Thursday, February 11, 2010

Despite Big Rally Today, Market Not Convincingly Bullish; Bears May be Set Up to Take Control Very Soon

Yesterday I put up a late post showing slight concern for the short term bearish view due to the action in the stock market and the US dollar. Today brought some clarity to that concern. First, observe the 5 minute S&P chart above. You can see that today's big rally was strong and composed of 5 waves that made a new high just under the 61% fibonnacci retracement level, my initial target for wave ii to end, and all the way up to 1092. When we're in a correction, it's important to look for 5 wave rallies to new highs because they are often "C" waves, which are the last wave in a corrective move. Of course you have to be careful that these 5 wave advances don't morph into a larger impulsive rally that may signal a trend change. But in the context of looking for wave ii to end, this 5 wave advance to a new high is welcomed. It makes it easy to get short, or establish more short positions because if the market drops to below that 5 wave advance it will confirm that the rise was in fact a C wave ending a correction, and eliminate the possibility that the 5 wave rally was the start of a new uptrend. The start of that 5 wave advance was around 1060, but there is a another low just prior to that at 1059, so I would establish short positions on a break below 1059 with an ultimate stop just above the end of the 5 wave rally (now at 1080), or ultimately the make or break level is 1105.

Now let's take a step back and look at the bigger picture with the 1hr S&P chart. The correction is an ugly overlapping affair, especially relative to the prior declines which were straight down and decisive. Again, suggesting that the trend is still down. The wave ii correction appears to have traced out a WXY double zigzag. All this means is that it traced out one abc correction (W), then declined (X), then rallied again in another abc correction (Y). The index again made it to just below the bottom of my reversal zone at 1081 before stalling. The correction can count complete right now, but I'm not sure we'll get a bunch of aggressive bears coming in on a Friday right before a 3 day weekend to push this market lower in a wave iii of (iii), but you never know, this market market has been quite erradic lately. In summary, with the 5 wave advance today the market looks like it's wave ii rally is in its final stages, and as long as 1105 remains intact, I remain firmly short term bearish.

Last night, I pointed out how the action in currencies was hinting that something was amist with the short term stock market and US dollar outlook. It proved to be a good indicator as we had a solid rally in equities. Well today we have more odd behavior occurring, but only in the opposite direction. The euro was pummeled today against the US dollar as it tanked to almost make a new low just beneath 1.3600 before snapping back hard. If you look at the 1hr EUR/USD chart above and compare it to the 1hr S&P chart just above that, you'll notice that they've been moving more or less in tandom with each other until today. Yesterday the EUR/USD and especially the AUD/USD soared higher, which of course led to a stock market rally today. However the stock market made a new high today yet the EUR/USD came far from doing so itself. Is the EUR/USD telling us something here again? Perhaps the extreme weakness in the EUR/USD will catch up with the stock market tomorrow or early next week, we'll see.

And on another note, I know us elliott wavers don't care much about news affecting the markets, but I find it interesting that the news buzz of the past several days has been about Greece worries. Today the stock market rallied hard, so the Greece worries must have eased, right? But if you look at the big selloff in the euro against the USD, it sure doesn't seem like everything is okay in Greece and the Eurozone, does it...

One last thing worth noting. The XLF has been correcting a nice 5 wave decline this week and it appears that its abc corrective rally is complete, or near complete. One thing that helps us determine this is the apparent "b" wave triangle that occurred. Triangles only occur in B, X and 4th waves. After a triangle is complete, we get a sharp thrust in the same direction as the corrective trend, which ends rather quickly and immediately reverses to at least the apex of the triangle. The structure of the XLF's triangle and thrust suggest that the financial sector's wave ii correction is over and that the sector is headed sharply lower in the very near future. This also lends itself as evidence to the outlook for stocks forming a top and reversing soon too. Also worth noting is the XLF's action near the $14 level again. I've mentioned before how important this level is and how substantial it was when it was broken and closed beneath it. Oftentimes when significant support levels are broken, they will be retested on the underside of them before resuming their downtrend. Well the $14 level was tested twice today and failed to hold ground and close above it. So perhaps today was the XLF's final kiss goodbye to the $14 level.

I am very tempted to get long the dollar right now, especially by shorting the EUR/USD, but the stop is a bit wide, the AUD/USD is still looking strong, and the GBP/USD's decline recently looks corrective. So it seems like these dollar pairs may continue higher in the Asian and European sessions so I don't want to get impatient. So I'm keeping my sell stop order on the GBP/USD in place at 1.555 in case it does decide to tank lower in continuation of its downtrend while I'm getting sack time tonight. If I see a safe and good risk/reward opportunity before my order executes, I'll post it here.



Gustavo said...

I seeing the EUR with problems, but the dollar this week was not strong indeed.
The gold is looking for highs and the USD/CAD was very weak too.
I am waiting for an apreciation in the two values for more weakness in the stock market.
But what I know there are some people very strong what don't want the stock market going down now.


rajabrooke said...

Keep up the good work Todd. Found the site recently & a must see now. Thanks.

rajabrooke said...

keep up the good work Todd.Found the site recently & its a must see now. Thanks