Sunday, July 18, 2010

A Look at the Week Ahead

Friday was a great day for the bears who needed to come back and try to take back control of this market before getting too close to the "breaking point" of a wave (ii) possibility being underway. Although it fell shy of the 78% fibonacci retracement of wave (i), it did fail miserably at at the 1100 level. The market was severely overbought on an intraday basis, and momentum indicators such as the RSI recovered well enough out of oversold territory to now support a large decline. The large decline projected is of course wave (iii) of 3.

Friday's internals were quite bearish as you can see above. Only 8 S&P stocks traded higher and 95% of NYSE volume was on the sell side. Volume was also high, but it was an options expiration day, and in that context volume was fairly light. Again, it appears people are on the beaches and enjoying the summer more than trading the markets. According to CNBC, the last several options expiration days have resulted in down days, with a bit of a hangover the following week as well. This would be welcomed by the bears since the structure of the market Friday is not one I like as a bear. I've noticed that the past few times this structure occurred, it has often led to large snap back rallies that proved the decline to be just a correction. I pointed this out in a brief Friday post how the sharp decline followed by a choppy grind lower defines this structure I'm talking about. The one exception is when the market just accelerates lower with another sharp decline. Interestingly enough, this usually occurs in 3rd waves. So in order for this potentially bullish structure formed on Friday to be negated, I'd like to see a sharp follow-through selloff Monday. If that occurs, I will disregard the bullish potential and look to lower levels.

The short term decline from the 1100 area is far from perfect for an impulsive wave (iii) decline to be underway. But that doesn't mean it's not happening. It's quite early in the wave and lots can happen to help clear things up. The big daily bearish candlestick after failing at the 1100 level and the failure to recapture the 200 day EMA shows that the bears have come back in control. The bulls have failed so far, and now it's the bears' chance to see what they can do. They still have work to do to support a wave (iii) of 3 decline in my view, but right now they hold the reins and the burden is on the bulls to show they still have some fight left to reclaim this market.

If wave (iii) of 3 is in fact underway, I'd expect to see heavy selling this week. And any rallies, although they may be sharp, should be short lived and completely reversed quickly. The market has been flip flopping around for quite a while, all while elliott wavers are counting different levels of wave 3s occurring. At some point, perhaps now, the market should finally give way and tank hard and relentlessly to support these wave counts. Otherwise, we need to remain open to other possible scenarios occurring.


My forex and futures charting software is on the fritz right now so I can't post charts, but I did want to comment on precious metals and the euro. Notice Friday that the euro rallied, and went flat, all while the stock market and precious metals fell hard. This divergence may be part of a major topping process as metals and stocks turn lower and the euro soon follows. The euro counts well as a 3 wave rise on the daily charts, but so far has not shown signs of a top. So I'm only currently short the euro 30% of my total desired position, and if there's an open gap up later this afternoon or signs of a top that arise soon, then I'll add to that short position. I also expect especially silver to fall hard along with stocks as well. Judging by the short term behavior in precious metals with the sharp selloffs and in an impulsive looking manner, it appears their uptrends have been broken and lower levels should be achieved soon. With the euro, gold and silver lined up for declines in the the days ahead, and stocks poised for a major fall, it paints a real deadly picture for the financial markets in the coming weeks.


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