Friday, June 4, 2010

If Wave (ii) is Over, then Look out Below Next Week....

S&P Cash Index Top Daily Count

There's a lot of evidence to suggest that wave (ii) of 3 of [3] or C is over and that a wave (iii) of 3 of [3] or C is now underway. Although it's not confirmed, and we've had many fakeouts of major selloffs in the past, the evidence still suggests major selling could be getting underway right now that should be very devastating to the markets in the coming days/weeks. Above is my top wave count for the S&P showing what I'm talking about, and it gives an idea of the magnitude of decline we may be undergoing right now.

Market Internals

Above are the market internals from Scottrade after the close. Today we had 99% of total NYSE volume trade to the downside, 90.6% of all NYSE stocks closed down, and although I need to confirm this but Scottrade is reporting that absolutely no stocks closed up in the S&P 500 today. (If anyone has any supporting or refuting data on this please let me know - thanks). I've never seen that before. So today's internals are some of the most bearish I've seen in the past few years. It fits well with a wave 3 at multiple degrees being underway right now. So this is a strong piece of evidence for the bears here.

Dow 10,000 Taken Out

The above weekly chart of the Dow shows how important the 10,000 level has been. It's probably just more of a psychological and news media driven number that ends up being a self-fulfilling prophecy. But nonetheless you can see that it's been pretty important the past few months. So as I said this morning, I wanted to see the market take out this 10,000 level convincingly. Today it did, and then it closed below it on some of the weakest internals I've seen in years. So this is another piece of evidence for the bears.

S&P Broke Uptrend Today

Today's decline in the S&P also broke it's uptrend since wave (ii) started by making a lower low beneath the two previous ones. This is basic stuff; by breaking the series of higher lows, the uptrend itself may be broken. When this is combined with the Dow closing below 10,000 all on solid volume and extremely weak internals, it all lends itself to the bearish case.

Silver ETF

Lastly I wanted to show a nice silver chart here shown through the ETF (SLV). Silver is important to track with the market, along with some currencies, because it is tied to risk and therefore their moves are often correlated to the stock market. So we can sometimes get a good clue about what stocks will do in the near future, or get confirmation of a trend change. As you can see in the above daily chart, the SLV has made what looks like a clear head and shoulders top. If so, then this metal should be headed sharply lower. And with the extremely bearish setup in the stock market the way it is right now, this means a lot of trouble in the coming days/weeks for almost all asset classes.


With all that said, we've seen a lot of fakeouts in the past few months so I still have to be cautious about getting fully short until the market fully proves to me that wave (iii) is underway. Ultimately that will take a break below 1040.78 in the S&P cash index. But the evidence is definitely aligned right now with the bears, and it appears that 1040.78 getting taken out is just a formality at this point. Should be an interesting week ahead.

Side note: I know a lot of folks liked the Yahoo Prechter video I had up on the top right of the blog so I just wanted to let you all know that I posted a new one today.

Have a good weekend.


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