Tuesday, August 10, 2010
Euro Looks to Have Topped; Stocks Should not be Far Behind
The clearest short term structure is in the euro which most likely formed a significant top the past few trading days by breaking through the key 1.3117 level I mentioned yesterday, and doing it with a 5 wave impulsive move. The US dollar is in the same position, only in the opposite direction. Now is a good time to get short the euro, or long the US dollar, in my opinion. Stops could be placed just above last week's high in the euro, or just below last week's low in the dollar. If the euro has topped, it could result in more than a 1000 pip decline and most likely will challenge parity in the coming months. Doing so would put tremendous pressure on commodities and stocks. Bulls beware.
The euro and dollar picture in the short term looks clear, but the stock market's picture is not so clear. This lack of short term clarity suggests that the stock market's top and decline might lag the euro in this respect. The bulls and bears are really fighting it out, like an intense arm wrestling match, shooting this market up and down violently the past few days. But the burden lies with the bulls right now since the market was in rally mode prior to this stalling out the past week. So far, the bulls haven't proven at all that this market should and will go higher in the coming days/weeks.
Today's internals were fairly bearish and volume was still light at just under 1 billion shares traded on the NYSE. But what's of interest is the fact that relative to the past few days' volume which was declining, today we had a strong rise in volume compared to the past week and today it just so happens that it was a down day. So again volume increases on declines and dissipates on rallies.
The divergences between the various indices remains intact and therefore keeps this market extremely bearish and holding a great risk/reward opportunity for the bears. The S&P has still not confirmed the Dow's new high, and the Composite and Russell 2000 indices are lagging far behind. This lagging of the higher risk indices is not a two or even three day affair. It's actually been occurring for almost two weeks now. Risk is fleeing the market and not joining the blue chip Dow on its move to new highs. This is bearish overall. And despite the VIX being at "comfort" levels for some traders on financial TV, the breaking down and divergence of the market as whole tells me the VIX should be more interpreted as a "complacency" guage at this point, not a guage determining how calm the market is. The market is complacent as risk is fleeing the market and volume disappears on rallies and returns on selloffs.
This market is bearish in my view and I'd only be looking to play the short side. It's possible we'll still get a sharp spike to a new high tomorrow, but the upside potential should be limited in time and/or price. A spike higher while these divergences remain in place and the euro stays below last week's high would give the bears a good opportunity to come in short, in my opinion.
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.