Tuesday, November 23, 2010

Stocks Should Bottom Soon if Triangle is Correct; Euro Decline Looks to be Just Getting Started

The market sold off apparently because North Korea is trying to start a fight, and banking issues in Europe that keep lingering, and even deteriorating in some cases (Ireland).  However despite the market’s selling today, volume was still a bit quiet as just over 1 billion shares were traded on the NYSE.  So people didn’t find the news important enough to disrupt their Thanksgiving vacations and rush to a computer to sell.  I will say that the weakness so far on this holiday week is a bit of a surprise.  But if the big picture results in a triangle during this period and into the new year, then it will all make sense.
The bears were in full control today since 90% of volume today was to the downside, and 464 stocks on the S&P closed down.  The bears clearly ruled the day.  But as I’ll discuss later, the S&P is still trading on the descending trendline, the VIX has a triple-bottom in place which would be rare if it holds, and we’ve still yet to see follow-through or a breakout trend setting move get established yet.  And with tomorrow and Friday expected to be very light trading days, I’m not sure we’ll get that decisive trend setting move until next week.
Although the market continued lower today, it did not close below the descending trendline I’ve been tracking since this decline started early this month.  And the decline today still fits in well with finishing off a Subminuette wave b within a larger triangle.  If the above count is correct, the next big move in the market should be a sharp shot higher towards the 1210-1220 area.  But if the market continues lower instead, and especially if it closes beneath the descending trendline, then it will severely damage the likelihood of the triangle from occurring and force us to look at other more likely wave counts.  But keep in mind that the choppy decline from the highs this month signals it’s still a correction, so I’d still be focused on a corrective pattern unfolding until 1129.24 is broken.
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To follow up on the XLF action I’ve been tracking, I wanted to point out that it closed below the apex of a previous triangle.  So the financial sector is tip-toeing towards giving us a very bearish signal here.  You can see that it’s currently trading at a very congested area right now it’s no surprise it’s struggling here.  So I want to see a daily close beneath 14.25 to give the signal that a significant top is already in place.  One more big down day from here should do it.

I mentioned before that triple bottoms are extremely rare, and for the VIX to not continue lower to a new low would be a big surprise.  Today’s surge higher filled a gap left open from last week so it seems quite likely that the VIX will continue lower from near current levels.  This would of course mean that stocks will shoot higher.  This fits my above wave count on the S&UP calling for a sharp Subminuette wave c rally from near current levels.
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The euro has fulfilled expectation both in its typical Thanksgiving holiday weakness, and with the wave count.  The wave count yesterday suggested that the small 5 wave decline it traced out early this week was a sign that the euro had topped and more selling was on the way.  If it was a Minor wave 2 top like I suggested yesterday, that would mean that it would have to fall very hard very soon in order to fulfill the expectations of a Minor wave 3.  And today it did just that.  But if the count is correct, Minor wave 3 is far from over.  I expect further weakness in the euro and a quick move toward 1.30 at least, if in fact it’s in a Minor wave 3 down right now.  Euro weakness of course means dollar strength, and dollar strength of this magnitude would put a lot of pressure on stocks and commodities.  I know this conflicts with the call for higher stock prices from here, but I have to call each market as I see it independently.  We’ll see which one prevails.
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Brian Long said...

Hi Todd, in light of the bearish Euro count, do you have an alt count for a bearish view on the S&P?

PrincipleAnalysis_Blogspot_Com said...

Hi Brian,

With the decline from the highs being so choppy in the S&P, I think the only viable bearish counts now are corrective. So the most bearish count I see now would be that Minuette wave (c) of Minute wave ((iv)) might be unfolding now which would lead to a sharp 5 wave move lower before bottoming.

Do you have a bearish count on the S&P? As I stated in my post today, there are various markets pointing in opposite directions right now. One side is probably misleading us, I just don't know which one yet. I welcome any thoughts on this.