Thursday, July 8, 2010

Wave (ii) Probably Has More to Go; Euro Gearing up for a Decline

The market shot higher this morning at the open only to fall and flatten out during midday trading. Again, this might be chalked up to "Amateur Hour" back in effect where mostly amateurs come in during the first and last 30 minutes or so while the professionals trade during the meat of the day. This behavior didn't do us much good on Tuesday though since it led to a huge monster rally on Wednesday. Outside of the first and last 30 minutes of trading today, the market was quite flat. The late day surge turned the internals of the market quite bullish into the close, suggesting that we still have higher levels ahead of us tomorrow, and probably into next week. Also, there's no real big news data Friday, like most of this week, so the bulls will again be able to blind themselves to the economic decay occurring and just feed off each others' unrelenting optimism to float this market higher again.

One thing to note is that the internals were weaker than yesterday's, although still quite strong today, and volume was also quite light as NYSE volume didn't even reach the 13 day moving average. So the majority of volume spikes above the 13 day moving average still occurred on down days, showing us that the conviction of the market is still on the sell side, for now.

Enthusiasm and optimism have already come back strongly as there are headlines and analysts aready discussing the bottom in the market and talking about the decline being overdone and that earnings and the economy are not that bad. Far different from the "depression" headlines we had over the weekend. It's also the type of sentiment we want to hear as wave (ii) reaches its final stages. But the move higher this week on not so hot volume lends itself to the fact that the overall market is not buying into this rally.

Above is a speculative wave count of the wave (ii) correction. I have it as a comination, or double zig-zag, that should now be in wave 'c' of 'Y'. Wave 'Y' can complete any time now, but will probably get into the meat of the reversal zone before doing so, and if the rally carries into next week then it should get to the upper portion of the zone around 1084. There's also a gap to fill just a few points higher from current levels, so it still would seem that we have higher levels to go.

Another thing to note is the action in the euro that I mentioned this morning. Although the euro and the stock market have not been correlated that well lately, it's still worth noting if you're a currency trader, or for whatever correlation to the stock market that still might be left. The euro is completing what looks like an "ending diagonal" which is a finishing move that is quickly and sharply completely reversed. Although the reversal may only be a short term move, it still may be finishing up a much larger correction which could line up well to wave (ii) in the stock market finishing up if the correlation returns.

So the bottom line remains that I'm firmly bearish below 1131.23, but in the very short term it seems wave (ii) still has higher levels to obtain before the next round of heavy selling to lows gets underway. And there seems to be a good opportunity to start building short positions in the euro (or long the US dollar).



Rob said...

Hey Todd, it looks like the market is tracing out a fractal very similar to the final leg of the June rally to 1130. The chart of the SP500 in your June 18 post seems a very similar pattern to the SP500 over the past 5 trading days.

If the tape continues to be "tightly coiled" for the rest of today's session, perhaps we will again see a big pop on Monday morning to somewhere around the top end of your reversal zone, and then start a big multi-week drop from there.

Todd said...

Good observation Rob. I think you're right. The rally has alleviated the oversold condition considerably this week. And some indicators, like the RSI, are now already at the wave '2' top levels and it's still over 50 S&P points from those wave 2 top levels. So the market is free to fall in wave '(iii)' of '3' anytime next week. And the consolidation and sharp rallies yesterday and now today are very characteristic of a series of 4th and 5th waves unfolding, which mean we're nearing the end of this rally phase. Plus the financial news has everyone saying "the decline was overblown and the market is moving higher from here". The tone is, "things really aren't that bad." So not only are the momentum indicators now way removed from oversold territory, but that aggressive optimism appears to sure have resurged higher out of the extreme pessimism territory it was in last weekend as well.

The low volume and decreasing internal strength of this rally is a good sign for the bears if it continues. but right now I see no signs of exhaustion or rolling over, so the market is certainly free to work higher from here. I'm watching the euro which appears to be at the end of its rally, and I'm watching 1131 which is key for the bears.


Blankfiend said...

Hi Todd. Your count looks pretty good, and is one of my alternates as well. What troubles me a bit is how to divide [A] of y of (ii) into a five wave move. It looks more like a three wave.
What do you think of this as an alternate?

Todd said...

Hey Blankfiend,

Your count illustrates the mild difficulty in counting this correction so far. You have wave '[A]' composed of a 3 wave combination and that cannot be possible.

I personally would just remove the '[A]' label, then change '[B]' to 'X', and then replace '[C]' with 'C' and 'Z'. This will make it a WXYZ triple combination correction. It is quite a lopsided correction but will ultimately result in the same outcome as you have here. It's just more EWP sound in my view.


Blankfiend said...

Thanks for the feedback Todd! I see your point. I revised [A] into a 5-3-5, with (A) being a Leading Diagonal, (B) a 3-3-5 expanded flat, and (C) a motive five. This gives (ii) the overall look of 3-3-5 running flat, with [C] an ending diagonal.
The chart is here: