US Dollar is Key, Precious Metals Probably Topped, Stock Market Should Follow Soon

Just a quick update this morning on a few things I think are significant. As I've said many times, the US dollar is key to the stock market's movement. A dollar bottom and rally should result in a stock market top and reversal. You can see from my primary wave count on the attached chart of the 4hr USD/CHF that it's possible to count the rally from the lows as impulsive. But as you can also see from my alternate count chart below it is that it's also possible to count the rally as just an A-B-C correction which will most likely lead to lower prices soon. This should clear up as time goes by and wave structure unfolds. But now that we have the two top wave counts, we can watch the action from now on and see what fits best. The bullish count does remain my primary count right now though.

The reason the bullish dollar count is my primary count though is because of the action in precious metals. Gold has been in a blowoff top for a few weeks now but appears to have made its top. Last Friday, and halfway into today's US session, gold has dropped $83, or 6.8%. You can also see from my attached gold futures weekly chart that in addition to this, gold made a bearish weekly reversal candlestick. If gold topped, it will be hard for the dollar to make a new low, which means the current dollar count should be bullish as of right now.

The stock market is struggling to find direction, but the indications in the US dollar, precious metals, and several of the smaller indices indicate that a major top is forming and can give way at any time to a major sell off. Until the stock market gives us clear signs of that top occuring, I have to remain neutral in the short term, and of course I'm still very bearish in the long term.

Observe the Power of the Dollar on the Stock Market

It looks like yesterday's late day sell off was just profit taking and protective posturing for the jobs number that came out today because the major indices rallied to new highs and the Nasdaq confirmed the Dow and S&P's highs from yesterday, which eliminates the short term bearish non-confirmation. The longer term divergences remain in solid place.

Today's better than expected jobs numbers has everyone doing cartwheels on TV about the economy and the stock market. However the dollar has rallied sharply this morning as you can see from the AUD/USD and EUR/USD charts attached which move opposite the dollar. The stock market rallied huge this morning but so did the dollar. The stock market's rally could not fight the huge headwinds that a dollar rally brings, mainly because most of the rally from the March 2009 bottom was due to dollar weakness to begin with. It was just an inflationary rally in prices, not a fundamental underpinning of strength in the market. So the Dow went from a strong triple digit gain this morning to negative territory where it sits today.

I, and many others, have been saying for a long time that the key to the stock market's rally and decline is the dollar. A dollar rally will result in a stock market decline, and vice-versa. If today's reversal holds, we'll see if it has legs and runs next week. But the fact that people sold good news and the dollar rallied on a great jobs report is definitely bearish, especially because the past several months have brought rallying on jobs report day. A change in recent trends are another sign of a top, and today we have another piece of evidence supporting that.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

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.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Market at Crossroads

The S&P cash index broke above 1114 into 1116 so that makes me short term neutral the stock market. The market has been consolidating the past couple weeks, moving sideways and getting nowhere. This usually leads to breakouts. With the market holding up and eeking out new highs, despite the evidence suggesting a top, it hints to me that it wants to move higher. Points of possible resistance are the 1121, 1150, and 1200 levels. I'm not sure we'll get that far in anything other than a wild erratic blowoff top, if any rally at all, but those levels are worth watching.

Looking at the Australian dollar vs. the US dollar (AUD/USD) it only has made 3 waves down from the 0.9410 high, which is a correction as it stands right now. It could be a series of 1s and 2s like I labeled it, but it needs to stay beneath 0.9321 to keep that count as a strong possibility, and of course 0.9410 is ultimately crucial to the bearish case. Remember, a bearish AUD/USD is a bullish US dollar essentially. A bullish dollar means that the stock market should decline. So since 1114 fell in the S&P, let's turn to the dollar again for clues on the stock market's future movement. So an AUD/USD break above 0.9321 would hint a stock market rally phase is underway, and an AUD/USD break above 0.9410 would confirm it.

Nothing really stellar to report on the stock market other than breaking 1114 in the S&P and the the fact that the high risk small cap and tech stocks are rallying much stronger today than the Dow and S&P, which is concerning for the bears. I'll be back when something of interest develops. And as always, I welcome all your thoughts and analysis as well.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.