Monday, December 6, 2010

Market Set to Decline; Euro Needs to do the Same to Keep the Confidence in my Wave Count

Internals today were as exciting as the price action in the markets.  But there were two things of interest that lend themselves to the short term bearish case in my view:
1) volume was extremely low at 800 million shares on the NYSE which tells me that interest in buying the market at this point in the rally has dissipated drastically.  This leaves the bulls fully exposed here for a gut punch from the bears, if the bears decide to come in here and flex some muscle;
2) the S&P decliners were at 300 today while the market’s price was only slightly down.  I expected a more even advancer vs. decliner ratio with the closing price today.  So again, it appears the bulls are a bit exhausted here and it leaves the bears some opportunity here since they seem to be gaining some momentum in the background.
From a price action and internals perspective, the market rally appears weakened and ready for at least a short term pullback to recharge the bulls.  The market has a rolling-over look to it, and the internals suggest a lack of buying interest at current levels.  But if the bears don’t come in and strike real soon, it will embolden the bulls and surge the market higher as a result.  So tomorrow or Wednesday we should see a sharp move; and my guess is that the move will be down.  How far it drops will help us determine the longer term wave count, but I still think we’re probably in a Minute wave ((iv)) triangle right now.
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Minuette wave (b) should be over at current levels.  A break above the Minute wave ((iii)) high would severely damage the triangle outlook and suggest that probably a flat correction is occurring for Minute wave ((iv)) instead.  The market price action and internals suggest that the market is vulnerable to a bear takeover here, if the bears decide they want to step in. 
If we’re in a triangle, then the market should decline with modest strength to around the 1190 area for Minuette wave (c). 
But if we’re in a flat, at least one index should make a new high above Minute wave ((iii)) and then all the indices should sharply reverse in an impulsive decline for Minuette wave (c) down to the 1160s before bottoming.
So we’ll see which one plays out.  With the holiday season upon us, I’m not expecting any big sustained moves in any direction in the coming weeks.

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The action in the euro last week was a bit concerning.  Right now we only have 3 waves down from the highs which I’m labeling Minor waves 1 and 2, with Minute wave ((i)) and ((ii)) probably complete now.  This is a bit of a problem because with only 3 waves down from the highs, it leaves my impulsive wave count down very vulnerable here.  And now that Minute wave ((ii)) is greater in size than Minor wave 2, it casts some serious doubt about the wave count I have right now.  Waves of smaller degrees should not be bigger in size.  But the key word there is “should”.  This behavior doesn’t violate any EWP rules but seeing as that it does violate a guideline, we need to be vigilant in protecting our short position.  We’ve made a lot of pips on this euro short trade and I’m not going to give them all back because I couldn’t stay objective.  The euro needs to resume its downtrend very soon to eliminate this doubt in my wave count calling for immediate lower levels, but I definitely do not want to be short if it rises above the Minor wave 2 high.  I will stop out above the Minor wave 2 high.
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