Wednesday, September 29, 2010

Market Rally Looking Real Tired; Will it Finally Give Way to the Bears? Also, a Look at Currencies.

Internals today were about as bearish as I'd expect with today's action action.  They were just mildly bearish and the price decline was the same.  The one point of interest is the slight increase in volume we're starting to see now.  Notice that we've popped above 1 billion shares again.  Still this is very low for the market in general, but relative to the past several weeks, this is a bit of an uptick.  We'll see if this uptick in volume results in what usually has happened in the past few months in that volume increases on declines, or if it's simply end of quarter josseling by fund managers.

Also of note is the relative weakness in financials compared to the S&P and Dow like I mentioned in this morning post.  The financials are showing significant and prolonged weakness compared to the overall market, and that's a huge warning sign as long as it continues in my view.  Also, the VIX climbed higher almost 3% today with just a mild decline in the indices. Again the VIX to me is also signaling a backdoor cautiousness that's working it's way slowly and stealthily into this market as apparently recently a lot of folks are doubting the latter end of this rally and buying a lot of put options for protection, or maybe even speculation.

Above is just an updated wave count on the S&P from yesterday.  It actually did exactly what I projected in giving us a little drop down to the lower end of the diagonal triangle I think might be forming.  If an ending diagonal (Elliott Wave Tutorial, 3.1) is forming then it brings about a great opportunity for the bears since they are clearly identified structures, represent extreme weakness in the uptrend, and lead to sharp reversals.  I mentioned my case for the ending diagonal in yesterday's post as well. And today I posted the RSI as well to show you that it's diverging lower compared to price, which is typical of 5th waves, especially ending diagonals. 

So the market can top and reverse at any time, and may have already done so, but if it hasn't, then I expect a slow grind higher for probably the rest of the week until the end of the quarter with perhaps a sharp rally and reversal to finish it off.  If the market breaks out higher to negate the ending diagonal structure, then my alternate count from yesterday's post is probably occurring which should the market to my reversal range of 1173-1181.


I think we're setting up here for a great opportunity to catch some really big moves in currencies.  I'm focusing on the majors, primarily the EUR/USD and the GBP/USD.  I think that both pairs are forming major tops and that the EUR/USD is headed to parity on the next dive lower.  That's a move I don't want to miss.  It may also trigger the top and reversal in equities and commodities as well.  So even if you don't trade currencies, I think it's worth paying attention to the euro and/or the US dollar.

I mentioned a week or so ago that there was a divergence in the EUR/USD and GBP/USD on the small timeframes but it didn't pan out as both shot to new highs shortly after.  But here we go again on the short term charts we see that the EUR/USD has been grinding out new highs this week while the GBP/USD so far has failed to do so.  As long as the GBP/USD does not make a new high on the week, I interpret this as immediately bearish & could be the first signs of a major top, which means a major bottom in the US dollar.

Again, the daily divergence between the two pairs still exists.  To me this is very telling and supports the thesis that the pairs' rally higher since May/June is that of a correction, and will be completely reversed to the downside in the coming months.

So why is this divergence important?  Has it resulted in any reversals in the past? Good questions, and I'm glad you asked.  Above I show a similar divergence that occurred while rallying into the late 2009 top in the EUR/USD.  Notice that the EUR/USD continued to make new highs after August 4th all the way up until November 24, 2009.  But the GBP/USD made it's high on August 5th, 2009, and then made one more attempt to make a new high November 15th which failed.  Then look at the result of both currency pairs after that resulted in complete and utter destruction to the downside.

So if history is repeating itself, the GBP/USD is again signaling that a major reversal to the downside is coming.  Once I see signs that a top and reversal might have started I'll post it here.

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So what do you think of my post and the market action today?  I'd like to know your thoughts and comments in the Elliott Wave Forum section. 



Plau678 said...

Hi Todd

It would be nice if your count of LD wedge works out as you described. However, I am concerned that the slope looks too horizontal to be a LD wedge. In addition, the SPX is an ascending triangle with the top of the triangle a horizontal line.
Is this triangle a wave iv of some degree and wave v will be a sharp thrust to new high?

PrincipleAnalysis_Blogspot_Com said...

I noticed that horizontal look too but if the diagonal is forming, it's still early in its development to where it can still grind out some higher highs besides what I put in red. Plus, wave iii was so extended relative to wave i that a really flat wave v would not surprise me.

If not an ending diagonal, then most likely just wave iv before one final shot higher like you said. I'm watching the euro closely. I think a european session one of these days will give us a nice reversal pattern and it should translate into an imminent top in stocks shortly after.