Tuesday, May 11, 2010

The Market is Seteup for a Possible Major Decline Soon

Internals Mixed

Above is a screenshot of today's finishing internals. You can see that there were more advancing stocks than declining stocks on the NYSE, yet downside volume well exceeded upside volume; and enough so that the NYSE closed down more than any of the other major indices at -0.50%. So a lot of stocks were up today, but not with much conviction. The conviction was on the sell side with a concentrated amount of stocks. That's bearish. Also notice that the S&P had more decliners than advancers. So after a monster 400 point Dow rally and saving Greece from immenent destruction, the markets could not get any follow through today. After yesterday's rally, it's already out of gas, which makes it more likely that yesterday was more short covering than anything. Just my opinion.

Updated 5min S&P Cash Index Chart

So above is an updated 5min S&P cash chart that I put up a few minutes after placing my full post up yesterday (click here for yesterday's chart). As yesterday's chart shows, it appeared we needed one more up-leg to finish off wave (v) of C before looking for a top. This top I'm looking for may be significant since the ensuing decline would be a wave 3 at various degrees, which means an almost straight line down. So I'm on high alert for a potential top to make sure I maximize the possibilities at this juncture.

Today the market fulfilled the expectation for that one up-leg and then met resistance and reversed at the 1170 level. With it now possible to count 5 waves up complete for wave C right now, the internals turning negative immediately after a 400 point Dow rally and Greece bailout, the reversal late in the day to turn the major indices mixed into the close, and the structure of Goldman Sachs' decline late in the day I talk about below, I think it's possible a major top is in. If correct, the amount of selling pressure will be enormous. If we don't get enormous selling pressure real soon, then most likely at least my short term wave count is wrong and that we'll eventually see higher levels soon. If that proves to be the case, the low 1180s should prove to be a very difficult ceiling for the bulls to break above. So regardless of the short term behavior of the market in the coming days, I expect tough resistance in the 1180-1185 area.

Goldman Sachs Declined in 5 Waves Today

One thing I noticed today was the fact that Goldman Sach declined in a nice 5 wave impulsive structure as you can see above. It doesn't get much better than this as far as EWP wave structure goes. Goldman's top back in April signaled the tops in many indices in the broader market back then (Goldman's April 16th top compared to the Dow and S&P's April 26th top. So even though this is just a 3min chart and not as reliable as a daily chart, perhaps these 3min charts above showing a late 5 wave decline is Goldman again is signaling to us that the broader market is topping too. We'll know soon enough. As long as Goldman stays below 145.50 then I view the overall market as extremely bearish. Above are the two possible counts for the corrective phase following the 5 wave drop and have equal weighting of probabilities in my opinion.

Judging by the non-impulsive looking declines in the major indices, it's possible they will pop up for one more new high while Goldman Sachs does not. In this case, the first scenario on top calling for at least one wave C rally before topping should be the preferred count. Goldman may then rollover while staying under 145.50 and the major indices may do so from new highs. This is very speculative, but the declines so far in the major indices do not look impulsive so it's possible they may have short lived new highs before topping. So watch Goldman Sachs and the 145.50 level tomorrow!

Bigger Picture

With all that said, let's look at the bigger picture so we know what we're focusing on. Wave (ii) should be topping soon, if it hasn't already done so today. The market opened down about 100 Dow points but rallied all morning into almost triple digit positive territory. So the bulls grabbed the reins and took control. However the rally was hard faught and choppy with moderately postive internals. Then later in the day, the bulls ran out of gas and the market rolled over, closing with bearish internals, and the indices started rolling over right after Goldman had already started to roll over mind you (Goldman Sachs appears to be leading the overall market lately). That reversal held into the close and it formed a nice reversal candlestick on the daily charts for the S&P.

So when you take this evidence and combine it the short term analysis I mentioned above, I see a good setup for the bears here to possibly catch a wave (iii) of 3 of [3] or C, which would be an extremely strong and sharp decline, well below the lows established last week. So because of the magnitude and profit potential for the bears at this point, I'm on high alert and am very actively trading right now to try and catch this top and reversal. If a top is in right now, there should be little mistake about it. The market should decline in an extremely sharp and unrelenting manner in the coming days.

Decline Structure Similarity

One note today that may put some doubt in the immediate bearish case. Looking at the above S&P structure on the 3min chart today bothered me. On the one hand we had Goldman Sachs, the market leader lately, declining in a beautiful impulsive manner, and on the other hand the major indices declined in this funky-looking structure. I recognized this pattern and knew I didn't like it. Then I looked back at the daily charts of the S&P and pulled up the last time most elliott wavers, including myself, thought the big wave 3 was underway back in January/February of this year. Notice that the structure of the decline then (see above daily chart blue circle), is very similar to the structure of the decline today on the 3min chart above. In both instances, you get this sharp decline that leads to a large bump and cluster at the bottom. The reason this concerns me is because this may be some type of corrective structure today on the 3min chart since back in January/February we saw the market bottom and rally to new highs after it occurred. Even though this may be true, and the market may make new highs above today's soon, I will still be watching Goldman Sachs closely to see if it also makes a new high or not. Goldman appears to be key right now for short term clarity.



moola said...

Excellent analysis.I like to visit this blog, because you call as you see describing different possibilities.Keep up your good work.

Todd said...

Thanks Moola!


Agustin said...

Hey Todd!! I have been watching your blog for nearly a year and I really like your analysis.

It's been a tough market for us elliotticians with a bearish bias but things have started to become clearer recently, especially after the May 6 crash. I too think that the wave structure is a 1.2 i.ii and a huge wave 3 of 1 of the huge wave C down is comming very soon.

Volatility has exploaded and I think that the Vix is just getting started. My next targets are 60 - 80 and I am long the ETF VXX. It has had a return of nearly 100% from the bottom to it's high right after the near 1000 point drop in the dow.

Watch the euro, 1.25 is critical support, there is a risk of a crash all the way to below parity although I personally think that it's probably about to start wave 5 of 1 and it should bounce hard around 1.22 but it it doesn't then we will have a full blown derivatives crash on our hands with massive implications for the stock market. I am on high alert and am watching developments very closely.

I advise everybody to be very careful and consider the current high risk of another much bigger Black Swan event in the next few days. Interesting times indeed...

Keep up the great work!

Todd said...

Hi Agustin. Thanks for the comments. Yes it has been a tough time for us ellioticians this past several months but if Prechter is right, and we stick to our discipline, then we will still end up doing very well. I'm mentally prepared for this to be yet another fakeout but I haven't altered my strategy one bit. If our count is right, then we should see extremely heavy selling on the ensuing decline. Anything short of that will call the count into question in my view.

Interesting take on the euro. I'm watching it, along with the yen pairs, for clues on the stock market.


agnes said...


Me too thinks that a big sell-off is likely...

Do you think we could restest the 666 level in the next 5-10 weeks?

IN 1929, the market sold off 48% over 10 weeks...