Saturday, February 13, 2010

Up Down Up Down, Where's the Market Headed?

There is plenty of bearish and bullish evidence at this point for the short term and instead of grinding out both sides, I'll just sum up the core of each side.

The bulls can claim victory because after 13 days of a sell off that shed 106 points off the S&P, the bears have failed to gain any momentum to continue selling to new lows. We've seen quite a few "fakeout" sell offs to the downside this week, only to have the bulls them up to new highs. This has also created numerous bullish daily candlestick wicks on the charts. So the bulls are holding their ground, and it's making this possible wave (iii) down looking a bit unlikely since it's taking so long to get going.

The bears can claim victories too. There are three core elements to the bearish case that keep me short term bearish:

1) the market has been declining in 5 waves and rallying in 3 waves, or pairs of 3 waves, telling me the larger trend is still down.

2) so far the market has rallied and reversed at a common fibonacci retracement level of 61.8%.

3) after 13 days and a 106 point decline, all the bulls have managed to recover from that in 5 1/2 days is a meager 31 points. That again tells me that the larger trend, and path of least resistance, is still down.

Other elements that add to the bearish case are the fact that most of this week's rallying has been extremely choppy which is characteristic of a correction, NYSE volume has been quite tame on the rally compared to the sell off prior to it, the EUR/USD has made new lows appearing to have resumed its downtrend, the stock market has been very wild and volatile throughout the day which is characteristic of a bear market (many of you remember the March 2009 rally was mostly just a steady float higher), and the XLF still failed to break and hold above the key $14 level. All this is very short term bearish in my view.

Instead of getting too caught up in the little ups and downs of the market, I'm choosing to align myself with the bearish side with comfortable risk levels and just letting the market play itself out. I think the evidence does favor the short term bears here, but I don't want to get too aggressive until 1059 is broken in the S&P. The ultimate breaking point is the 1105 level for the bears so I'd like to be comfortably bearish with a stop above that level, and/or get short with a break of 1059.

My currency stance remains the same, I'm looking for US dollar strength to resurface and still have a sell stop position to enter the GBP/USD with a break below 1.5555. I'm not comfortable shorting with a market order at this point though as the currency picture is not clear enough to eliminate further upside from current levels. more thing, I thought I'd try posting some polls at the top right of the blog to see if we can get some value or entertainment out of them. So please participate! :)

Have good weekend!!



Dave427 said...

Todd - Not specifically related to your last post, but with an ABC correction up, can B finish lower than A started? Does that violate any EW rule?
watching the market the last few weeks, would it be fair to say that we are fast approaching the point where it will have to make up its mind and either resume the decline, or start a new significant rally? Looking at non-market social mood indicators, I have a hard time believing that the mood is sufficiently positive to fuel a significant rally. Your thoughts?

Todd said...

Hi Dave,

Yes, B waves can finish lower than where wave A started. This type of formation is called a "flat correction". The only rule about the wave B length in a flat is that wave B must retrace at least 90% of wave A. But the guidelines state that wave B will normally retrace 100%-138% of wave A, but in my experience if it goes past 1.618% of wave A, then it's probably not a flat and it's time to develop other possible counts.

I agree with you that this choppy sideways market is getting ready to break out. This is part of the reason why I wanted to instill some caution to over aggressive bears right now. The failure of the market to tank fast and hard like it should in a wave (iii) make it possible that it still wants to go higher in the short term. The evidence still supports the short term bearish case though as long as it's below 1105, but I want to protect myself if the "breakout" is to the upside by some chance.

I think you're right in that social mood is quite sour and angry at this point. Just the fact that the Tea Party movement got so big and strong so fast is testament to that. It's a sign of anger and disenchantment with the sitting powers. Plus, so many other factors like unemployment and housing not recovering continue to keep people on edge. So I'm with you in that social mood does not support further rallying but markets can remain irrational for long periods of time; heck just look at how long and high the wave [2] or B lasted since March of 09.

I think the key for the shorter term outlook is to observe optimism. Are people on TV and in the papers "buying the dip", and looking at declines as great buying opportunities? If so, we have much further to fall. But if people start panicking right now and talking a lot about a test of March 2009's lows already, that would be concerning for the bears this early in the decline.

Anyway, good questions, I hope I answered them for you.

Hey Dave, do you trade or follow currencies by any chance?


Dave427 said...

Todd - Thanks for the insight. I am fairly new at trading - stocks, some ETFs, and some options. Have not traded currencies. One of my issues is I bought a leveraged Bear financial ETF last year in May when it looked like (to some) that the large decline was imminent, down to S&P 500. As you know, I was wrong and am underwater on that one. So, I am naturally looking for the big decline. And, I tend to see things bearish because of that and I am trying to keep that in check as much as possible. That said, even before I found your blog and seriously started studying EWP, I still felt that a turn was due because everything the Administration has done has been so anti-business, anti-capitalism, that it just could not work out well. So, I think EWP supports that view and so many other indicators - If the market does not fall big time in a reasonable timeframe, I will be totally baffled.

adan said...

was very tempted to pick# 3 (don't know) cause it's the final truth, but, since i do lean to # 2, chose that one, but definitely not, don't leave me alone ;-)

great bear/bull analysis, thanks!

Todd said...

I will be baffled too Dave.

Good luck man.


Todd said...

Thanks for participating Adan :)


agnes said...


While I expected a 25% rally, I never expected such a sharp one.

Without all the government interventions and help for the banks (by changing accountancy rules and by providing liquididity at 0%) we would never have seen such a long and sharp rally.

Anyway, I see two possible scenario's:
-this market collapses in a way that takes everybody by surprise (I have never seen such a disconnect between the real economy and the market)
-or the market just keeps on being inflated by all sorts of shenanigans.

EWP states that the market can not be manipulated. I believe this my guess is that we will see total collapse.

Todd said...

Hi Agnes, my guess is that the "shenanigans" have run their course and now outstanding results are being demanded from firms who are beating lowered expectations by cutting jobs and other costs. Short term that's fine, hence the huge wave [2] or B rally, but in the long term, cutting costs and the workforce will have a reverse effect on the macro elements of the economy. I think we're at the beginning stages of those negative elements taking effect.

Thanks for posting Agnes.


Gustavo said...

Hello people:

I don't understand the word shenanigans, but my opinion is what in the market are the bankers and the stablishment and the common people what living in two different worlds, its impossible to me to understand the price of the actives how I believe they are overvalued the most of the time, but I know what if I act in concordance with my beliefs the most of the time I will go to lost money and we are in the weak side of the trade. The better to make is go with them because they are saving the real world:-)).
See age of the jubilation in France. poverty in the world, inequity, hapiness and other things.

Sorry my English.

Todd said...

Hi Gustavo,

You're right in the core of your statement in that we should go with the people making the market move. In other words, we're here to play the market, and whether it makes sense or not, we need to put our money where the market is going.

But how can you measure "manipulation" in the market. We have to use an application, such as EWP, to analyze and determine where we think the highest probability move for the market is. I can't predict or analyze manipulation, so it's tough for me to just through my money to the bullish side hoping the powers at be will continue to push the market in my direction.

Just my opinion.

Thanks for posting,

Gustavo said...

Hello Todd:

I agree with you, really I cannot predict manipulation, only feel post fact or in the exact moment what happend, and I believe we are in a strong manipulated market where we need to go with the strongest hands.
I accept this how the rules of the game because I can win or lose with the interventions, regulations, etc if I play wisely.
All we can, but for many moments I want to see the market go in the direction what "my logic" assigned to it and fast. :-))


Todd said...

So how do you feel about the market's short term direction, Gustavo? Are you bullish right now? If so, at what point do you think you'll switch to bearish?


Gustavo said...

I feel bear in the near term discounting today:-).
From tomorrow we begin the downside:-).
Really I don't know, I am watching more the forex market and not closely the stock market where I have not any investment.
My feel is what USD/CAD have not many to go to the downside.And the pairs USD/SGD abd USD/INR seems to me particulary cheap now.
And because a probable intervention in EUR/CHF when the EUR is not precisely strong, is probable more upside in the USD/CHF too.
AUD/USD and NZD/USD are high too in my opinion.
There are very much to trade now.