Thursday, October 14, 2010

Euro MAY Have One More New High Before a Major Top; Equities Should Decline with the Euro From There

Looking at the futures and the euro last night I was prepared to wake up this morning to another big surge higher in equities and was surprised to see a somewhat flat market.  Not only that, but the internals of the market are bearish with a lot of down volume entering the market, and so far the S&P has almost the same amount of decliners today as it had advancers on yesterday's big rally.  So there seems to be some profit taking ahead of options expiration and the Bernanke's speech tomorrow.

So the S&P appears to be in at the tail end of an ending diagonal-type pattern.  The count looks good and sentiment and momentum is certainly ripe for a nice bearish reversal here, so this remains my top count until a new high is registered.  A new high and close above yesterday's high would put the bullish alternate counts as top possibilities.  I mention those bullish alternates below. 

The main problem with the ending diagonal count is the speed and strength of the current decline so far.  After such a huge "melt up" rally and an ending diagonal, the market should be declining very rapidly.  But it's not.  It's just doing a stair-step decline.  So I don't have high confidence in this count right now, but a sharp move to the downside at any moment can change that. 

So far, there is a series of lower highs and lower lows on the short term intraday charts, which is the key characteristic of a downtrend.  But I'm far from convinced at this point that the larger trend has reversed downward.  But as along as the series of lower highs and lows continues, the above count is my top choice.   A break below wave ((4))'s low at 1155.57 will be a good sign that a top is in and lower levels will rapidly be achieved.

Looking at simple daily bars I'd like to see a close today below yesterday's low of 1171.31 to even begin to think a top is in.  Closing below this level won't confirm a top is in, but it will the first step for the bears to move toward confirmation.

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Of all the bearish evidence out there, I think the lagging financials is the most compelling.  The overall market cannot sustain a long term uptrend without financials participating.  The financials have continuued to fail to make new highs with the main indices over the past few months, and today they are struggling big time again.  When the blue chips went into the positive early this morning the financials were down almost 1%, and Goldman Sachs, often a market leader, was also down just as much.  This is a huge warning sign for the long term bulls as long as this behavior exists.

Normally I don't do counts on the VIX since I'm not sure how much it can be tied accurately to large crowd psychology, but the rally it's had off the low with a bullish reversal bar is something to watch.  A completed impulsive rally in the VIX would suggest that the larger trend was now up, and that would mean a decline in stocks.  And stocks can make a new high and the VIX not make a new low, keeping the VIX impulsive rally count intact and signaling ahead of time that a top is at hand.  Keep in mind that we're getting this impulsive looking rally right after the VIX closed outside then back inside the bollinger bands this week.  Perhaps a big warning sign for the bulls here.

With tomorrow being options expiration and Bernanke giving a speech, it could end up being a wild Friday with big moves.  If those moves happen to be to the upside then I want us to be prepared.  Above is my top alternate count on the long term timeframes.  I'm not sure about some of the larger wave degrees, but the core count is still valid.  And that means we're in one final ABC rally higher to new highs for the year before Primary wave ((2)) tops.  Judging by how stretched this market already is, I don't expect the market to exceed this year's highs by much before that top occurs.

This is my second alternate count and a little less likely than the other alternate count because projecting an ending diagonal this early is a fool's errand in my view.  So I'm going to let the market play out a bit more and prove to me this count is worth being a higher probability.  This count would make sense for many reasons, but the main ones are the accompanying internals and momentum that are occurring right now, such as the declining volume on the rise, and the 2 VIX market sell signals executing which is typical in 3rd waves and having no resultant reversal.  But there are also other reasons why it's NOT a good option, and that's because the 3rd wave looks impulsive and not a 3 wave move like it should be in an ending diagonal.  Also, the move is a bit stronger than one would expect for an ending diagonal.  These issues don't negate the count, they just make it a lesser probability at this point.

But just to clarify, these are my ALTERNATE counts.  My primary count is listed up top and is extremely bearish in the short term.  Any strong sustained rally above yesterday's highs would put these two bullish alternates in higher standing.

The euro lagged equities in making new highs the other day.  While equities surged higher in the US session the euro stayed flat.  But once the Asian session kicked off last night, the euro blasted to new highs eliminating my short term bearish count.  The delayed move higher looks like Minuette wave (iii).  The choppy overlapping grind lower in today's US session is Minuette wave (iv).  So one more new high to complete Minuette wave (v) is likely to complete Intermediate wave (2).  The result will be a sharp and massive selloff shooting the euro to parity with the dollar and probably much lower.  Once the decline in the euro starts, equities should fall as well.  But yesterday equities led the euro, so we'll see if it leads the euro lower again.

Should be an interesting Friday.


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