Wednesday, December 15, 2010

Market Looking Very Vulnerable

Don’t look at the Dow.  I’m not sure who still follows the Dow as a market barometer anymore, but if anyone still does, don’t look at it today.  The true story is in the S&P, and even the NYSE today.  You can see the true bearish picture I’ve mentioned this week as it’s starting to come through now with a solid down-day in the markets today.  Volume was solid for the holiday season today, but still relatively light compared normal days.  Decliners and down volume were both solidly bearish, which continues the trend we’ve been seeing all week, despite how prices in the major indices closed.  Internals were and market action overall was quite bearish in my view.  The market looks very weak and vulnerable right now.

Also note that bonds have been selling off ferociously lately causing interest rates to rise, signaling fear entering the bond market.  I read an article last week on CNBC that stated the Freddie Mac 30 year fixed mortgage rate hit its lowest level in like 40 years at 4.17% back in early November after the QE2 announcement.  Today, Yahoo Finance reports the average 30 year fixed mortgage rate is at 5.00%.  Also, notice that the TLT which tracks the 20 year treasury bond has fallen off a cliff in an impulsive 5 wave move, interest rates move opposite to that.  Many folks feel that the bond market is often a leading indicator since bond investors tend to be more long term and prudent than equity traders, so the bond market tends to lead the equity market.  If so, equities are about to fall off a cliff just like bonds have.
Today’s decline appears to be a “breakdown point”.  We’ll only know if this is true in the coming days, but looking at the wave count, the diverging momentum as seen through the RSI above, and the action in the price bars, one can logically conclude that the market’s odds are heavily leaning towards the bears.  Regardless of the bigger picture, and whether this is the Primary wave ((2)) top or not, the short term picture strongly suggests that when the market does top and reverse, it should fall hard and in a hurry.  I would not want to be in a short term bullish position in the S&P here at all.  So I would think that the bears should start positioning themselves for a decline.  We don’t have confirmation that a top is in yet, so risk must still be controlled to account for a possible rally to new highs.  But the bears should be putting strategy to work here and get ready for a slide downward soon.
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My euro comments didn’t come through yesterday for some reason and I didn’t notice it until this morning so I posted a brief summary of what I originally wanted to post then.  Sorry about that.
The euro’s decline recently is very encouraging for the bears.  Although I’ve been mentioning that my wave count does not instill a high amount of confidence since Minute wave ((ii)) which  is one degree smaller than Minor wave 2 is actually much greater in both price and time.  This is unusual and makes me a cautious bear here, but I still remain a bear as long as 1.3785 remains intact.  The euro is trading at a very strong congestion area that MAY act as a floor temporarily at the 1.3200 level.  A solid breakdown of that level will negate the bullish implications of the strong rally we got from earlier in the week, and also make the rally off the 1.3000 level a confirmed 3 wave move, which is a correction.  So I would become more aggressive on the bearish side once we get that solid breakdown of 1.3200.  The bearish action the British pound and precious metals is also an encouraging sidebar for the euro bears as well. 
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