Thursday, August 12, 2010

Wave iv. Finishing up, then Wave v. to New Lows

So the market continued selling off hard this morning like I said in yesterday's post. It gave the bears another opportunity to take some profits off the table which I did right at the open. But the market didn't rally nearly as much as I thought it would after that drop. I thought today would be a flat, or possibly up day. With so much volume coming in yesterday, relative to prior days, and only 5 S&P stocks trading higher yesterday, I thought the bears would be just about done for the short term. But the market's trend remains so firmly down that it couldn't even manage a short squeeze rally after such a bloodbath yesterday. So in 3 days the Dow has lost 376 points and has erased the last 12 days of the previous uptrend.

So where is the bottom, whether the short term or long term? I get hate mail all the time when I try to project and call any degree of bottom. I'm often told I'm a fool for trying to pick a bottom in a big wave 3. Those people obviously haven't been trading EWP the past year or so to see how many fakeouts we've had, and how valuable it is to remain objective and protect yourself no matter how sure you are that the big wave 3 is underway. After the past several months of having promising big wave 3 declines get completely reversed and blowing me out of the water, I learned to be a bit more skeptical, and many times I've been right in calling a significant bottom when we're supposed to be in a big wave 3 down. So I'll continue to call the market as I see it. And I can comfortably jump in and out of the market on short term trades since I have long term put options in place that will profit from a big wave 3 anyway, just in case I do miss it with the short term trades I make.

Looking at the CNBC front page today (left click on the image above to enlarge) it doesn't seem like there's much worry in the market right now. If you recall, over the past year or so whenever we'd get a big selloff we'd get the armageddon news headlines fairly quickly; and bottoms have formed with new highs following shortly. It seems optimism is quite entrenched now, and it's harder to break down that optimism, which contrarily is good for the bears. Looking at this afternoon's front page posted above I see a lot of optimistic stories which I put red arrows next to. There are some pessimistic articles there too, but the optimistic headlines far outweigh the pessimistic ones. And for the most part the headlines are about people recommending to buy something, or that some type of economic data has improved. Hardly the type of headlines we'd expect to see if a major bottom were to be put in today. That doesn't mean we won't get a short term pop rally tomorrow, but the larger trend appears down for the time being.

Also looking at the Dow's daily RSI you can see that it is still far far away from oversold territory. So the market is certainly free to fall much further from current levels over the coming days.

The 30min S&P RSI tells a different story though. It is trending higher after being in oversold territory which is typical for 3rd and 4th waves. The next turn down to new lows should be wave v. that should be met with a higher low in the RSI thus creating a bullish momentum divergence which is typical of 5th waves. The market can subdivide differently than what I have labeled above and the impulsive move from the highs still be valid, but above is my best interpretation of the short term count in my view.

Technically you can count a 5 wave drop from the high complete right now, but to get a better look from the degrees of trend and wave correlation, it would look better if we made one more new low beneath today's low. There is a small gap in the 1089.47 - 1083.88 area that should get closed prior to wave v. getting underway to a new low. It should be a very small "c" wave to complete this wave iv. so I expect a sharp pop higher that should be reversed fairly quickly. This quick pop may come at tomorrow's open, so watch for it.

Lastly, we all know the US dollar can have a large impact on the stock market. And you can see here that the euro has led the selloff in stocks since it topped just before the Dow did. The euro, which moves opposite the US dollar here, appears to be wrapping up a clean and sharp 5 wave impulsive decline. I expect the pair to push a bit lower though to finish up wave v. A good target for a bottom is the 1.2732 level. It can certainly fall much further since a major downtrend in the euro is probably underway. But the behavior of the currency around the 1.2732 level could tell us if it does want to find a bottom there, and if the stock market might be finding a short term bottom as well.

In summary, the evidence suggests that the stock market still has at least one more new low to make before we even start to think about a short term bottom being in place. Tomorrow would be perfect for a quick pop higher to close the gap in the S&P I mentioned to complete wave iv. followed by another sharp drop beneath today's low to complete wave v. Once that nice clean 5 wave impulsive drop is complete, I'd say we could feel more confident in shorting rallies that follow.



JemimahB said...

This S&P gap was perfectly closed after hours in the futures (right at the the end of the asian session), and then declined back down in a small but impulsive looking move (on the 15 min chart). Do think that counts for a fill, or are you still looking for one during 'on hours'?

PrincipleAnalysis_Blogspot_Com said...

Nice catch. I usually give the cash market presidence but with the futures closing the gap it certainly raises the odds of the decline to new lows occuring any minute. If the market just falls to new lows from hear, I'm sure the gap will be filled on the next big correction higher. So the market is free to fall at any time if wants to.

Do you trade the Nasdaq? It continues to be much weaker than the S&P and Dow.