Tuesday, February 16, 2010

Market Probably in Larger Correction

Short Term S&P Cash Index

The market rallied all day, and strongly as practically only buyers entered the market today. This is discouraging for the bears because all last week the bears were taking down the bulls on most rally attempts, creating the ugly and choppy sideways action made on last week's charts. However today, the bulls came in and shoved the wore out bears aside and pushed this market higher. The bears appear worn out, and all the bears that wanted to sell have probably already done so. After 6 1/2 days of rallying, it's just too long in time, and by going above the 78% fibonacci retracement today it's also too long in price, to confidently say that 1105 will remain intact. I still think the larger trend is to the downside as the 1hr and 2hr charts show nice 5 wave declines in various indices and sectors, but the 1105 level looks extremely vulnerable at this point.

S&P Futures

The above chart is of the S&P futures which is a main reason I remain firmly long term bearish and thinking that a major wave [2] or B top is in. The futures have traced out a nice clear 5 wave drop telling me the long term trend is now down. I reworked the wave count to show what is probably transpiring now, considering today's strong rally. You can see that today's close was right on the 50% fibonacci retracement level. So it's possible today will market the top of wave 2, but I doubt it. The bears were still on vacation from the long weekend and I doubt they'll come roaring back tonight/tomorrow morning. Most likely the futures will rally up to the 61% fibonacci level around 1107, or the 78% fibonacci level around 1125, before topping and reversing (this would be 1110 and 1128 in the cash S&P index). Although I was probably wrong in thinking that 1105 would cap any S&P cash market rally attempt, I will say that I hold firm in planning to use any significant rally attempt as an opportunity to add to my short positions if my previous short term outlook did not hold. If this market gets to above the 61% fibonacci level, then it will bring an excellent risk/reward opportunity to short the market against the highs on the year; allowing someone to risk about 30 S&P points to possibly make several hundred points.

XLF (financial sector ETF)

In another piece of bad news for the bears, the XLF broke and closed well above the key $14 level proving me dead wrong in stating that this level would not be broken to the upside for a long time. However I'm not bullish this sector at all. By looking at the above 2hr chart of the XLF, the wave structure is quite clearly impulsive to the downside with 5 waves completed from $15.40 to the $13.50 level. Just like the stock market, this sector probably has further to rally, so I'm looking at the $14.60 level to offer some resistance to this rally phase seeing as that it's the prior 4th wave extreme.

With the evidence right now pointing to higher levels in the short term for the stock market and XLF, I see no reason to start any new short positions at this time. I would add to my short positions on a rally above 1110 in the S&P cash index, or on a break below 1059. And I will wait for signs of a top in the S&P before considering getting short the XLF again. So in the short term, I'm basically flat in regards to establishing any new positions right now, but am medium-to-long term bearish the stock market and the XLF as long as this year's high remain intact.

Athough it appears I've been wrong in the short term view of the stock market, it did prove to be a wise decision to exit my GBP/USD short position at 1.5633 because the pair is currently trading almost 160 pips higher at 1.5790. I do not see a sign of this pair, or any dollar pair reversing right now so I don't want to take a position at this point so I'll keep my sell stop at 1.5555 in place.


Gustavo said...

I see the same in USD/CAD and inclusive I take a long position in GBP/USD yesterday in 1.5781, there is too much movement in Europe now, and seems to me the market don't want go down when there are anouncements by the european country headers.

Todd said...

I agree. And usually when the action is like this it means it's in a correction. When I see signs that the US dollar has bottomed again, I'll be right back in.