Tuesday, January 18, 2011

Stocks Float Higher; Euro Big Picture Foggy, but Good Short Term Setup in Place


The Dow can take the credit for the market looking so bullish today since it was the only major index showing strength.  But peeling back the onion shows a more flatter market.  Volume on the NYSE was moderate at 1.22 billion shares but what’s really interesting is the volume ratio on the NYSE.  Notice that there was a bit more down volume to up volume today, despite the positive closes and seemingly bullish day.  Could people be dumping their riskier stocks and moving their money into more conservative stocks that compose the Dow?  One day doesn’t tell us much, but it’s something to watch closely for continuation of this behavior later in the week.  If it continues, it would probably mean and shift to being more conservative which usually results in a selloff eventually.
The wave count remains the same, click here, so no sense in me relabeling the same stuff everyday when not much has changed in price, and nothing has changed in the count.  We remain in a 5th wave, probably at multiple degrees, and when complete we should see at least a 100 point S&P selloff over the following weeks.  But unfortunately for the bears, the market shows no signs of reversing, only exhaustion.  But without any reversal signs, most of us know the market can continue higher with extreme readings for a long time.  So look for higher levels until the market shows that it’s had enough and needs to pullback.  It should be unmistakable.
Looking at a different chart we can see that the RSI on the daily chart has reached overbought again.  This doesn’t mean a top will occur right now, but it is just another indicator telling us this market is overbought.  The risk is to the downside, and I’d rather be looking to short than holding long at this point.
Although the VIX sell signal failed us miserably last time, we find ourselves with an extremely overbought market and the VIX sell signal in place again.  This occurs when the VIX closes below the lower Bollinger band one day and then closes back above that lower Bollinger band.  Usually a top in stocks occurs within 10 days of the signal executing, but in this market I’d say it should be shorter than that.

The euro is flip flopping all over the place with 3 wave moves all over the place.  I’m not certain that the larger downtrend is still intact so I’m cautious here for the longer term bearish view at the moment.  And when the wave count is unclear, it’s usually because I’m looking for an impulsive move but it’s usually in a correction and therefore causing confusion.  But I still see a possibility that the larger trend is down based on other indicators so I’m still going to be cautiously bearish the euro for now.  Looking at the action the past few days I think the bears have a good opportunity here. 
There appears to be a lot of resistance at the 1.3400 level as you can see from the long wicks on the candlesticks there.  And we got two real long ones just recently.  What I love about this price action is the break above 1.3400 which was sharply repelled and reversed, then later another break above 1.3400 is attempted and even more sharply repelled and reversed, and the move wasn’t confirmed by the RSI either.  So this sets up as a nice shorting opportunity with a stop just above today’s 1.3465 high.  The risk/reward here is outstanding so I really like this trade.  A solid and sustained break above 1.3465 (more than 2 hours in core trading) would probably open a door a longer and more sustained rally over the coming days/weeks.
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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.

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