Tuesday, July 20, 2010
Market Might be Declining Impulsively; Euro May have Topped
The S&P is taking it's sweet time to decline in a wave 3 at various degrees, and although the decline can be counted as an impulse wave, it can only be done so in a very ugly manner. The main problem is the decline from the high which is an obvious 3 wave move. The only way to count the entire decline impulsively in my view, is to count that initial 3 wave drop as part of a flat correction where wave 'b' exceeds the end of wave 'i', then rallies in a wave 'c' to complete wave 'ii'. So far, the decline is a slow sideways down move where I'd expect to see more a sharp and almost straight line down if we were in a wave (iii) of 3 of  or C. That can certainly change at any moment, or the decline may just be a "slow bleed" that just continues for weeks. But so far, I'm not impressed with the decline to fit into the current preferred wave count so I'm watching the market carefully to identify any possible turn that might mean new highs ahead. I still remain short term bearish, although I'm "cautiously" short term bearish at least until we see a big swoosh down with real price destruction to equities that a wave at this degree usually brings.
The conlusion I'm getting from the companies already reporting earnings the past week is that they are not doing well on the top line but are doing well on the bottom line. Correct me if I'm wrong, but that tells me that revenues (total sales or gross income) are down and less than expectations meaning that the consumer and economy are not recovering as expected since total sales are down. However companies are still beating earnings expectations on the "bottom line" because they were able to slash operating expenses, which usually means layoffs and closing plants to fatten up profit margins. So through smoke, mirrors, and clever management trimming the fat, they were able to still show profits for their companies' bottom line which is great for the company's shareholders to which executives are ultimately responsible for. However, not meeting revenue expectations and essentially downsizing to meet profit expectations is not good for the overall economy. On a fundamental basis, this is very bearish for the economy as a whole in my view. I welcome any thoughts or differing opinions on this.
I've been looking for a euro top the past two weeks now and have been wrong a few times in calling one. Once a top is in it should lead to over a 1000 pip move to the downside, so calling a top at this magnitude undoubtedly will be difficult. Today I see another possible top in the currency. The hourly EUR/USD, as shown above, shows a spike higher and then reversal to a new low where it currently sits. A daily close beneath 1.2903 and especially 1.2870 would strongly suggest a major top in the pair has occurred and the short side should be favored in my opinion. Stops can be placed just above today's high.
Although the correlation between the stock market and the euro has not been that strong lately, a 1000+ pip decline in the euro would equate to a massive dollar rally and would create a very steep upward battle for stocks in an already difficult earnings report season.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.