Wednesday, November 3, 2010

Fed and Elections Out of the Way; Back to the Basics Again

Well, the elections and the Fed QE2 nonsense are finally out of the way.  And the markets didn't really do much as a result, did they?  At least not yet.  The elections were a non-event.  I suspect this is because the outcome was what was expected, i.e. Republicans take back the House but not the Senate.  The result should be a gridlocked government attacking itself the next two years, leaving corporate America alone for a little bit.  I'm sure Wall Street likes that.  But it was already priced into the market.  So that's done.  Then the Fed's QE2 burning of $600 billion is now out of the way and also pretty much in line with what was expected, hence the virtually flat result at the end of the day in the markets.

Today's internals were modestly bullish, but nothing to do a cartwheel over.  The internals and price action the rest of the week, and probably into next week should be more telling about where we're at in the wave structure.  In looking for a top, I'd like to see a sharp rally, maybe a gap-up open, tomorrow morning and then a sharp reversal into negative territory closing on the lows.  That would be as good of time as any to get short and place stops above the high on the day.  If anything, the pure risk/reward of the trade is compelling enough to take the trade.

"Market Manipulation" Is Not Why Most Traders Lose

The uptrends remain intact and I see no reason to short this market, or to assume that a decline is coming anytime soon.  That of course can change in a blink of an eye with a break and close below these uptrend lines and lower lows.  But that hasn't happened yet.  What has happened is that the market has continued making higher highs and higher lows.  That's an uptrend.  Since at the moment, it appears the major indices are headed to new highs on the year, don't forget to check out my longer term bullish count I posted a couple weeks ago for my bigger picture perspective.  Until the evidence shifts away from the bullish view, this count remains valid, and my top choice. 

On another note, the XLF (financials sector ETF) has been consolidating in a triangle like pattern and today's candlestick looks bullish.  It exceeded the overall market's gains today by rallying 1%.  So we need to watch this sector carefully, and monitor its performance relative to the overall stock market.  If financials catch up to equities in their rally, then we'll know that it was the stock market leading financials.  But if the XLF continues to lag the rest of the market, then it still leaves a deadly bearish picture for stocks in the longer term.

I know the market is stretched and many folks are waiting for the top and big reversal.  And that certainly may happen now that the Fed and elections are out of the way.  But playing a top and bearish reversal at this point here is no more than a guess in my opinion.  And I rarely trade on "guesses".  The evidence currently suggests higher levels ahead.  Once that evidence changes to suggest the uptrend is broken, I'll analyze the downside potential from there.  One way we can determine the strength of the market and when a top in stocks may occur is in the action of the euro, or the US dollar.  The euro's count is clearer than stocks, and it appears to have finished up a triangle that led to a new high during its thrust.  That thrust should be quickly and completely reversed, marking a major top in the euro.  When the euro tops, so should stocks.

The Fed and "Plunge Protection Team": Are They Manipulating Stocks?

A triangle appears to have completed Minor wave 4, leaving Minor wave 5 underway at the moment in the form of a thrust.  Thrusts are finishing moves that are quickly completely retraced.  A euro break below 1.3733 would confirm a top and suggest it is moving aggressively lower towards parity in the coming months in my view.  It should also result in a top in stocks.

DJIA Priced in Gold: What It Means for the Long-Term Trend

Of the many forward-looking market indicators we at EWI employ, one of the most interesting tools (and least discussed in the financial media) is the DJIA priced in gold -- "the real money," as EWI's president Robert Prechter calls it. What implications might the present position of Dow/gold have for the long-term trend of the nominal Dow? In this video, Elliott Wave International's Steven Hochberg shows you several revealing charts that answer this question.
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