Wednesday, September 22, 2010

All Eyes Looking on for a Stock Market Top: Currencies also Setting up Nicely for the Bears

Bob Prechter's Updated Deflation eBook is now available for free at EWI.  With the mainstream media and the Federal Reserve catching up to the dangers of deflation, now is an excellent time to view this free resource.  Prechter's 90-page eBook teaches how to prepare for deflation and adapt during it, but also learn how to survive it and -- most important -- prosper during it, so people can be ready for the buying opportunity of a lifetime at its end.   Check it out here for free.

And don't forget to check out my midday post, "Midday Update - Risk Still Pulling Back", if you missed it.

The internals today were modestly bearish with the exception that volume remains fairly light still with 953 million shares traded on the NYSE.  We had a break above the 1 billion share market yesterday, but today we're right back to the upper end of the slow volume range we've been at for several weeks.  It's possible a major top was registered yesterday, and the uptick in volume then helps contribute to that thesis, and today's slight decrease in volume may be because the market was correcting the sharp late day selloff from yesterday.  We'll have to see.  But it's clear that the internals of the market are not showing signs of strength at the moment, and when you add the fact that the higher risk indices are showing more weakness relative to the lower risk indices like I mentioned in my previous posts, then you have the signs of a market topping.


The S&P daily chart shows that after wave 1 down was complete in late May, the market has been undergoing a long and complex "combination" correction labeled WXY (Elliott Wave Tutorial, 5.1).  Yesterday's high and reversal occurred at a good level for the bears at the 61.8% fibonacci level, a common retracement level for 2nd waves (Elliott Wave Tutorial, Section 8).

Also notice that the daily stochastics are starting to trend down with plenty of room to run from overbought territory.  The bearish potential from current levels, with a stop just above yesterday's highs, remains a good trading opportunity for the bears to risk little and possibly gain a whole lot.

You can also see that the XLF picture I laid out yesterday with the 4hr chart proved to be a good indicator of future movement since the XLF declined 1.63% today, significantly more than the blue chip indices.  The decline comes right after it fell short of breeching its early August high which keeps the 5 wave decline intact, and the larger trend pointed down.  Again this could be another great trading opportunity for the bears with a stop just above the August high and plenty of room to run on the downside if that high remains intact.

With the XLF in full bear mode at the moment, it paints a bearish picture for the stock market as a whole since I highly doubt the stock market can sustain any meaningful rally without financials participating.


While many market divergences have been erased with this week's rally, some still remain in place.  For instance, the XLF and the S&P Small Cap index have not exceeded their July/August highs with the rest of the market.  But in comparing apples-to-apples, the S&P Small Cap's failure to make a new high is in conflict with the Russell 2000's new high made yesterday.  So the small caps are mixed, and the financials and the S&P are mixed.  This type of behavior doesn't mean tell us for certain that a stock market top is in, as we've sure learned the past couple weeks, but if a top is in fact in then this is the type of divergent behavior we'd like to see.


The daily euro count paints a very bearish picture ahead. The currency is currently in a wave C of 2 that should be wrapping up shortly (Elliott Wave Tutorial, 7.2, number 2).  Although wave 2 does not appear complete on the smaller timeframes, it can finish at any time, and there's evidence to support that. 

For instance, the Daily RSI as charted above is at levels that it's achieved near tops in the past as you can see by the green markings on the above chart.  Although the previous tops have been much smaller than what this wave count suggests, it still shows that the current extreme in the RSI is when price tends to top and reverse.  And with the wave count projecting a large wave 3 about to start, any possible topping signs we get demands our attention.

This wave count and setup also coincides well with what's expected in stocks.  The euro and stocks tend to move quite correlated to each other.  And so it's encouraging to see two very bearish wave counts and setups in both equities and the euro at the same time.

Lastly, I just wanted to show the divergence in place between the British pound and euro agains the US dollar.  You can see that the euro has been on fire lately and has well exceeded its August high along with most equity indices.  However the British pound not only has not confirmed this new high in the euro, but also has not confirmed the euro's new September high it just put in, and has recently declined in a nice 5 wave impulse pattern (Elliott Wave Tutorial, 2.1) as discuess in today's midday post.  See GBP/USD chart here.

So even currencies are setting up for a big fall, which in this case means a massive US dollar rally. 

So the setups in the markets are there, we just need to wait for them to play out.  The key for the bears is to soon get a sharp impulsive decline with a strong increase in volume to break down key levels which I'll discuss when the decline gets underway.  Any continuation higher the rest of the week should just be temporary, and may mean a challenge of the 78.6% fibonacci retracement level surrounding 1180 in the S&P.

Also, don't forget to take advantage of Prechter's August 2008 Theorist offered for free.  In this issue he does a question and answer format on the government's role in the economic conditions we find ourselves in.  Below are some of the questions he addresses in the newsletter:
  • What impact did the so-called “stimulus package” have on the U.S. economy?
  • In an economic depression, will pension funds keep most retired Americans afloat?
  • Who really benefits when the government props up Fannie Mae and Freddie Mac, and what's the fraud behind the idea of “too important” to fail?
  • Who does the government consider to be homeowners: you and your neighbors, or the banks that hold the deeds?
  • Who really endorsed the emergency Housing Act – and who will be hurt by it?
  • Can the Fed keep making loans to banks forever?
  • Is it actually against the law in some states to warn people of potentially dangerous banks?


1 comment:

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Share Market