Market is Well Into Wave (ii)

So the market's declining momentum and bullish divergence last week (click here for post) told us the market was gearing up for a snap back rally from it's oversold condition. Yesterday's 5 wave decline fooled me, but I was able to exit around 1043 once the start of that 5 wave decline was breeched today. Today was quite a ferocious rally that was an across the board all bull move. You can see that the internals were very strong with almost only buyers in the market today. There was probably a lot of short covering today as the bears realized the easy pickens on the short side have already been made. With a wave (ii) now underway, I expect to get a minor feel of overall optimism and glee come back into the financial media with talk about great earnings and all the bad stuff already being priced in. Over the weekend there was a feeling of doom and gloom with headlines talking about the second Great Depression. This obviously was around the wave (i) bottom. So when looking for the wave (ii) top, we should get a bit of the opposite in the headlines which should talk up the recovery and "great stock values" again. This should alleviate the oversold condition the market was in just in time for a monstrous wave (iii) of 3 of [3] or C. Although this reversal can happen at any time, and it will be so fast that it will be tough to enter without a good strategy in place, I don't beleive this rally is over quite yet.




So let's start to look for area for a reversal. That way when the market approaches this level, we can anaylze the internals, momentum indicators, and wave structure to see if the market may be rolling over. You can see in the above S&P chart that a good reversal zone is between 1070 and 1084 since that is between the 50% and 62% fibonacci retracement levels of wave (i) down, and there is an open gap there too. So for now, I will expect the market to continue higher into this area where I'd expect to see some resistance and weakening of the uptrend. Any rallies would bring about good opportunities for the bears to get short this market with stops just above the start of wave (i) at 1131.23. And although today's internal strength suggests rallying the rest of the week at a minimum, the fact that we're in a wave 3 of [3] or C means that rallies can be very sharp and short lived. So I'm not falling asleep at the wheel on this one at all.

As long as the market stays below 1131.23, this market is very bearish in my view. However, a break above 1131.23 would be very bad for the bears, and would strongly suggest that we are back in bull mode and that the market will surge to new highs on the year. But I don't want to get ahead of myself since we're far far away from that level. The focus is on resistance in the 1070-1084 area for now, and I'm of the opinion that rallies should be shorted in the short term.


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.

Larger Trend Remains Down

S&P 500 CASH INDEX COUNT




Friday I expressed caution for the aggressive bears, citing several pieces of evidence showing that the market was oversold, and that downside momentum was waning. This morning we got a big pop leading to a strong triple digit Dow rise with strong internals. However the rally didn't last long as less than an hour into the session the bears came out and pushed the market lower for most of the rest of the day, even at a couple points turning the market negative. So the market did indeed rally as the evidence Friday suggested, but it did so very quickly. This short rally and reversal action time and time again illustrates the struggles the bulls have been having in mounting and sustaining rallies. It also probably speaks to how strong this downtrend probably is.

Building on today's thesis of the larger trend being down, we can see in the above count that today's rally was quite possibly a 4th wave, and that perhaps the 5th wave is now underway since we can see a nice 5 wave decline from today's 1043 high. According to this count, the market will make a new low beneath 1011 before making a new high above 1043.


UNDERSIDE TEST OF KEY 1040 LEVEL, WHICH IS NOW RESISTANCE




Speaking of 1043.....that high today also represents an underside test of the key 1040 level that was important for the bears to take out in order to further confirm that a larger downtrend was underway. Once major key support levels are broken, they will then quickly be re-tested on the underside of that level, which has now become resistance. Today we got that test on the underside of the key 1040 level, and the market reversed sharply in 5 waves after doing so. This is a very bearish sign.


MARKET INTERNALS




Depsite most of the major indices closing positive today, and the Dow mounting a big triple digit rally this morning on strong internals, by the end of the day the internals of the market were mixed-to-flat. The NYSE had more declining stocks than advancing stocks, but had more up volume than down volume. This "mixed" picture is especially odd since the NYSE managed almost a 1% gain today overall. So even the internals of the rallies the bulls do manage to sustain into a close are still done on very anemic internal strength. The bulls' legs are clearly shakey.


INDEX TRACKER




Above is a list of how some indices closed on the day today. You can see that although the majority of indices closed positive today, but the high risk small cap indices were down big today, and the Nasdaq Composite barely eeked out a gain in the final minutes of trading. When taking in all the evidence previously mentioned here, the fact that the high risk indices lagged this rally badly today is more evidence that the bears are still firmly in control and that the larger trend remains down.


AMATEUR NIGHT




I've often heard that the first and last 30 - 60 minutes of trading is done by mostly amateur traders, and the meat of the trading day is done by the professionals. If true, the above 3min chart of today's action tells us a lot. I drew red lines at the halfway point between 30 - 60 minutes at both 45 minutes into trading this morning, and 45 minutes at the end of trading this afternoon. Notice that during those "amateur times" the market rallied hard while during the meat of the day when supposedly the professionals dominate the market, the trend was clearly down. Now most of us know that money is made by following the professionals, not the amateurs, and this chart is telling us that the professionals are selling this market. Also notice that the segment belonging to the professionals traced out a clear 5 wave drop. So the professionals all by themselves are telling us that the market's trend is down. I'm following the pros. 1043 remains the key level for the bears to defend for the immediate bearish case.


EUR/USD




Lastly I wanted to post a EUR/USD chart and count. It appears that the euro is wrapping up a large rally that I believe might be a large 4th wave. This is evident by the apparent 3 wave a-b-c rally that is finishing off wave 'v' of 'c' right now. If correct, the profit potential is enormous since this currency pair should drop over 700 pips before even trying to form a bottom.



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.

Downtrend May Be Resuming

My latest posts warning of a snap back rally came to light this morning as the market surged higher to a strong triple-digit Dow gain. But the rally was short lived as the market is well of its highs and has now just declined in five waves just a few minutes ago as you can see from the 5 minute chart above. With a small 3 wave rally completing prior to that 5 wave decline we see now, we should be aware of a resumption of the downtrend.




The 15 minute chart above shows a possible wave count that puts the rally today as a wave 'c' of a three wave rally composing wave 'iv'. The five wave decline seen on the 5 minute chart at the top may signal that wave 'v' down is now underway. Wave 'v' will most likely get below 1011 at a minimum, before it even thinks about bottoming. 1043 remains key for this short term bearish outlook.


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.

My Approach

The evidence suggests that a short term bounce may develop early this week. But since we're probably in a wave 3 of [3], that bounce may not occur until hundreds of more Dow points are removed. And although I play the "in-and-out" day and swing trader game in the short term, I do keep focus on the bigger picture for my longer term core positions that I rarely touch. The bigger picture suggests we are in a major downphase of the market that will work prices much much lower in the coming months, and perhaps years. So I feel sticking with the short side, as long as key levels aren't taken out, throughout this phase is a wise choice. If I feel a bounce is coming, I might take some profits on short term positions and look to re-enter on that bounce, but I would not even think about trying to get long, nor will I touch my longer term core short positions. It's also important that if I do play for a bounce, that I set a "sell stop" order beneath the current market price so that I can re-enter the market if I'm wrong about that bounce and the market were to just keep moving lower. Again, I'm only doing this with my short term trading capital as it will allow me to take aggressive positions for big potential gains, and I know that no matter what happens with those short term trades I still have my longer term short positions in that I don't touch. So I just wanted to explain my trading approach to the market as this decline progresses and be clear that I remain longer term short despite moving in and out of the market with other short term trades.

Below are a couple articles that I thought Prechter followers might be interested in:

With the US trapped in depression, this really is starting to feel like 1932

Dow Repeats Great Depression Pattern: Charts



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.

Bullish Non-Confirmation in Place

Although I know I'm a fool for trying to call short term bottoms when a big wave 3 is probably underway, but I like to keep profits when I get them. And exiting some or all my positions now is fine when I can simply just add them back on when the S&P makes a new low. The market is oversold on the daily charts and momentum lower has been weakening as discussed yesterday. Now the Dow and S&P have both made 5 wave declines today, but the big problem is that the Dow made a new low and the S&P has not. This again shows a weakening of the downtrend as not all indices are even able to make new lows together. I would be cautious here if I was an aggressive bear, and if anything I would keep that caution on unless the S&P and the Nasdaqs confirm the Dow's new low. If that occurs then I'd simply put my shorts back on. So I'd only be missing a few S&P points of profit to perhaps save myself from a possible huge rally into the close, or early next week. So the risk of missing profits is small and the potential to safe already existing profits is great. Again, if the S&P and Nasdaqs make new lows to confirm the Dow's new low, I'd simply put my short positions back on.

Just a thought.


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.

Short Term Bullish Setup In Play; Precious Metals Broken

S&P IN OVERSOLD TERRITORY




So today we had a nice morning with stocks cascading lower and making the bears even more happier on the week. But when the Dow shot back up to be down only 80 points, and the VIX went from up 8% to flat, despite the heavy selling on the day, it raised a flag with me. Why would the VIX tumble that hard while the Dow was still down 80 points? I smelled a rat, or better yet, I smelled a bull. I've made so much profit so quick on the short side that I wanted to take profits off the table first chance I got. And that little peculiar event with the VIX was all I needed to close my short term short positions at a nice profit.

Internals were negative today, but again they continue to get stronger than the day prior, which has been the trend the past couple days, again signaling that the downtrend is weakening. We also had a nice volume spike today with NYSE volume exceeding the 13 day moving average, so perhaps the bullish reversal today had some strength to it. And still, despite the crazy volatility lately and jobs number coming out tomorrow, the VIX closed down almost 5%. I have a dozen theories as to why this happened, but for a bear who's made a lot of money really quick, I took it as a sign to get on the sideline for now, at least in regards to my short term trades. There is also a bit of other evidence, such as most momentum indicators like the daily RSI showing the market in oversold territory that has marked bottoms in the past. So this decline may be getting a bit extended, and perhaps some bearish caution is warranted.


S&P CASH INDEX COUNTS






Above are my two top counts (click here for yesterday's larger wave count). And although my short term short positions are out, I still have my core long term short positions in. And since we might be in a wave 3 of [3] or C, then oversold indicators are almost meaningless since wave 3s, especially of this size, can go on as long as they want. So I'm giving my top count to the more bearish version on top. This calls for some meandering around sideways type action that stays below 1067.89 for wave 'iv' which will then lead to another sharp decline to new lows for wave 'v'. Although 1067.89 is the max retracement that can happen for this count to remain valid, the S&P will have a very difficult time getting solidly above the previous support shelf level of 1040 it recently broke through. So I'd expect a ton of resistance in that area if the top count is correct.

The second count is immediately bullish, and there's plenty of other evidence to support this as well. The only reason this count is not of equal weighting with the top count is because in a wave 3 at this degree, the larger trend is so strongly down that trying to call a bottom not particularly wise. But I still want to be mindful of it if 1040, and especially 1067.89, is broken soon.


CRYSTAL BALL


Lastly, I wanted to talk about what my crystal ball is telling me. Most of this is just an educated guess on my part, so take it for what it's worth. Tomorrow is another big jobs number. And if anyone has watched or read the financial media this week, everyone is planning for the number to be horrible. Seeing as that the market has already sold off so much going into this number, and everyone is expecting a bad number, I can't imagine a big selloff on the data announcement tomorrow. Anything short of absolute armaggedon in the jobs market will probably lead to a sideways wave 'iv', or a sharper wave '(ii)' rally; both would be supported by the two counts above. But I doubt any big sustained selloff will occur into the long weekend. Plus, many short sellers have made a lot of money this week and won't want to go into a long weekend holding short, so they will use any chance they get to cover their shorts tomorrow to reduce risk into the weekend.

So the bulls seem to have the "theoretical" advantage, along with one wave count and momentum indicators showing oversold levels on their side. But in a wave 3 of this magnitude, anything is possible and the market can just keep tumbling lower. Regardless, the evidence and setup was compelling enough to get me to close my short positions on my short term positions today. We'll see soon enough if that was foolish or not.


S&P VS. the EURO






I know there's been some concern about the affects of a monster euro rally on the stock market since Prechter thought the euro would be in rally mode for a while. For the past several months the euro and the stock market have moved relatively together. So a big euro rally would lead to a big stock market rally, right? As I said a few weeks ago that wouldn't necessarily be true. I was concerned about it, but I wasn't making any trades based on it. As you can see from the two charts above, the S&P and the euro can in fact move opposite each other. The euro rally today I'm sure helped stocks to some degree, but the fact that they still closed down tells you that the euro is NOT the all and powerful determinant in whether stocks rally or fall. This is why R.N. Elliott told us to analyze and count each market independently. Markets remain correlated usually for only certain periods of time. And lately, the euro and the S&P have not been correlated all that well. Speaking of which, did you see the euro rally and compare it to gold's massive selloff today. Again, another reason to analyze a market independently and not rely on a correlations with another market to determine where it is going.



PRECIOUS METALS' UPTREND APPEARS COMPLETELY EXHAUSTED






And lastly, although I hate trading precious metals because they usually kick my butt. I am short silver and today's action in the metals looks extremely bearish in my view. This bearish picture is so compelling that I wanted to post it here. Notice that gold, represented in its ETF (the GLD), has been eeking out new highs with a recent "ending diagonal" pattern at the end while the momentum indicators at the bottom have been making new lows. An ending diagonal is a pattern showing extreme weakness in a market, and they are finishing moves that usually result in sharp reversals. Well that sure happened today with the GLD down 3.8%. Now look at silver's ETF (the SLV) and notice that silver did not confirm the GLD's new highs recently, and then both declined sharply today with the SLV getting the worst of it at a 4.2% decline. This divergence between the two metals, along with the sharp downward reversal, EVEN THOUGH THE EURO RALLIED BIG, tell me that the rally in precious metals the past several months is probably at an end. Look for the metals to move lower in a hurry.


Also, please note that I updated my daily S&P chart count on the right side of this blog.


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.