Tuesday, March 1, 2011
The Evidence is Strong that the Stock Downtrend has Resumed; Euro Looking Vulnerable
The market fell hard most of the day suggesting Micro wave ((3)) is now underway. Volume was solid at 1.2 billion shares on the NYSE, but not jaw-dropping. Nonetheless, down volume crushed up volume, there were 1,574 more decliners than advancers on the NYSE, and 427 more decliners on the S&P. So quite a bearish day internally, and after a trailing off bullish push the past couple days, it looks like today’s action was a sign of a trend change to the downside now.
The S&P stopped just shy of the 78.6% Fibonacci retracement level I mentioned yesterday. The target level I wanted to get short was between 1315-1320, and anything above. So far, that call is in the profit. I would like to have my stop just above today’s high. But more conservative traders might want to keep their stops just above 1344.07 until we get a new low beneath 1294.26.
In reference to last week’s lows in stocks, Monday I said, “The Nasdaq Composite did not confirm the last new low in the Dow and S&P and the market has been in rally-mode ever since. I'll be looking for another such divergence, only reversed, to mark a top.” Today we got that divergence I was looking for. You can see from the red lines on my S&P and Nasdaq charts (blue lines mark the divergence at the low). Divergences like these often accompany reversals in trend. So here’s another check market to put in the bearish column.
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As you can see above, the Dow, S&P and Nasdaq Composite all topped out between their 61% and 78% Fibonacci retracement levels. These two levels are textbook EWP typical stopping levels for second waves. So again, the evidence mounts on the bearish side.
Lastly, today’s daily candlestick in the S&P created a huge bearish engulfing pattern where today’s high was above the previous candle, and yet today’s close was below the previous candle’s intraday low. This pattern often occurs at reversal points as well.
So there you have it, on a silver platter….ready for the bears to gobble it up. Nothing is guaranteed in this business though, it’s all about probabilities. And right now the probabilities definitely favor the bearish side. So I would still trade cautiously and with a solid risk management plan. No matter how good the setup is, it can still be wrong…..plan accordingly.
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Still no new high for the euro, yet the US dollar has made a new low. Looking at how weak the euro’s price action has been this week, supplemented by the diverging RSI on the 4 hour chart, it looks like this pair might not make that new high. But I don’t want to jump the gun here since I don’t have any evidence of a top in the euro. So I’ll wait for a close below 1.3700 before I get short again. But looking at the price action here and the overstretched rallies in oil, gold and silver, I think a close below 1.3700 will happen sooner rather than later.
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.