Sunday, July 11, 2010

Market Getting Ready to Fall, but May Work a Bit Higher First

The market appears to be undergoing a series of small 4th and 5th waves since the last few trading days have been composed of flat traded, followed by sharp rally thrusts at the end of the day. The trajectory of the rallies are flattening as well, suggesting a mild tiring of the uptrend. I see no signs of a top though so I have to assume higher levels in the short term. The market is well into my "reversal zone" and has filled the chart gap I've been pointing out. So the market is certainly free to fall hard at any moment, but I don't see that happening quite yet. I expect a push toward the upper end of the reversal zone around 1084 at the least. From there I'd expect to see even more weakening of the uptrend and possibly the finishing touches on wave (ii). The internals gradually decreased all week during this big rally but they still were quite strong overall regardless. But more importantly, NYSE volume fell off substantially as the week wore on and the market surged. So even though the internals were strong, they were still weakening mildly as the rally worked higher and overall volume continued to shrink. So this rally certainly looks corrective so far.

Over a week ago when I was warning of a bottom and reversal I pointed out that the daily RSI was in the same area that has marked bottoms in the market the past few times. The market was oversold in many indicators, but the daily RSI is the most reliable one to follow in my opinion. Notice now that last week's rally has significantly alleviated the RSI's oversold condition as it is nearing the same place that marked the top of wave '2'. But since wave '(ii)' is of a smaller degree than wave '2', it's possible that the RSI won't work much higher at all and just fall from near current levels.

So although there is little evidence that a top is in right now, nor is there evidence of any significant overbought or very tired uptrend, many indicators are well off their oversold levels and are now able to support a solid decline at any moment.


I mentioned last week that the euro was in what looked like an ending diagonal pattern which represents a severe weakening of trend. Ending diagonals are usually reversed sharply. Since the euro has a nice 3 wave corrective-looking pattern right now, and the fact that it declined in 5 waves late last week, it's possible a major top in the euro has formed. If so, I expect at least a 700+ pip fall to new lows on the year. This should put pressure on the stock market, especially if earnings outlooks aren't that great. Folks will know that a weaker euro, which means a stronger dollar, will only exacerbate the earnings problems going forward.

Also it's important to note the weakening momentum in the Japenese yen pairs as seen through the USD/JPY. These pairs tend to be tied to risk, and therefore they track equity markets quite well with a solid positive correlation. The USD/JPY has a bearish divergence on the RSI and may also be forming a head and shoulders top. Now there's no 5 wave decline yet, so a top is definitely not being called here. But if both the EUR/USD and the USD/JPY are topping and about to undergo large reversals, it should no doubt translate into a weaker stock market.

So I remain firmly bearish the S&P as long as it stays below 1131.23.



God's Own Scourge said...

since the retracement is too much both pricewise and timewise , i think primay degree 3 is out of question now as third waves never retrace so much, i feel at max this can now be some abc type correction which may consume time but retain new high at some pt in future.Prechter is wrong yet again

Anonymous said...

Or intermediate wave 1 of primary 3 may be forming a leading diagonal, or perhaps we will see an extended fifth wave rather than a 3rd (5th waves also commonly extend). There are still many options on the table until we either start making new short term lows or new highs.

Prechter may still be proven incorrect with time, but sometimes the pattern takes awhile to reveal itself.

Right now, the risk is still to the downside.