Thursday, January 27, 2011

Stock Bulls Remain in Control; Euro Looking Shakey

I'm going to cut back my postings and saturate a few postings per week with the core elements to focus on. Since EWI's Short Term Update comes out Monday, Wednesday and Friday, I will post my core thoughts and charts Tuesday and Thursday to help fill in the gaps that many wavers might feel they have. On Monday, Wednesay, Friday and sometimes Sunday I will post internals data and brief comments on the day's action.

Internals today show a boring and lethargic market. Yet, with no bears in sight, the exhausted and overstretched bulls can still chop the market higher like a heavyweight boxer trying to get through the 12th round. Volume was very light today as not even 1 billion shares traded on the NYSE. Up volume exceeded down volume but did so with a 59.5% advantage and yesterday it practically did the same on Fed day with 59% more advancing volume than declining. Yet yesterday at 1.12 billion shares traded yesterday, much more than today, and had 1169 more advancers to decliners while today had only 364 more advancers. So the ratio of bullish to bearish volume mirrored yesterday’s, but the ferociousness dissipated quite a bit today since total volume was much lighter and there were much less advancers today. Tomorrow is a Friday and should bring about even less enthusiasm internally, and three days in a row of flat-to-down internal strength would be a nice supplement to a 4th or final 5th wave. So we’ll see.

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The wave count is in line with the internals data the past couple days, and another declining day internally tomorrow would put this thesis on solid ground in my view. Notice that Minor wave 5 has diverging momentum (red lines) as seen through the RSI, and that even the latest push higher is also diverging so far (blue lines). This is typical 5th wave-like behavior. I’ve adjusted my long term count to a more probable scenario, leaving the entire rally from the March 2009 lows as a simple (A)(B)(C) correction instead of a (W)(X)(Y) combination correction. The reason I liked the combination correction is because there aren’t clear 3rd waves in the heart of the initial large move off the March 2009 lows, and dividing up the move as much as possible made it more likely I thought. But at this point, leaving the combination correction in place is getting too complicated and unlikely with a big flat correction in the middle of it which is now exceeding its likelihood of occurring with the long rally we’ve been having the past several weeks. And now we can see two clear 5 wave rallies off the March 2009 lows. So an ABC seems like the easiest and most likely scenario.

Needless to say, if the above count is correct, the next selling phase will be quite a sight to see. But we wavers have been waiting for this for what seems like an eternity, so I’ll wait for the market to prove to me it wants to tank hard instead of trying to pick an exact top of Primary wave ((2)) every day. But even if it’s not Primary wave ((2)), a 100-150 point pullback in the S&P to correct the 5 wave rally off the 1010 level would not be out of the question anyway. So the next big move should down, whether it’s 1000 points, or 100, it’s still a bearish opportunity.

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The above chart shows a wave relationship that is typical of impulse waves where wave 1 will equal wave 5 in price. Wave 5 actually equals wave 1 at 1290 and perhaps the modest push higher to the nice round number of 1300 is just simply to get the index to a nice round psychologically desirable number before topping. Keep in mind the Dow is also at a key psychological round number at 12,000. Will it top and reverse here? Probably not, it’s too obvious. Perhaps a flat market tomorrow and then another rally early next week will top this thing off. Those who took profits at 1300 hundred will not see a big pullback and then jump in to target 1400 with impatience. That will probably mark a top since most of those types of traders get fooled. But until we get signs of a significant top being in place, we need to be prepared, and expect, higher levels.

Lastly I wanted to show the MACD data above. I know that these basic momentum indicators are horrible for timing and don’t do us much good until it’s too late, but it’s worth noting in the larger scheme of things that the moving averages in the MACD are diverging from price in the S&P also in Minor wave 5, and they are hovering at levels that have marked where some significant tops have formed in the past year. Just look at the red circles on the MACD and their corresponding tops on the chart above. But as you can see, the moving averages remained at these levels for quite some time and they didn’t really tell us when the market had topped and reversed until it was basically too late. So this doesn’t tell us the market will top tomorrow. But this indicator, along with the wave count and RSI, tell me that the market is more likely to top and decline than it is to shoot to the moon higher from here in a long sustained rally. Once we get a break down of the uptrend, I’ll announce it here and the bears can look to attack again. Until then, I’m waiting.

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The AUD/USD is still posting the best waves for us to count and continues to show more weakness compared to the euro against the US dollar suggesting that it's leading the majors.  The euro may not be sporting a clear wave structure, but the choppy and sloppy rally with diverging momentum as shown in the stochastics and RSI tell us that this rally is probably coming to an end soon.  Now there is no evidence to suggest that a top is occurring right now, so the bears should still be patient.  I'm also concerned at the 3 wave-looking decline from 1.4281 that suggests the euro needs to rally above it before establishing a major top.  But with the AUD/USD sporting a good wave structure and excessive bearishness compared to the other majors against the USD, I remain a bear, which means I'm bullish the US dollar.  I'm not ready to get short the euro just yet though.  Still need to see a break of the uptrend.


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