Wednesday, March 24, 2010

Fragile Downtrend Formed on Small Timeframe; EUR/USD Declined in Big Impulse Wave

S&P Cash Index Daily

Since making new highs on the year in all the major indices I'm not certain what the bigger picture wave count is so I don't want to label all the bigger picture waves just yet. So I'm keeping my scope quite small and looking for just the basics, i.e. 5 waves and 3 waves, momentum, and trends. With that in mind you can see on the S&P daily chart above that a 5 wave rally is in its final stages. And in typical EWP fashion, the 5th wave we're currently in is being completed with momentum diverging. Notice the MACD histogram below has been declining, illustrating that the moving averages have been tightening and starting to get close to crossing down, even though price has continued to rise. This divergence is typical in 5th waves so it helps add confidence to this wave count. Although the averages have not crossed down yet, which would be illustrated with a blue bar on the underside of the histogram, the rolling over on the daily chart is certainly a sign of an impending decline that should have us look more closely at the shorter term picture. Once this 5th wave rally in price completes, we'll have at least a correction of that rally, if not an outright major top and reversal of larger trend. I want to be positioned for declines at this point, and any bullish action or evidence would only make me become neutral.

S&P Cash Index 10 Minute

The above short term S&P chart shows a simple and basic look at a downtrend starting. There's a series of lower highs and lower lows. On a very short term basis, as long as the series of lower highs continues, then I'm short term bearish. The reason is that I've been expecting a top for some time now, and so any signs of a trend reversal has my attention. The series of lower highs and lows is the first hint of a top. Now we don't have an impulsive 5 waves down yet, so if a higher high develops soon then it will make a choppy overlapping decline that is most likely a correction and new highs are just around the corner. So I want to get out of the way if a higher high forms. So I'm short term bearish as long as the sequence of lower highs remains intact, and until a 5 wave decline develops. If the market rallies to a higher high then I'll simply step aside and wait again for another sign of a potential downtrend to come about.

EUR/USD Nice and Clean 5 Wave Drop

If back in October 2009 someone told me that by March 2010 the EUR/USD will have fallen almost 2000 pips and the S&P would not be down at all, but actually be up 70 points, I'd laugh my butt off. But that's exactly what has happened. Never did I think the stock market would be able to hold up, let alone rally, with a euro decline and dollar rally of this magnitude. Either the stock market is just delaying its crash or it's marching to the beat of its own drum. We'll have to wait and see on that one. But what's clear from the daily EUR/USD chart above is that this pair has traced out 5 wave down from the highs, and probably won't make a new low beneath my projected big red wave 3 at the bottom left of the chart. Because of that, it means that not only is the long term trend down for this pair, but this almost 2000 pip 5 wave decline is probably just a wave 1 in a larger 5 wave decline. That's big. Will the dollar get to parity with the euro? It will probably be close if this count is correct. Regardless, it sure has been an interesting and fun ride trading this thing down in-and-out over the past several months. And although EWP hasn't been too kind to our stock market positions, it has been very kind to our EUR/USD, and sometimes GBP/USD, trades.



Singulorum said...

Hey Todd,

thanks for your analysis. I always appreciate it.

Regarding USD or EUR/USD and EW: it works fantastically. Forex is to big to be manipulated over a long timeframe.

Therefore I primarily trade Forex with EW.

Kind regards, Markus
Have a god

Todd said...

Hi Markus,

I agree with you about forex vs. stocks. EWP works nicely with the huge forex market, and one person or firm will have a hard time moving currencies on their own for a lengthy period of time. But stocks on the other hand are not so hard. EWP works best predicting what the large collective crowds will do, not small groups of heavy hitters.

Thanks for the comment,

Singulorum said...

Hello Tod,


"Have a god"

Was supposed to be "Have a good night"

Good trading,


moola said...

Hi Todd, With the intraday reversal of S&P 500 and closing below the yesterdays closing, do you believe a market top is formed. Moola

Todd said...

Hi Moola,

Looks like you beat me to the punch in making that assessment. Check out my latest post to address your question in a little more detail; but the simple answer is "yes" I do think today's action is very telling of some degree of top that's in.