Tuesday, February 2, 2010
Market Correction Underway; AUD/USD Short Trade May Be Coming
The market surged higher today suggesting a longer break from the downtrend is underway. This should not break above this year's highs. What I'm doing is looking for potential reversal points for the next wave down, which would be a wave (iii), and even more powerful and faster than wave (i), which will be impressive. If I get a good risk/reward and highly probably opportunity to add to my shorts, I'll do it. Right now I'm looking at the wave structure and that 3 wave drop to a new low I mentioned yesterday stands out. The 3 wave structure suggests it was counter trend. But it made a new low. So I'm labeling it as a "flat" correction. In this particular case, EWP states that flat corrections are ABC affairs where wave B exceeds the extreme of the most recent wave 5, then moves in a wave C to finish off the correction. Right now we are in that small wave C up. Normally in flat corrections, the C wave will rally to just above the wave A extreme before topping and reversing. This level is at 1096.45. Another potential reversal point is the previous 4th wave at 1100.22. Above that is the fibonacci 38.2% retracement at 1105.74.
With that said, even though I'm projecting a "flat" correction which means that wave C should not exceed wave A too much, I do see an open chart gap below 1116.10. This is also right next to the 50% fibonacci retracement level as well. This would probably mean that this wave (ii) rally was not a "flat", but something else. Wave 2s tend to be sharp and deep affairs, and a rally to or above 50% retracement is likely. Seeing as that an open chart gap is there makes this level even more appealing. If the market has enough strength to get to that level, I'll add to my short positions.
So initial resistance is at:
One other thing to note is that the higher risk Nasdaqs and the Russell 2000 small cap index have been outpacing the S&P and Dow to the downside, and underperforming them to the upside, especially yesterday and so far today as the Nasdaqs are almost negative as I write. The higher risk indices are lagging so far, suggesting again that risk appettite is fading and that the larger trend is now down for the foreseeable future. With the VIX at such low levels with this type of behavior, it sets up a huge and long sustained move to the downside which fits well with the wave  or C projection for the long term.
My GBP/USD position has now become vulnerable with the rally in equities and dollar weakness. My stop remains the same at 1.6115 which locks in a 125 pip profit. I do see a possible short trade coming in the AUD/USD. Last night it dropped sharply lower to a new low, but has since found a bid and rallied higher. As a momentum trade, if it rallies close to .8900 and shows signs of topping, I'll enter a small short position with a stop just above .8926.
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.