Wednesday, March 30, 2011

Market Continues Rally on Low Volume, but Danger Lurks

The internals today show the same picture we’ve been seeing the past week or so in that volume has been very light on this current rally leg. Today we had an uptick in volume relative to the previous trading days, but still light overall at 918 million NYSE shares. I don’t think the uptick today means much, other than typical midweek trading kicking up the volume bars a bit. Getting above 1.15 billion shares will get my attention though.

Unfortunately for the bears, the rally is starting to look quite impulsive. It’s quite a smooth and clean looking rally that has now gone quite deep. I still count the decline from late February as a 3 wave ABC move. An X wave, which is how I am counting this current rally, should be a bit choppier and composed of a 3 wave ABC move itself. But right now I’m not seeing it. Regardless, with very light volume throughout this rally, and the RSI in a position now that it has been at in the past when a decline was near, I’m on the lookout for a good short term shorting opportunity coming very soon. I’d like to see an up day that is reversed during the trading day with solid volume to support it. I’d get short with a stop just above the high on the day if that occurs. Other than that, an impulsive decline on high volume at any time would also get me on the short side. Until I get that, I’m waiting on the sidelines.

Learn Elliott Wave Principle

This chart of the S&P SPDR (SPY) shows what I’m talking about when I mention volume is declining as the market rallies. This is typically a bearish development, but it can continue doing this for quite a while. So I want to wait for signs of a top and reversal before attempting to short.

Lastly, the Nasdaq 100 has a rally that looks the most like a nice developing 5 wave impulsive rally. If correct, the overall stock market probably has already bottomed and the bull trend has resumed. This conflicts with the evidence I’ve listed above on the S&P though, so we’ll have to wait and see which side prevails here. So watching volume in the overall market, and the wave structure in the S&P and especially the NDX, seems like a good idea to help us establish a high confidence low risk trade in the near future.

Still Enough Time to “Conquer the Crash”

The euro is flip-flopping around directionless this week and so the wait continues. So far there is only a 3 wave decline from the high which suggests it’s only a correction. But a 3 wave decline can easily develop into a 5 wave move as long as no rules are broken. So staying below 1.4219 would keep the possibility open for a 5 wave decline to develop from here. Breaking above 1.4219 would mean new highs were on the way soon.



td12 said...

Hey Todd - EUR broke the level but the action from the low is hardly impulsive until the very last leg - possible expanded flat? I know you like to keep it simiple but I havent really seen anything very impulsive from the euro since the move from 1.28 to 1.38...thx

PrincipleAnalysis_Blogspot_Com said...

You're right, the euro has not exhibited impulsive moves in either direction really. But that's indicative of a larger correction occurring. I too look at the euro with a bearish bias, but my trading plan requires certain pieces of evidence to be in place in order to take a trade. I need to see a big reversal day, an impulsive decline, or something suggesting a top.

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