Monday, November 22, 2010
Markets at Crossroads; Euro Completing Impulsive 5 Wave Decline
The S&P declined to the top end of the descending trendline I've been following since this pullback started. However it's having trouble breaking below it, so far. Failure to break below it, and establish a daily close beneath the trendline leaves the possiblity open that it is merely a "retest" of a recently broken trendline and will surge higher soon; which is a typical behavior after breaking through a significant trendline. So the S&P is at a crucial juncture here, and the short term movement from here could easily define the trend in the coming days/weeks.
It's important to keep this triangle pattern in mind as we grind forward here into the holidays because the sharp up-down moves, especially the sharp surprise moves like this morning, can drive traders insane for weeks. But if we're aware that a triangle might be forming, we'll be ahead of the game while others are running around in circles and frustrated as they pull their hair out. Until the triangle possibility is eliminated, it needs to be respected.
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The financial ETF (XLF) also appears to be back at a decision point as well. It's decline today puts it right back at the apex of what looks like a previous triangle. A sharp short term move in either direction from here should define the larger trend going forward. So this will be interesting to watch here.
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Minor wave 2 in the euro may have topped last night. The bulls made a fatal mistake Sunday afternoon when they gapped up at the open and failed to close that gap for several hours. Leaving that gap open into the european session told me that a sharp reversal would likely be coming soon. Remember the Thanksgiving dollar bullishness I've been talking about? (Dollar bullishness means euro weakness). So now is not the time for the euro bulls to get lazy or sloppy, and leaving a wide open gap at Sunday's open was sloppy, and today they paid for it as the euro bears came in strong.
Minor wave 2 looks a bit shallow so I can't eliminate the possibility of a rally to new highs coming later on. But the evidence and risk/reward strongly favors the bears so much here, that I'm still going to focus on the bearish potential here. I count a nice 5 wave decline from the Minor wave 2 high occurring, which strongly suggests that the euro has topped, and the US dollar has bottomed. If so, the Minor wave 3 potential here is great for the euro bears and dollar bulls, with risk limited to the Minor wave 2 extreme.
A top in the euro would make it very interesting to see how stocks and commodities react. With stocks apparently in a triangle it may make it difficult to achieve that goal. But we'll see.
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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.