Wednesday, January 20, 2010

A Top is in...

What an exciting week this has turned out to be in the markets. The S&P cash index made a new high by .04 points according to OptionsXpress, but the S&P futures fell short of a new high by .50 points according to OptionsXpress. Like I've said many times before, and as many of you know, the market will do everything it can to shake you out before it forms a major top and reverses. The Dow made a new high, but the Nasdaq Composite and Nasdaq 100 failed to do so. We also have break-away gaps from the major indices at this morning's open while all the major indices broke last week's lows. The Dow has been making new highs the past several days while other indices, especially the Nasdaq Composite, has failed to do so. This type of action, along with the break-away gaps this morning, are signs of a severe exhaustion in the uptrend. Although it appears that a major top is in, we've seen this market do crazy things to shake out the weaker hands, so I'd like to see the S&P close beneath last week's lows at 1131.39 today in order to confirm that a major top is in. Continuation and acceleration of this downtrend will strengthen the case that THE top is in of wave C of Z of [2] or [B].

Adding more pressure to equities is the collapse in precious metals today with silver down well over 4%, as well as weakness in the EUR/USD (US dollar strength). As you can see from the attached chart, the long term EUR/USD trend is now officially down as last night the the pair made a new low completing its 5 wave drop from the November highs. The pair should be at the beginning of a multi-month decline which means the US dollar will be on a multi-month advance. This will bring about tremendous pressure on the stock market and precious metals and other commodities, which also lends itself to the projection for a top in equities as well.

Many of you subscribe to and follow Bob Prechter and Elliott Wave International's newsletters, educational materials, and forecasts. I don't want to reveal any proprietary information they have for their paid subscribers, but they have been nailing this wave count and technical analysis for a long time now. And although they certainly are not perfect, no one is, they have been excellent giving average traders like myself a significant advantage in the market. I'm not just saying that because I'm an EWI affiliate, I'm saying that because credit is due where it's deserved.



binve said...

Hey Todd, I am in complete agreement Thanks again for all your work! I read it every day and it is definitely appreciated!!

adan said...

very true todd re ew's subscriber info; not always right, but really hitting the targets on the main indexes and on the dollar -

and you ain't done too bad yourself ;-)


Rob said...

Many thanks Todd.

How would you rate the odds that the downward action in EUR/USD is the beginning of the third wave down from the November peak, versus the fifth leg of the first wave down?

And if EUR/USD is finishing the first wave down, do you think the upcoming second wave retracement take off a lot of the pressure for equities to fall right here?

Thanks for thoughts!

Todd said...

Thank you both! Binve, I too appreciate you analysis as it's very in-depth and technical on the current wave structure, so kudos on that. I'd like to see those MA's you have cross down over each other soon, perhaps a couple more solid down closes will do that.

The XLF count is nice too, especially because it lines up great with Goldman Sachs' earnings tomorrow. If your count is correct, that sector should fall off a cliff real soon. Perhaps the reaction to Goldman's earnings will spark that.


Todd said...

Loosely thinking, I'd say it's a 50/50 tie on whether the EUR/USD is in wave three, or finishing up a wave 5 and about to go on a big wave 2. However, since stocks and commodities are poised to sell off sharply right now, I'd give a little advantage to the wave 3 now scenario.

Speaking of which, I actually just put in "sell-stop" orders just beneath today's lows in the AUD/USD and the GBP/USD. The EUR/USD has already fallen so much it's tough to get in right here, however the AUD/USD and GBP/USD have not fallen as much, making me think that if the wave 3 down scenario is happening then the AUD and GBP will tank hard to catch up to the EUR/USD.

It's hard to say what a wave 2 rally in the EUR/USD of this magnitude would do to stocks because the stock market was quite resilient to the entire EUR/USD decline since November. So it seems possible that a EUR/USD rally may not result in much action for the stock market. But I can say that a EUR/USD rally would not be helpful to the stock bears.

Hope that helps.