Friday, November 19, 2010

Grinding Sideways for a While; But Watch the Euro (or USD)

Internals today were slightly strong, providing better follow-through for the bulls after a big move which is more than what the bears could muster up after their big move earlier in the week.  Options expiration day probably contributed to volume making it above 1 billion shares, but overall it was still a quiet day nonetheless.  It should get even quieter next week with Thanksgiving on Thursday and a half trading day on Friday.  I don’t expect much action to occur in stocks, and usually the market floats higher during this time, so that would fit nicely with the wave count looking for Minuette wave (b) of a triangle forming.  But I will be watching the dollar intensely.  Thanksgiving is often a very volatile time for currencies, and the dollar is usually the benefit of big moves.  We’ll see if this turkey season keeps the dollar bullish trend alive.

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After breaking through the descending trendline to the upside yesterday, the S&P tested the top end of the trendline before bouncing the rest of the day.  This is typical behavior of a trend reversal in the making.  This doesn’t mean the market is a straight shot higher from here, but it does imply the Minuette wave (a) bottom will hold for quite a few more weeks.  I suspect a triangle is unfolding right now, and perhaps another down-up move will complete Minuette wave (b) of that triangle.  I tried to place a general projection of prices in the coming weeks for a Minute wave (iv) triangle in the above chart.  I didn’t place the triangle barrier lines in the chart because I thought it would just add clutter to an already cluttered chart.  But you get the idea; a sideways chop is ahead for us.
The bottom line: unless we get a sharp move below Minuette wave (a), I expect a fairly sideways market in the coming weeks.  1129.24 is the key level the bulls need to hold, and it’s quite far from current levels so they don’t have much to worry about at this time.

The VIX has been crushed lately.  And today was no exception.  With options expiration today, and a flat week most likely ahead of us, I’m sure options investors know that a bet for low volatility is a good choice.  The VIX chart doesn’t follow typical technical analysis as well as the major indices do, so take this VIX call with a grain of salt: the VIX is at a previous floor that has repelled it before, but if we’re hoping for a triple bottom here then I think it’s a fool’s errand.  Triple bottoms are extremely rare, and the action in the VIX suggests it will move lower soon.  This should be bullish for stocks in the short term.

The financials ETF (XLF) is at an interesting juncture here.  Although the larger wave count eludes me, it does appear to have formed a triangle in October, and then thrusted from that triangle early November surrounding the QE2 hype.  Since then it has behaved just one would expect it to after a triangle and thrust, which is retrace back to the apex of the triangle.  Now this is where it’s interesting.  A move lower here beneath the lowest point on the triangle will signal that a significant top may be in for the XLF and that further selling is coming for weeks, maybe months ahead.  However, a reversal higher from the apex of the triangle would suggest just the opposite, that the XLF is headed higher in the coming weeks.  So any sustained decisive move from here should provide momentum to continue in that direction for the foreseeable future.  I’ll be watching this closely.
Nothing new to report on the euro.  My currency software is acting whacky so I’m not posting a chart.  No real need anyway, the euro didn’t do much today anyway.  It appears it’s about half way done correcting higher.  If so, I’d love for the euro to make some progress higher early next week because once the Thanksgiving lull hits the currency markets, it opens the door for the big US dollar rally, and euro decline, that I’ve been talking about.  So of all the markets I’m watching next week, I think the setup and action in the euro will be the most interesting.



convictscott said...

Usually you are pretty considered with your analysis, but IMO this draws a very very long bow.

PrincipleAnalysis_Blogspot_Com said...

I can only take what the market gives me. Anything more at this point would just be a guess, and I don't trade based on "guesses".