Monday, November 15, 2010

Stocks, Euro Continue to Work Lower, No Reason to Expect that to Change any Time Soon

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The euro smashed through 1.3560 convincingly in the US session, giving the bears the advantage again.  Doing so opens the door for more euro losses.  I think the key for the short term is for the bears to get a strong daily close beneath 1.3560 to give even more evidence that the short term downtrend is still firmly intact.  The more surprises to the downside, and barriers broken on the downside, the more likely it is that the euro has formed a major top over the long term.  Even if you're not a currency trader, understanding the impact of the euro and the US dollar is still key for equities and commodities.  A major top in the euro, and major bottom in the US dollar, will put tremendous pressure on stocks and commodities over time.

The british pound is getting punished against the dollar this morning, hinting that some degree of 3rd wave is unfolding.  As long as this holds, it suggests that the dollar is going to continue surging higher and has most likely put in a significant bottom already.  What's also of note is the the US dollar has made a new high.against the swiss franc this morning at .9970, eliminating a previous impulsive looking decline from contention.  Oftentimes when these "barriers" are established in the majors it will either lead to some sharp follow through, or a sharp temporary reversal.   So whether the dollar pulls back a bit from here is not that relevant at this time since it seems that it has most likely formed a long term bottom already.  Any dollar pullback will just be an opportunity for dollar bulls again.

Internals today reflected the closing price action in the market well.  Early this morning they were very bullish, right in line with the big surge in price.  But as the day wore on, there was little follow-through to the happy Monday bulls’ early buying, and the market was faded into the close, leaving it flat.  The Nasdaqs were the worst hit of the major indices, while the financials actually did quite well.  Volume was very light today, only 877 million shares on the NYSE, and uppers vs. downers and up to down volume was relatively flat just as price was.
So nothing really stands out here other than the usual crew of Monday bulls that like to surge this market higher early in the week were unable to sustain that push higher by the end of the day.  And not only did price break down, but so did the internals.  This market is trading very heavy right now, and it suggests buying interest is exhausted and that the path of least resistance is down.

If you look at my daily chart from yesterday you’ll know that I’m expecting a “flat” or “triangle” correction for Minute wave ((iv)).  So far, this outlook is well on track.  So far, selling and volume has been quite tame, suggesting this is just a pullback to a larger trend bull move.  Also, the lack of any impulsive decline yet also prevents us from calling any significant top with a high amount of certainty at the moement.  Only a break below 1129.24 would mean that it’s highly likely that Primary wave ((2)) has already topped and that we should be looking for aggressively lower levels.
The 15min S&P chart above shows the opposite of what I was tracking on the previous uptrend.  Many of you may remember that I said for a few weeks that although the wave count may not be clear for the rally, the serious of higher lows and higher highs tells us that we were still in an uptrend and that we should expect higher levels until that trend breaks down.  Well now on the 15min time frame we see the start of that “breaking down” I mentioned.  Now we have a series of lower highs and lower lows being established.  They’re too close together to be counted impulsively, at least so far. But as long as this trend continues of lower highs and lower lows continues, I expect price to continue to work lower in the near future.

How Analyzing Forex with Elliott Wave Can Help You Catch Both Rallies and Declines

The euro appeared that it formed an impulsive rally on Friday, but today’s deep retracement to a new low erased that potential and keeps us eyeing lower levels.  Although the wave count does not appear fully developed to label it impulsively yet, the steep slope of the decline sure suggests that a top is in and that the euro is declining impulsively much lower, probably for many months.  Right now, there’s strong support at 1.3560, and downward momentum is waning, so I’d like to see a strong sustained break below 1.3560 to instill confidence in the bearish case for the short term.  Without that happening, we have to be prepared some degree rally coming soon.


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