Monday, October 18, 2010

Stocks Make New Highs, Euro and XLF do not, VIX 5 Wave Rally Still Viable

I wrote long post over the weekend of my overall view of the market at this juncture and other than the short term wave counts, it still holds relevance after today's action.  Please check it out if you haven't already because it will provide context to what I talk about in the coming days.  Click here for the post.

Volume today was fairly strong although definitely not jaw-droppingly strong.  The ups and downs and decliners vs. advancers were solidly bullish.  Nothing here to really note other than today the main indices made new highs on the internals shown here are far from stellar for the bulls.  It seems that the new highs of the past few weeks have been done with moderate enthusiasm.  This is usually the sign of a weakening rally.  But the market just continues higher with no end in sight, so perhaps weakening look will continue for several more weeks.  Until we get signs of a reversal, the market's trend remains up.

This chart was printed right at the close so the volume bar is not fully developed for today so it appears like a very low volume day.  But it should come close to kissing that 13 day moving average.  Notice that we get these little volume spikes, albeit today's was not impressive, on these big up days that are acting like launching pads and floors for the market.  Once we get closes below these "floors" on solid volume, we can begin to start compiling the evidence for a top.  But right now, I see these as building blocks for a sustained rally.  Looking at stocks alone, I see nothing that suggests a top or that I should be bearish at this point.  But the evidence surrounding stocks, like that in the euro, VIX and financials, suggests otherwise though.  So we'll see who wins here.

The financials made up for their major selloff Friday by taking those losses back today.  Much like I said in this weekend's post, although everything surround stocks appears to be bearish, in the past stocks have held up and the surrounding evidence turns up with stocks.  Today financials did just that.  But one day does not make up for several months of lagging as you can see from the comparison chart above of the S&P and XLF. 

But it does concern me that a lot of this selling is occuring into earnings and Citigroup surged higher today on their earnings and may signal a trend of sell the rumor buy the news type of thing where these financials will squeeze the shorts at earnings report time.  Also, and more importantly in my view, is that EVERYONE, and I mean EVERYONE, is talking about how the financials are lagging the overall stock market and that's a bad sign for stocks.  It's mentioned on CNBC TV at least twice a day, on their webpage, and check out the blogosphere; almost every blog out there is mentioning the "lagging financials".  The contrarian perspective is that if everyone knows about it, then it's probably meaningless and worth taking the opposite side of the trade. 

With that being said, the lag in the financials is still too big and great to completely ignore, and the historical significance as it relates to the 2007 early exit of the rally by financials does flash warning signs for the stock market here.  So we still need to watch it. 

Most major indices made new highs today, and the Nasdaq 100 has already made a new high on the year so right now I'm not sure on the wave count at the moment.  I need the market to play out a little more before I get a better degree of confidence in a count.  However, if the market doesn't fall hard soon, like tomorrow, the fact that it's in the very upper end of a comfortable retracement level if April 2010 marked a Primary wave 2 top, then I think that we can assume that those highs will be taken out soon.  The Nasdaq 100 has already done so, and although it often divergese from the rest of the indices at major turning points, it's also viewed as a market leader.  And I think it would be safe to look for new highs on the year if we get further steady buying like we had today.  If the market has been in a Primary wave 3 since April of 2010, then this would be the worst and most pathetic wave 3 I've ever seen since studying EWP.  It's still possible, don't get me wrong, but ask yourself..........does the action since April feel or appear like what you'd expect for a wave 3 to be?  In my view, the market needs to top now or those April highs are good as gone and we continue our hunt for the elusive Primary wave 2 top.

And if the market keeps chugging higher, keep in mind my counts for bullish alternatives.

The euro is still lagging the stock market in that it did not make a new high today.  But if stocks are the leader here, then expect the euro to do so soon as well.  But right now we have to count it as we see it at face value.  And right now the evidence is strong for the euro to have made a major top.  We can count 5 waves down from the highs, and although the current rally looks impulsive, it is still well short of last week's high and is having trouble rising through some fibonacci retracement ceilings in place.  Wave (2) may continue higher in the Asian and European sessions where 1.4030 and 1.4090 should offer solid resistance.

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