The stock market is doing nothing today, just floating around on light holiday trading. But the much bigger and global 24 hour forex market might be giving us something to watch. Above is the daily euro chart, which basically moves opposite the US dollar, and it shows a 3 wave ABC corrective rally possibly ending. The retracement of the 5 wave decline from last November has reached the 61.8% fibonacci level, as well as my long targeted 1.40 round number resistance, the daily stochastics and RSI are overbought and waiting for a turn down, and the candlestick formation we might get today oftentimes occurs at the point of trend reversals. So the setup is there, but it's far from perfectly bearish.
The reason I say it's far from perfect is the behavior and wave structure from the recent high that would be the Intermediate wave (2) high. I would expect a more violent move surrounding a top of this magnitude, and then significant follow through to the downside for the kickoff of Intermediate wave (3). This isn't a requirement, but it's certainly a guideline that I'd like to see to instill confidence in a major top.
It's possible we can chalk up the weak topping behavior to the light volume in the US session, and as the week moves on we may see some strong and violent moves to the downside like I'd expect to see if my wave count is right. With QE2 on the table for the Fed, I wouldn't doubt if we get some violent moves this week, and as this chart shows, those moves will be to the downside. But we'll just have to wait and see if that happens for sure since the structure and behavior right now is far from perfect.
Regardless, there's a nice risk/reward setup here in my view. The Micro wave ((2)) at 1.4012 acts as a good "line in the sand" for the bears. I think any move above that level would suggest that the uptrend is still intact and that we need to wait for further signs of a top later on. But as long as the euro stays below that level, I think we have a good chance of seeing some heavy selling in the pair come in this week. A major top in the euro would mean a major bottom in the US dollar, and a major low in the US dollar would likely mean a major top in equities. So this currency pair is important watch along with the 1.4012 level in my view.