Tuesday, October 19, 2010

Market Setup for Massive Decline in Place; We Now Have Clear Risk Levels Where we Know We're Wrong

Complimentary Report: Revealing new perspective on China and Japan

Don't forget to check out my post over the weekend for overall longer term perspective.  All is still relavent except for the short term wave count.  Click here for the post.

The internals today were quite a bloodbath.  Volume was quite high at 1.27 billion shares traded; much higher than what accompanied the final stages of the recent rally.  Also down volume represented 89% of total volume on the NYSE.  In the S&P, 460 stocks closed lower on the day.  So the bears stepped in today and let the markets know they're not dead yet. 

Today's action was just what the bears needed to do.  In yesterday's post I basically stated that the bears needed to step up today because the market is at the very tail end of the comfort zone allowed for a correction at this point.  If Primary wave 2 topped in April, then the bears needed to prove it today.  Well, today's action was a good start.  But it's far from confirmed that a top is in. The action tomorrow and the rest of the week will be more important and telling than what happened today.

The good news is that we now have solid resistance areas where we know we'd be wrong if the market broke above them.  So now we can establish short trades with clearly defined risk levels.  I discuss them below.

Let's keep it simple.  From an Elliott Wave Principle perspective, the Dow needs to stay below 11,068 and the S&P below 1177 to keep the impulsive count intact.  Once a large 5 wave impulse can be counted, we will then have to move those key levels up to yesterday's highs.  But right now, the 11,068 Dow and 1177 S&P, are key levels going forward from here because at this point, a break above those levels would make the decline look like a 3 wave drop, which is just a correction.  So those are key stopping levels for the short term action in my view, but ultimately only a break above yesterday's highs will completely eliminate the short term bearish view. 

I usually don't put much weight in VIX wave counts since I'm not sure how well the VIX can be tied to mass psychology, but I'll keep tracking this count as long as it stays valid.  Under this count, the VIX should continue aggressively higher in Submicro wave (3).  This would of course lead to more selling in equities.  A break above the Submicro wave (1) at 21.59 would signal that Submicro wave (3) is underway and moving aggressively higher.

Free article: October Curse vs. Objective Analysis: The Choice Is Yours.

The daily candles in the S&P show a change in crowd psychology to me.  The fact that we completely reversed all of yesterday's gains, closed well beneath yesterday's intraday low, and did it all on big NYSE volume, tells me that the previous trend is over.  The previous trend that was filled with excessive optimism and the lack of fear since the Fed will act as everyone's stop loss, and that massive asset inflation is on the way, has perhaps reversed here.  Today's selling of almost everything, accept the dollar, tells us that deflation got a grasp of the markets today.  The Fed can pump their billions of dollars into the market all they want, but if people hoard dollars instead of spending them, then prices will go down anyway.  Tomorrow is another "POMO day" as many people follow.  So we'll see what impact they will have on this market then.

The euro has been declining nicely, right according to forecasts.  If correct, the wave count suggests a major top is in and that the euro is working its way down to parity with the dollar, and probably much further.  At this point, as long as 1.4005 remains intact, I am comfortably short here.  Once a clear 5 waves down from the high is complete, we'll have to move that risk level up a bit, but for now staying below 1.4005 will keep the count looking impulsive.  A break above 1.4005 will make the drop a 3 wave move and therefore signal that most likely the pair will be moving to new highs in the near future.

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