Thursday, February 4, 2010
Wave (iii) is Underway; GBP/USD Short Well on Track for More Profits
The stock market has broken down on various levels signaling that wave (ii) completed a flat correction yesterday, and now wave (iii) is underway. It would be possible that today's decline might be a B wave of a flat, if perhaps you moved waves iii and v over one wave, and that a sharp wave C rally would ensue soon. But I highly doubt this because of the massive force of the decline and the internal breakdown today which is in line with a 3rd wave, not a B wave. Momentum and internals in a B wave should be relatively flat or even, but today was decisively strong to the downside, strongly suggesting today's decline is in fact a 3rd wave.
Notice on the S&P chart attached that the market is unfolding very nicely in 5 wave drops and 3 wave rallies at various degrees, which is what the bears want to see. The S&P closed well below the previous low set last week, and is now breaking away from several trendlines that offered support in the past. Also as you can see on my chart that today's decline traced out a nice 5 wave drop as well, just adding to the evidence that a modest wave (ii) rally is complete and now wave (iii) is underway. If correct, this market should be moving down in a hurry, and it's possible there will be little-to-no let up in the process.
The attached data show the "internals" I sometimes mention. As you can see, today's data is extremely bearish, and in line with a wave 3, which aligns perfectly with what we were expecting at this time in a wave (iii). Today's NYSE stocks had 10.44 stocks close down for every 1 stock that closed up, 97% of total volume today was to the downside, and only 11 out of 498 stocks in the S&P closed up. This is some of the most astonishingly bearish stats I've seen in a very long time.
One more note on the market breakdown today is the action in the XLF, the financial sector ETF. Today the ETF closed beneath a very important $14 level I've mentioned in the past. This has been holding up the ETF since September of 2009. It has now broken down. It should get to the next level of support at $13 in a hurry, and whether it bounces hard there or treats it like a speed bump will give us a clue how powerful this downtrend in fact really is. The XLF led the stock market going up, and it should now lead going down. The XLF has a high possibility of outpacing other indices to the downside in the coming months.
With the dollar surging, it puts a ton of pressure on all commodities, such as gold (down 4.26% today) and silver (down 6.36% today), and the XLF sector breaking down, will all add to the downside pressure on equities. The stock market is extremely short term and medium term bearish at this point.
The short GBP/USD trade is tracking nicely now as I sit on a very nice profit here. I've adjusted the wave count to make it look more proportioned, but whether we follow my last count or this count, they both point to a wave 3 down and heavy selling. I want to preserve profits and lower my stop to the 1.5930 level which will lock in an additional 145 pip profit, locking in a total of 305 pips profit on the entire trade (see original trade setup by clicking here). I hope to lower my stop again in the near future.
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.