Wednesday, October 27, 2010

All Eyes on the Euro (and US dollar)

Today's internals showed decent volume at 1 billion shares on the NYSE and uppers vs downers was what I'd expect from a day like this for the S&P and NYSE.  So nothing glaring out at us here.  The market fell hard this morning, in line with what the euro has been telling us should happen this week, but then stocks rallied hard into the close.  So the uptrend remains intact.

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The euro has continued to subdivide lower and has completed the minimum requirements for an impulsive move down.  It may continue to subdivide lower from here for wave (5), but it's not required.  Last night I cited that 1.3981 was key to the bearish euro case.  But with 5 waves down in the euro possibly complete now, we have to raise that key level to the start of the 5 wave decline at 1.4079.  If I were not able to have a stop that high on my short position here, then I would cover enough of my short position to allow me to place a stop just above 1.4079

The euro has declined impulsively, although it has been a far from stellar move from a major top.  I'd expect a much sharper move lower.  So I'm a bit skeptical here of the implications this 5 wave drop has.  But nonetheless, we use EWP to give us clues of market directions so with that in mind the euro looks poised to continue moving gradually lower. 

But just to keep us honest, we can't ignore the other signs of this just being part of a larger correction.  Remember that the original move from the top was a 3 wave move, suggesting all this declining action is just part of a correction.  I see it likely that perhaps a triangle is unfolding.  If so, then the euro cannot fall below 1.3695.  Doing so would make the triangle all but impossible.  It's also possible the euro is completing a combination correction with a flat occuring in the second position which would have a slight new low beneath 1.3695 before bottoming and reversing. 

So a solid break below 1.3695 would eliminate the highest probably bullish scenario (triangle), and a continued decline well beneath 1.3695 would put the last bullish count on very thin ice (combination).  The action in the euro should be telling for equities.  If the euro has topped, equities will do so soon.

The choppy 3 wave up, 3 wave down mess is not worth guessing on a wave count in my view.  I want to see a 5 wave move somewhere so I can get oriented better on this EWP map.  But with all these 3 wave moves, it's possible an ending diagonal or 4th wave triangle is forming.  If it's an ending diagonal, then the bearish euro story lately is very telling.  It means the euro has topped and stocks will soon violently follow.  But this is all high speculation here since there is no solid evidence to support this other than the euro's 5 wave decline.

The uptrend lines remain intact, and so the uptrend remains intact.  The market has been having a tough time making gains lately, causing a real test of the trendlines in the Composite and S&P on the daily charts.  A solid close beneath the trendlines on solid volume that holds more than a day would be a good sign that some degree of top is in.  Again, the elections and Fed meeting (QE2 announcement) early November is on everyone's minds here.  I doubt any top will be as easy as selling equities on November 3rd, so I expect either an early selloff this week,  next Monday, or the second week of November to surprise us........that is, if the uptrend will be broken at all.  The bullish alternate I've been discussing here are still on the table and should be focused on until the bears prove they're making another move to take control of the market.

DJIA Priced in Gold: What It Means for the Long-Term Trend

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