Tuesday, August 31, 2010
Long/Medium Term is Clearly Bearish, but Short Term "Interference" MAY Delay the Downtrend
Today's internals were much more positive than what it looks like when just viewing the closing numbers on the major indices. The internals were not robustly strong by any means, but looking at the final numbers I would have expected a much higher close in the markets.
Today was the last trading day of August and so there was a lot of maneuvering around and positioning, along with a big spike in volume. There are numerous economic reports coming out the rest of the week, to include China's PMI tonight at 9pm (EST), that could swing the market around in the short term. Plus, the beginning of September should not only bring about some swings in itself for being a new month, but a lot of traders and investors will be coming back from summer breaks so volume should steadily start entering the market.
So with all said and done, the next week or so could get a bit wild. But the longer term remains clear, the market is declining impulsively and the majority of evidence suggest the path of least resistance remains to the downside.
The bulls are fighting ferociously to protect the 1040 level they feel is important as you can see from the above chart. It looks quite clear that their attempts to keep this level will ultimately fail. And the wave count certainly supports that outcome as well.
Very aggressive shorts can establish new positions with stops just above 1055.14, or keep them just above 1065.21, depending on risk tolerance. I feel that longer term bears should keep their stops just above 1100.14 at least until 5 waves down on a larger scale can be counted complete.
Above is a montly chart of the financials ETF (XLF). It shows that it made a new high in August compared to July, and then closed beneath the open in July. The last few times anything like this, or similar to this, has occurred recently it has led to hard selling the following months as you can see from the above chart.
The XLF is also trading below the key $14 level that it has been held up at for several months. And this month's close below $14 is only the second time it's done so since July of 2009. Once the $14 level fully gives way, there's not much holding it up for a long way down. It will be very difficult for the stock market to hold up in this current economic environment and mood, especially if financials start breaking down.
Lastly, the above 30min chart of the euro suggests that the downtrend has resumed and that today's sharp rally was just a 3 wave correction that will soon be completely reversed. If the euro is starting to collapse again, it means the US dollar should surge higher which would be more downward pressure on the stock market. So although there may be short term pops in the market here and there, the headwinds for equities remains strong. The above euro count remains valid as long as 1.2779 remains intact.
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.