Thursday, September 16, 2010

Many Divergences Exist, the Rally is Struggling, Friday Could be Quite Wild

Quite a snoozefest in the markets today.  Looks like people were already positioned for options expiration day tomorrow.  Volume again hovered at the 900 million share mark on the NYSE, which is very low.  Various markets diverged today with some making new lows and others making new highs; it's a truly fractured and confused time for the markets at the moment.  This is very bearish at this present time.  A nice smooth uptrend should have all, or the overwhelming majority, participating more or less in sync with each other's highs and lows.  What's occurring now shows a struggling market in the final stages of a large and overextended rally.  One other thing of note is that the S&P was significantly weaker today than the other indices and you can see it internally as 301 shares closed down on the day with only 191 shares closing up. 
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Above is an intraday 5min chart of the Dow.  It looks a lot like a triangle and thrust at this point, although it's far from perfect (see EWI Tutorial, sections 4.3 & 4.4 here).  So if the above count is correct, it means that the late day rally today was part of a thrust, which is a finishing move.  And if you look at my counts from yesterday (4hr S&P and 1hr Dow) the triangle and 5th wave thrust fits well to finish up waves v. of c of (ii). 

With the setup just continuing to look more appealing for the bears, we can add to our long list of evidence of a major top forming along with the fact that the VIX market sell signal is still well in place from September 7, the anniversary of a major top on September 19, 2008 may be "celebrated" Friday or Monday, and that options expiration day is tomorrow, probably means Friday and early next week can get real exciting for the bears.

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Just one more divergence today to add to many throughout the market and through various momentum indicators is the fact that while the Dow was thrusting from a triangle (see EWI Tutorial, sections 4.3 & 4.4 here) to a new high, the S&P lagged and could not make a new high at all.  Again, these little signs on the intraday charts MAY be trying to tell us that a top is essentially in already. 

Here's just another little technical indicator showing a top forming and a major pullback is coming ahead.  Here on the Dow's hourly stochastics you can see they are confused at the top end of the range as they have been flip-flopping all over each other and have actually formed a nice wedge into the upper right corner.  Just like in market prices, when wedges are formed they usually signal a severely weakened trend that results in sharp reversals. 

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Lastly, the S&P Small Cap 600 made a very slight new low today and has been lagging the rest of the market significantly along with the Russell 2000 and the financial sector (XLF).  This is a bit unusual because the higher risk tech index, Nasdaq 100, has been exceeding the other indices with new highs lately which is an unusual divergence in my opinion.  Usually technology and small caps are grouped together in the "higher risk" category and tend to make new highs and lows more in less in sync with each other.  This is not the case here.  Again, a sign of a fractured and confused overall market.  

Now the Russell 2000 did not make a new low with the S&P Small Cap 600, and normally I would consider that bullish.  But in this case I don't because usually that would be bullish if it were to happen at the end of a downtrend, and also because looking at how fractured this market is right now and all the bearish setups I see all over the place, I can't see that as a bullish signal.  I think within the current context of a severely fractured market, the small cap index is telling us that it wants to go lower.

Now all these little divergences can be cleared up with a strong push to new highs by all the indices tomorrow, but that still won't erase the overall bearish potential here at all.  If the charge higher is made tomorrow then I would take that as the markets just wanted to take out their August highs before making their tops and reversing sharply as expected.



agnes1938 said...

have a look at this guy's chart (scroll down on the website):

he has minor wave 2 just ending now....but that would be mean minor wave 2 is a triangle, that can't be heh?

Federico Fernandez said...


good evening, it's me again. I'm carefully following the whole action :). It's turn very interesting.

Let us asume, I'm the guy who bring some confusion.

I do really think, that we have more and more evidence that a top or a high is near. Maybe is already there. But two phenomeno are bothering me.

The first, have you notice, that lately at the end of a market session we have increasing quotes. I carefully studied this before. At the beginning private people do the trade, at the end the big boys or the pro finish it. So, I think they want us to reach more tops and they want this rally to continue going higher.

The second, historically in expiration days the markets tops. But if they tops, many EW counts are not going to be valid and we have to think in another counts.

On the other side, after expiration day a trend turn take place. Maybe tomorrow will not be a wild day at all but next week. But without bad news or a black swan i think may be nothing is going to happen. Something similar happend in year 2004. Where some EW thought, the end of the world is there, but instead we experienced a 3 year big bull market.

I think, next week is the key for the following months and maybe years.

Great post today, keep like that.

I wish you success with your trades.

PrincipleAnalysis_Blogspot_Com said...

Triangles occur only in 4th, B and X waves. So I do not view that as a valid count

PrincipleAnalysis_Blogspot_Com said...

Hey Federico,

I certainly share your concerns, especially on the long term outlook. I would be disingenuous if I said that I haven’t lost any confidence in the long term big wave 3 down bearish case. So a while ago I decided to play more of the short term action, i.e. 1hr and 4hr charts, instead of the daily charts.

As for your first concern, it’s quite possible the bulls will push this market to some new highs, but the evidence strongly suggests that the move to new highs would be short lived. The bulls may have been pushing equities higher into the close for a while but that trend can easily reverse any day now. So I don’t see any impact over longer term. At least that’s my opinion. You may think differently?

As for your second concern, the EW count from the highs on the year is far from perfect. In fact, it looks pretty clearly like a correction. But the bulls really haven’t taken over to prove the market is done falling. Even if it’s a correction, it can still fall significantly further in the short-to-medium term. Don’t you think? Also, looking at the action in late 2008 leading up to the big 2008 October selloff you’ll see that the choppy sideways overlapping decline was also far from perfect elliott waves. But despite that, look at what happened in October 2008.

I hope to hear back from you if we get some big moves Friday, and especially after you see the action early next week. I’d like to know what you think.

Good luck to you too!

Federico Fernandez said...

you were right, it's a very wild day!

you should see the german DAX, unbelievable!.

I gonna write you later. Good Luck!

PrincipleAnalysis_Blogspot_Com said...

Wow that's a big reversal in the DAX. Would like to see that downsloping move in the US :)

Good luck to you too. Talk to you later then....