Wednesday, July 21, 2010

Market's Flip-Flopping = Bottoming? or A Series of 1 and 2 Waves Before a Crash; Euro Has Good Shorting Opportunity

Strange day today as Ben Bernanke didn't come in and manipulate the short term market behavior like he usually does. I actually wanted that to happen to get a big spike higher so I could add to my shorts in preparation for an imminent reversal. But the market just sold off hard instead. Internals were moderately weak, but nothing to really focus on; volume was average as it kissed the 13 day moving average in the NYSE.

The market appears to be ignoring earnings for the most part and is just focusing on the economy and recovery as a whole. Once the evidence swings in favor of a good recovery then the market swings higher, but when the evidence swings back to favor a weak recovery then the market falls. This up-down behavior is similar to either a series of 1 and 2 waves at various degrees, or a bottoming process. I favor the series of 1 and 2 waves because the market is trading under key moving averages and has broken down various key levels to suggest the trend has turned to the downside.

Plus, the series of 1 and 2 waves makes sense here on the charts and psychologically since the charts obviously show a series of sharp ups and downs lately which is conducive to the behavior and structure of 1 and 2 waves. Also, the fact that the market is trying to get ahold of what the actual status is of the recovery and buying and selling sharply also fits in well with the characteristics of 1 and 2 waves.

But just stepping back and looking at the market itself you can see that the decline is far from creating clear and smooth impulsive patterns. And although it can be labeled with impulsive moves, at face value it looks more like a correction. A sharp and sustained move lower beneath the 1010 level will just about eliminate the potential for a bottoming-type structure taking place here, and it would also fit in well with the wave count that suggests a massively strong and sharp wave 3 at various degrees that should be getting underway any time now. So I'm looking for that sharp decline to confirm the wave count above. It should happen any minute now. The longer it takes to occur, the less likely the count above is correct, in my opinion.

One thing to note: I noticed the XLF (financial ETF) might be forming an inverse head and shoulders pattern. This is a very bullish reversal structure. Today's decline should finish up the pattern which means a sharp rally should occur very soon. I didn't really find any viable patterns in any of the main indices (with the Nasdaq Comp coming the closest), and I'm not sure how much of a market leader the XLF is, so I didn't post a chart. I'm not sure it's significant or even likely. But I did want to mention it for something to watch and if anyone trades the XLF.


So the topping candlestick pattern I mentioned yesterday has so far paid off with the euro. I called a similar top a week or so ago and it proved to be wrong obviously, so I want to be vigilant in monitoring this short position. It appears that a 5 wave impulse wave is unfolding to the downside from the high and I'm waiting patiently for that to occur. Once it does, I will aggressively add to my short positions on any rallies. It's even possible to count the current structure an impulsive decline as it sits right now, but the proportions aren't desirable so I'm expecting it unfold a bit more to complete a full 5 wave drop from the highs.

As you can see from the daily euro count on the top chart there, if a top is in then we're in for a doozy decline ahead. I originally labeled the wave 2 as a wave 4, but the current rally's extension higher has made it too disproportionate to the corresponding wave 2 to make it likely. So it appears the euro has traced out a completed 5 wave decline already, and that a monstrous wave 3 down is underway. If correct, the profit potential is enormous, with a little less than a 1000 pip profit for the shorts at a bear minimum. But if a wave 3 is underway as the count suggests, then it will fall much much farther than that. This count also lines up well with a major equity selloff as well since a crashing euro might put pressure on stocks too.



TAfool said...

Rather than an impulse, what if you labeled the EUR/USD as a Zig-Zag down? "i" would be "A", your small "ii" is "B" and it's in "5 of C" now. Once 5 waves up are in then it could be the top for a nice short. An example:

I enjoy reading your blog!

rippy41 said...


PrincipleAnalysis_Blogspot_Com said...

Judging by today's sharp rally, I'd say your count looks more likely. Only I'd move your wave "B" to where you have wave "a" just to the left of it.