Tuesday, May 18, 2010

Downtrend May Have Resumed

Primary Wave Count

The market shot up this morning to complete wave (ii) and spent the rest of the day declining. It was a very orderly sell off that steadily pulled the market down while floating the VIX higher. There was no 'panic', it was all well thought out and orderly selling. This type of behavior can be brutal to the bulls because a slow bleed usually has a hard time squeezing shorts and therefore bottoms and buying power are harder to come by. The market simply just trickles down lower and lower. If the above wave count is correct, there should be very little alleviation in selling. The market should be headed much lower, with the first target being 1066, but it should continue on down down down. The count remains valid as long as 1174 remains intact.

Much Less Likely Alternate Count

At first, watching today's slow and choppy decline had me thinking it had to be a 'B' wave within wave (ii), and that a strong wave 'C' rally above 1149 would complete wave (ii). But two things stood out that severely weakened this view:

1) The market closed the day with NYSE down volume representing 88.7% of total volume. I would expect a wave B to have up/down volume closer to break even, not overwhelming selling. This is more indicative of a wave 3 at some degree. So again, the top count looks more likely.

2) The market maintained a series of lower highs all day, and every attempt to snap a rally higher, especially into the close, had failed. A wave 'B' is usually a 3 wave affair, or some combination thereof, but today's structure does not resemble any 3 wave combination, more like an elongated impulse.

So although this count is still possible, it's a distant 2nd compared to my top count.

Stock Market Support Shelf

It appears that the 1120 level is a support shelf, at least temporarily, for the S&P cash index, and it closed right on it. Most of the other major indices also closed right around their support shelves as well. So the fact that this level didn't lead to a sharp rally, and in fact closed right on it, is a good sign that this support will be taken out fairly soon. Looking at the daily charts, there should be little support until it reaches the levels of "the big selloff" a couple weeks ago, which is 1066 in the S&P. So a strong break below 1120 should lead to a quick move to the 1066, and according to my top count, it will go much further below 1066 as well.

USD/JPY Support Shelf

Above is the USD/JPY (US dollar vs. japanese yen) I've been tracking the past few weeks since it looks very similar to the structure of the stock market. It trades 24 hours a day so it's good to watch overnight to perhaps give a clue to what will happen during the next cash index session in stocks. The USD/JPY also looks bearish at various time frames, and it also has a support shelf. So for those that don't follow the futures can follow the USD/JPY overnight to give a clue if perhaps the stock market's cash indices will follow suit once they open. FXCM has free real time charting at click here. Looking at the S&P futures right now, the June contract is trading around 1110, which is below its support shelf. Acceleration to the downside would be a good sign that the US cash indices will tank tomorrow too. But the futures have been down big overnight quite a few times in the past several days, and have almost always been completely reversed by the time the US session gets underway. So this is nothing to get too hung up on, but something interesting to follow throughout the night, be eventually the futures WON'T reverse.


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