Thursday, July 1, 2010

Short Term Bullish Setup In Play; Precious Metals Broken


So today we had a nice morning with stocks cascading lower and making the bears even more happier on the week. But when the Dow shot back up to be down only 80 points, and the VIX went from up 8% to flat, despite the heavy selling on the day, it raised a flag with me. Why would the VIX tumble that hard while the Dow was still down 80 points? I smelled a rat, or better yet, I smelled a bull. I've made so much profit so quick on the short side that I wanted to take profits off the table first chance I got. And that little peculiar event with the VIX was all I needed to close my short term short positions at a nice profit.

Internals were negative today, but again they continue to get stronger than the day prior, which has been the trend the past couple days, again signaling that the downtrend is weakening. We also had a nice volume spike today with NYSE volume exceeding the 13 day moving average, so perhaps the bullish reversal today had some strength to it. And still, despite the crazy volatility lately and jobs number coming out tomorrow, the VIX closed down almost 5%. I have a dozen theories as to why this happened, but for a bear who's made a lot of money really quick, I took it as a sign to get on the sideline for now, at least in regards to my short term trades. There is also a bit of other evidence, such as most momentum indicators like the daily RSI showing the market in oversold territory that has marked bottoms in the past. So this decline may be getting a bit extended, and perhaps some bearish caution is warranted.


Above are my two top counts (click here for yesterday's larger wave count). And although my short term short positions are out, I still have my core long term short positions in. And since we might be in a wave 3 of [3] or C, then oversold indicators are almost meaningless since wave 3s, especially of this size, can go on as long as they want. So I'm giving my top count to the more bearish version on top. This calls for some meandering around sideways type action that stays below 1067.89 for wave 'iv' which will then lead to another sharp decline to new lows for wave 'v'. Although 1067.89 is the max retracement that can happen for this count to remain valid, the S&P will have a very difficult time getting solidly above the previous support shelf level of 1040 it recently broke through. So I'd expect a ton of resistance in that area if the top count is correct.

The second count is immediately bullish, and there's plenty of other evidence to support this as well. The only reason this count is not of equal weighting with the top count is because in a wave 3 at this degree, the larger trend is so strongly down that trying to call a bottom not particularly wise. But I still want to be mindful of it if 1040, and especially 1067.89, is broken soon.


Lastly, I wanted to talk about what my crystal ball is telling me. Most of this is just an educated guess on my part, so take it for what it's worth. Tomorrow is another big jobs number. And if anyone has watched or read the financial media this week, everyone is planning for the number to be horrible. Seeing as that the market has already sold off so much going into this number, and everyone is expecting a bad number, I can't imagine a big selloff on the data announcement tomorrow. Anything short of absolute armaggedon in the jobs market will probably lead to a sideways wave 'iv', or a sharper wave '(ii)' rally; both would be supported by the two counts above. But I doubt any big sustained selloff will occur into the long weekend. Plus, many short sellers have made a lot of money this week and won't want to go into a long weekend holding short, so they will use any chance they get to cover their shorts tomorrow to reduce risk into the weekend.

So the bulls seem to have the "theoretical" advantage, along with one wave count and momentum indicators showing oversold levels on their side. But in a wave 3 of this magnitude, anything is possible and the market can just keep tumbling lower. Regardless, the evidence and setup was compelling enough to get me to close my short positions on my short term positions today. We'll see soon enough if that was foolish or not.

S&P VS. the EURO

I know there's been some concern about the affects of a monster euro rally on the stock market since Prechter thought the euro would be in rally mode for a while. For the past several months the euro and the stock market have moved relatively together. So a big euro rally would lead to a big stock market rally, right? As I said a few weeks ago that wouldn't necessarily be true. I was concerned about it, but I wasn't making any trades based on it. As you can see from the two charts above, the S&P and the euro can in fact move opposite each other. The euro rally today I'm sure helped stocks to some degree, but the fact that they still closed down tells you that the euro is NOT the all and powerful determinant in whether stocks rally or fall. This is why R.N. Elliott told us to analyze and count each market independently. Markets remain correlated usually for only certain periods of time. And lately, the euro and the S&P have not been correlated all that well. Speaking of which, did you see the euro rally and compare it to gold's massive selloff today. Again, another reason to analyze a market independently and not rely on a correlations with another market to determine where it is going.


And lastly, although I hate trading precious metals because they usually kick my butt. I am short silver and today's action in the metals looks extremely bearish in my view. This bearish picture is so compelling that I wanted to post it here. Notice that gold, represented in its ETF (the GLD), has been eeking out new highs with a recent "ending diagonal" pattern at the end while the momentum indicators at the bottom have been making new lows. An ending diagonal is a pattern showing extreme weakness in a market, and they are finishing moves that usually result in sharp reversals. Well that sure happened today with the GLD down 3.8%. Now look at silver's ETF (the SLV) and notice that silver did not confirm the GLD's new highs recently, and then both declined sharply today with the SLV getting the worst of it at a 4.2% decline. This divergence between the two metals, along with the sharp downward reversal, EVEN THOUGH THE EURO RALLIED BIG, tell me that the rally in precious metals the past several months is probably at an end. Look for the metals to move lower in a hurry.

Also, please note that I updated my daily S&P chart count on the right side of this blog.


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