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.
PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.
3 comments:
Stock market isn't doing much today, but have you seen the VIX? It is *way* below it's lower Bollinger Band, and on a day where the major indexes are basically flat!
Whoa crap! You're right, I hadn't noticed that yet. I'm sure the light trading is attributing to that but that doesn't mean it should be ignored. We have good euro formation setting up and the Fed later in the week, so perhaps things are lining up. The only problem is if you go to CNBC, all the articles, especially on FastMoney, are asking if the market is topping. Can't stand that. But sentiment measures on more scientific polls suggest tremendous optimism, so who knows. Week could get wild. And don't forget about options expiration Friday too!
Hey Markus. It's an awefully sidways move for a major top of this degree of trend to have, but with today's light holiday trading perhaps it's the best it could muster up at this point. I think the action this week will be telling, since the Fed will be involved in a lot of it. Things could get wild, and I can easily see a sharp shot higher which is then reversed, so I'm not "all in" yet.
We'll see...
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