retracement level of the start of wave 1 exactly at 0.9321. This is the absolute maximum retracement for a wave 2. So the count posted yesterday and today remains valid. The reason this is of importance is because this pair moves fairly inverse to the US dollar, and is sporting a clearer EWP structure and wave count that other pairs that better follow the dollar, like the USD/CHF and the EUR/USD. When the AUD/USD and EUR/USD top, the stock market should top as well. The pair cannot rally above today's high, and should be in for a wave 3 of (3), which means it should collapse very soon in a fast and ferocious manner for the count to be correct.

Second, look at the financials ETF (XLF) daily chart. You can see the financials topped in mid-October, even though the Dow and S&P have kept charging higher to new highs since then. The XLF is lagging drastically, along with the Russell 2000, showing the inter-market divergence and strucutural weakness in the overall market I've been discussing for the past few weeks. You can also see that the XLF made a nice clean 5 wave decline from the high, then rallied in a 3 wave a-b-c structure I labeled wave (2). After some consolidation, most likely a series of small 1 and 2 waves, we got a big 2% sell off today. That fits well into the wave count which calls for a wave 3 at various degress to occur soon, which basically means an almost straight line down. So this count too remains on track, and very short term bearish, along with the Russell 2000.

Third, look at the daily chart comparisons of the Nasdaq 100 (left) and the S&P 500 (right). Click on the charts to enlarge. You can see that the Nasdaq 100, and the Composite (not shown), failed to confirm the new high the S&P and Dow (not shown) made on a daily basis. this is just more fracturing now occuring on various levels with various indices. This evidence, combined with a strong selloff today is very bearish.

Fourth, this last illustration is a good example of how bearish a non-confirmation can be when other markets, indices, or sectors do not confirm new highs. They are 15 minute charts of the Dow (left) and S&P (right). Click on the bottom charts to enlarge. The S&P shot to a new daily high while the Dow failed to confirm it. The result was a sharp sell off into the close today. Now this is just an intraday divergence among two indices. Just imagine how much stronger a decline will be when several indices and sectors on the daily charts are diverging, just like what is occuring now, and decide to finally sell off. Big decline ahead.

Today's action is encouraging for the bears as it is evident the market is looking for a reason to extend an overextended market higher and is having trouble finding it as it's been having trouble making any significant gains the past several weeks. However the bears have not been able to gain control of the market on downturns either. Until the bears arise in strength, which will be illustrated with a high volume day and consecutive selloffs, the market probably won't be able to tank in wave 3 or C. I suspect that people were selling today to reduce their exposure to stocks ahead of the big jobs number being reported early tomorrow morning. Lately, people have bought the dips when the jobs numbers were reported, so a break of that trend would be a good start for the bears. A big down day tomorrow may be very telling and would be encouraging for the hungry bears looking for a major top to gobble up.

So I remain short term neutral at this time with a slight bearish bias heading into tomorrows session. A big sell off tomorrow on big volume and weak internals will be a big sign that the prior trend of market action is breaking, and that perhaps a major top is in. Tomorrow's action should be very telling.



donatoloscalzo said...

Very interesting analysis and charts, especially the ones on AUD/USD. Keep up the great work!!

Todd said...

Thanks, I appreciate that :)