Wednesday, July 14, 2010

A Top and Reversal Coming Very Soon; Will it be Wave (iii) of 3 of [3] or C, or Just a Minor Correction?


The market had trouble continuing its monster rally from the July 1st lows. The extreme overbought condition the market is in right now on the intraday charts has finally caught up with it. Although the market closed mixed across the board of various indices, the NYSE internals were slightly negative. So the amount of stocks pulling the market up is decreasing. Two days ago we had a similar scenario where at the end of a long push higher for days, the market closed very mixed with negative internals. The following day (Tuesday), the market surged higher with very strong internals. I don't feel this time we will see that again. For one, it's too obvious; and second, this time it is occurring after only one day of fierce rallying vs. several days of rallying for the last time. The current market rally is nearing its end, but that's not really what the big debate should be about. The market is overbought right now in the short term so a pullback is coming, that's a given. The real question is "at what degree of trend is this top going to be." Is this just a correction for a 5 wave impulsive rally from the July 1st lows as I proposed in this morning's post? Or is it the wave (ii) top we've been looking for?


Above shows my top S&P wave count. The wave (ii) rally is much too steep and impulsive-looking for my liking, but wave 2s do tend to be quite sharp and deep and with light summer volumes hitting the markets now, perhaps this rally is just exaggerated. We'll see soon enough. The late day surge today tells me the market might not be quite ready to give up on this rally quite yet, and that we might see a push to the 78% retracement level around 1105. That's awfully close to the 1131.23 critical level for the bears so I'd be aggressively shorting in this area since my risk (stop losses) would be fairly close by. I'm already 75% short of what I want to be for my short term positioning. A break above 1100 will get me thinking about adding more. A nice pop rally and reversal around the 1100-1105 level would be a good sign that the bears have come back in the market to take control.


The top chart shows how much the daily RSI had come out of oversold territory to where it is now at current levels. The RSI has made a new high above where it was at during the wave 2 high. Some may say that's because the RSI is showing that it's leading the market higher and will get price to above the wave 2 high as well. I disagree mainly because on the intraday timeframes momentum is severely waning with bearish divergences on numerous indicators. Plus, with a wave (iii) of 3 of [3] or C perhaps gearing up here, it would need to get as high as it could to shoot down as far and fast as it's going to in order to support a decline of that power and magnitude.

The bottom chart simply shows the stochastics, another momentum indicator. Although this is a much less reliable indicator than the RSI, I still wanted to show it because it's currently at the same level it was at the wave 2 top, and you can see that they are starting to "pinch" for a cross downward with plenty of room to run on the downside. I could go on and on with these momentum indicators showing topping behavior, but I think you get the point.


In the short term, I want to know what needs to occur for me to gain confidence that a top, whether short term or long term, has formed. Looking at the 3 day chart above, I see a minor support shelf at 1090 that seems to be important at the moment. If the market can break through this level convincingly and impulsively, then I think it can be safe to say that a top is in. Once the decline gets underway we should know fairly soon if we should favor the bullish or bearish count. Right now my money is still on the bearish count since 1131.23 has not been broken and the market is severely overbought intraday to where I'd still make money on even a short term pullback.


I mentioned the other day how I thought the euro had topped. I was wrong obviously as a new high was made. But there was little sustained follow through today, and the intraday RSI is showing a bearish divergence for quite some time as you can see above. The rally from wave 3 low is also a clear 3 wave move which is a correction. And when you take into account that the stock market appears to be topping at some degree, it would also make sense that the euro may be topping as well. The fact that there are about 800 pips to go to make a new low for wave 5 in the euro, it would be wise to look for shorting opportunities in the euro, or long opportunities in the US dollar, in my opinion.



rippy41 said...


Johnny said...

Concordo com o teu cenário embora esteja um pouco cauteloso. Em que circunstâncias reconsideras a imininente descida??

Bicep said...

Awesome Todd - Thanks!

Todd said...

Hi Johnny,

I'd probably reconsider the imminent descent if 1090 didn't hold in the S&P and the rally just continued impulsively toward 1131. Right now that's not happening obviously, so I think I'm going to just to analyze the structure and strength of the decline to see if it's a new trend (wave (iii) of 3 of [3]) or if it's just a correction.

Hope that answers your question.

What's your view on the short term movement of the market? Are you a bull or bear?