Thursday, September 30, 2010

A Top Looks Good Right Here

Internals today are what would be expected with prices in the major indices closing down the way they did.  We got a nice surge in volume today, on a down day no less, which is probably just end of quarter jostling by fund managers. 

The rally this morning looked like the S&P wanted to breakout to my targeted resistance range of 1173-1181 as it surged well beyond the key 1150 level.  But the market quickly rejected this rally, sending it downward to new intraday lows in a clear impulse pattern that I'm labeling Submicro wave (1) as you can see in my below wave count on the intraday chart.

Today's reversal comes right at the end of a great September for the bulls and at the end of a great quarter for stocks.  It also comes at a time when the wave count and sentiment extremes suggest a major top should occur any moment now.  Us wavers call it Minor wave 2.  So in just looking at the charts, today may well mark a top.  But a break above today's high simply means another charge toward the 1173-1181 area before Minor wave 2 tops and reverses.

Today on the drudgereport there were two stories: one pointing out the great run stocks have had, and one pointing out the horrible decline the US dollar has had.  I believe both are the cusp of major reversals.  I consider Drudge an electronic international newspaper.  It's not a financial publication, it's just a grouping of international stories of interest going on during the day.  So it has mainstream outreach that can be useful in my hasty analysis of sentiment.  So when when stocks do so well and the US dollar does so bad that it makes Drudge headlines to get to the mainstream, it may mean things are about to reverse, at least in the short term.

On the other hand, today's rally and reversal structure was no secret in financial media as CNBC documented it and had a discussion with the FastMoney traders about the action.  So in that respect, it may be too obvious to mark a top.  But seeing as that Drudge is not financial based, and gets much more readers per day than CNBC's FastMoney to have a more "mainstream" audience to it, I'll hold my contrarian position a little more reliably with Drudge.  But we'll see.

Looking at the daily S&P wave count it sure would count well as complete here.  The struggle at the 61.8% fibonnaci level  (Elliott Wave Tutorial, 8.1) with a pop above it that's quickly reversed in an impulsive manner is certainly a good time to mark a top to Minor wave 2.  Also notice that we finally got some RSI divergence on the daily chart as you can see above.  This is typical behavior in 5th and final waves that often lead to big moves once the reversal occurs.  And when the divergence occurs on the daily charts, those reversal are often quite large.

The small intraday counts nicely well with a major top being in place today.  Subminuette wave v traced out an ending diagonal (Elliott Wave Tutorial, 3.1), which resulted in "throw-over" to complete the pattern with this morning's rally.  In Prechter and Frost's Elliott Wave Principle they state that, "Within a parallel channel or the converging lines of a diagonal, if a fifth wave approaches its upper trendline...[on heavy volume], it indicates a possible penetration of the upper line, which Elliott called 'throw-over'" (p. 73).  Today's uptick in volume into the 1.2 billion shares level certainly qualifies as heavy volume since volume of the past several weeks has held steadily below 1 billion shares most of the time.

If the count is correct, Submicro wave (1) finished early this morning, and the choppy 3 wave rise later in the day MAY have completed Submicro wave (2).  If so, tomorrow morning will lead to a sharp Submicro wave (3) down and put this current count well on track.  But if the market wants to push a little higher first, as long as it stays below today's high, this count still remains valid but we'll just have to push Submicro wave (2) up a bit higher.

The ending diagonal count certainly looks weak, as ending diagonals usually do. But this one looks horribly weak, so much so that it looks more like a 4th wave triangle followed by a sharp 5th wave thrust and reversal this morning.  There's little difference in the two in that they both mean a top is likely in and lower levels ahead.

Other than the RSI, this other basic technical indicator is showing a nice bearish setup on the dialy charts too.  It's taken a long time for the divergences on the intraday charts to move their way to the larger time frames, but here we are finally.  The MACD has started to "squeeze", a behavior typical of a market reversing trend.  And on the daily charts, this probably means a big move to the downside once confirmed.  Again, this aligns with the wave count calling for Minor wave 3 down getting underway.

Nothing new on the euro or the US dollar.  Their still working their way into their reversals.  Their reversals should coincide fairly closely with the reversal in equities.

For those of you who like supplementing your wave counts and trading with basic technical indicators and patterns, don't forget to check out this free resource while it's available for free: "How To Use Bar Patterns To Spot Trade Set-ups"



Plau678 said...

"How To Use Bar Patterns To Spot Trade Set-ups" talks about a pop-gun pattern.
Today's bar is the outside bar enclosing yesterday's inside bar. If this pattern is correct, a pop to the downside is likely. However, popgun moves are significant retraced once the move ends. If this is correct and IF this is a down move, then when the down move ends, there will be retraced significantly

PrincipleAnalysis_Blogspot_Com said...

Yes indeed, nice catch. It's especially clear in the Nasdaq 100 daily. But the examples in the booklet don's show complete reversals, and the Sirius example shows it kicking off a wave 3, just like we might be entering now. And I would think it likely that the "significant retrace" could be Micro wave ((2)). Don't you think?

Thanks for pointing this out

Plau678 said...

Today is an inside day. It is too bad that there is no follow through today for the pop-gun pattern. As you pointed out, it is a 5 wave impulse down from Thur's high and the price pattern since the 5 wave down has been choppy, (corrective). I agree with you that DJIA need to go down soon (Monday?) but price action does not seem to want to go lower.

Share tips said...

Thanks so much for this! I haven't been this moved by a blog for a long time! You’ve got it, whatever that means in blogging. Anyway, You are definitely someone that has something to say that people need to hear. Keep up the good work. Keep on inspiring the people!
Share Tips