Wednesday, June 30, 2010

Shelves Breaking Down


The market continues to have a very hard time mounting any significant or sustained rally. This morning I was a bit bummed out because I really would like to have seen some follow-through to yesterday's decline and see the indices take out those shelves I mentioned yesterday once and for all. But this morning the market internals were fairly positive and the market was trying to push higher. However as the day moved on it was clear that the bulls were having a very hard time pushing the market higher. It seems like every inch of gain they made took a lot of effort, only to be completely reversed in less than half the time. I pictured the bulls being like that skinny guy at the gym lifting a big barbell over his head and his legs are shaking violently from all the weight. Eventually the bulls' shakey legs gave way by the end of the day and the major indices broke through their shelves solidly, and closed beneath them. This is a big dagger right through the hearts of the bulls. The short term count from the wave '2' high can be interpreted a few different ways, but with today's continuation to complete what looks like another 5 wave decline, I feel comfortable labeling the count this way for now. The minor nuances of the very short term are a bit irrelevant to me though because we're probably in a wave 3 of [3] or C. And that means heavy selling for a long time.


Once in a while I like to post the above chart for new readers, folks new to EWP, or just for a reminder to long time elliott wavers. The chart shows the absolute price destruction of a wave 3 on a large scale. We are probably in an even larger wave [3] right now, and within that wave [3] we are in another wave 3. So even though the market may seem oversold in the short term, as the above chart shows, wave 3s often ignore technical indicator logic and what might just seem like "common sense" at the time, as they can just keep going and going and going.


With that said, there are a few things to watch for, merely for mental preparedness, not for trading, in my opinion.

The first one is that the financial media, and even non-economic savvy people I know, are all talking about the "double dip recession". Others are talking widely about the head and shoulders pattern in the market right now. All are signs that there may be just too much pessimism too early for this decline to be the real deal. My arguement to that is that it's a wave 3, so that means many people will know that the bull market hasn't returned and so everyone sells since everyone knows the market is headed lower. This is essentially what wave 3s are made of. Everyone finally giving up and selling. And despite the non-financial savvy people I know talking about the "double dip recession", none of them have pulled the trigger and voluntarily closed any of their long positions to my knowledge. So the bulls are still in the market, and one by one they're being picked off as the market moves lower.

The second issue is that although today's price action was nice for the bears since the bulls could get next to no progress from the market even though internals were so bad yesterday that you'd think everyone out there who wanted to sell already sold, leaving no other direction for the market to go but up. But despite all that, the market barely managed a rally, then rolled over fiercely through many indices' support shelves. Unfortunately this was done on slightly stronger internals than yesterday, and although volume kissed the 13 day moving average on the NYSE today, it was still well below yesterday's volume numbers. So today's decline fits well with a 5th wave within wave 'iii' of '3' as seen in my count above. But with the very weak rallies we've seen since wave '2' ended, I'm not going to make any trade expecting a big bounce anytime soon.

Lastly, with such significant support shelves broken in the major indices and sectors, it's quite possible an attempt will occur to retake those levels soon. If it doesn't happen tomorrow or Friday, it may mean that a retest of the underside of the shelves will occur sometime in the future. But let's not forget these levels because oftentimes when the topsides are broken, they are then later tested on the undersides before continuing lower.


Above are updated charts showing the impacts of today's action on the shelves of the major indices and the XLF I showed from yesterday. I added the biggest index of them all, the DJ Wilshire 5000. Since this index is the best representation of the entire stock market, I thought I'd show you that it too has broken down its shelf and appears to be headed much lower. Now it is possible for a false breakdown scenario to occur where we get a day or two below the support shelves only to have it recaptured right after that. But right now the evidence doesn't support that happening so I'm not going to plan on it. I'll deal with it when the market actually does it. And even if it did, the erosion of support at these levels are so broken down by this time that any reversal again downward would be met with very little resistance. So all in all, the market looks to be breaking down and lower levels are ahead of us. The real key level for the bears is quite far away at 1131.23. That level should not be broken if the bears want to remain in good control.


Lastly I just wanted to show you that after the market's support shelves have broken down, there's really very little support holding the market up above 870. There is some congestion and "speedbumps" along the way, but the market's next major level to be targeted should be the 870 area of the S&P cash index. If my wavecount is correct, it should get there in a hurry.



Rob said...

Thanks for the great analysis Todd.

Today feels like a big day. I was a bit skeptical of a continued drop short-term, not only because of the talk on CNBC of the 'obvious head and shoulders down to 900', but also because of the way the tape floated around 1040 all day (until the last hour) - I thought we could be setting up for a 'failed' head and shoulders like July 2009. Not blasting to new highs this time, but possibly retracing the fall from 1130 deeply.

But the drop and close solidly below the support shelf seems to have lowered the probability of a 'failed H&S' significantly. The next few weeks could be a lot of fun for the bears!

Todd said...

I know a lot of folks are concerned that the head and shoulders pattern is too obvious and well known for it to work. But with that logic, then no head and shoulders pattern would ever work. They will always be well known because it's a common and easily identifiable pattern.

The thing I'm thinking about is that everyone on CNBC is just dreading the jobs number tomorrow, expecting horrible numbers, and the market has been selling off all week into that number. So anything short of armaggedon on the jobs number should not be a surprise, and perhaps lead to a sharp short covering rally going into the long weekend. We might even see a pop later today in anticipation of that. My opinion.