Thursday, March 17, 2011

Stock Rally Looks Corrective, Downtrend Still Intact; Euro Finishing Triangle

Looking at the internals of today’s action it helps me answer the question I had all day: was today’s rally a correction within a larger downtrend, or did a bottom just get put in and a rally to new highs on the year coming? Looking at the internals it’s clear that today’s action fits much more with a correction than a bottom and reversal. Today’s volume was 1.04 billion NYSE shares compared to yesterday’s down day volume of 1.13 billion shares, and Tuesday’s 1.28 billion shares suggesting much less enthusiasm to the upside than downside. Also, today only had 1,392 more advancers than decliners on the NYSE and 316 more on the S&P, which are much less numbers than we’ve seen on down days the past few weeks. So these are not stellar numbers for such a big rally after a downtrend that’s lasted several weeks. Also note that the Nasdaq Composite closed with only about half of the percentage gains as the S&P and Dow indices. I know Japan is playing a big role in tech’s lagging here, but just looking at this from a technical analysis standpoint, the technology sector’s lagging is often viewed as bearish since higher risk stocks often lead the overall market (note that the Nasdaq 100 which is all technology stocks fared a little better than the Composite at 1.01% gains today).

So looking at these internals now, today’s rally is probably just a correction, and that a resumption of the downtrend to new lows is imminent. Of course, that may change with robust internals tomorrow or later on, but as it stands right now the larger downtrend is still well intact. The bulls took down no key levels, nor did it break the downtrend in price action, and the internals today were far from stellar.

Get Bob Prechter's Latest Elliott Wave Theorist Letter Free!

The S&P chart above shows that despite the big rally today, the series of lower highs and lower lows remains intact on even the 30min chart. It’s a good sign for the bears, but not a requirement for success. As long as the Minute wave ((i)) low of 1294.25 remains intact then I’m firmly bearish stocks.

Elliott Wave International's Commodity Freeweek!

On a minor note, I wanted to point out that the Nasdaq Composite (and NDX) did not participate in the late day rally that the S&P and Dow embarked on. You can see that it remained quite flat while the S&P surged higher on the above chart. Now I know the Japan crisis is leaning harder on tech stocks than others, but taking this at face value it MAY be a very subtle signal that more selling pressure is coming sooner than we think. We’ll see tomorrow if this little divergence turns into something much bigger.

The euro has continued its rally, as well as kicking me in the pants, as I was stopped out again last night on my short trade. I see no signs of a top right now so I’m neutral in the short term. It appears a triangle might be forming now as part of a 4th wave. So a sharp thrust higher to a new high and then reversal would then be in order in the Asian and European sessions tonight. Doing so might signal a longer term top and reversal, so I’ll be watching the action closely tomorrow morning to try and attempt another short position. Since I’m long term bearish the euro, I’m only looking for shorting opportunities right now.



Hargrave Matt563 said...

great insight on the S&P.The second I got the email for this post the /es rallied.I'm trading positions right up to the 1292. area.Your charts are really good :)

Hargrave Matt563 said...

I'm really not sure if this is a correction or the end of the bull cycle.I'm now leaning toward correction because of a couple things on my daily chart.

1 (and most important) Thursday we touched the very bottom of the Ichimoku cloud and bounced hard
2 My squeeze indicator is showing reversal.

IF we close above the 1292 the debate will be over (unless bears call double top)

PrincipleAnalysis_Blogspot_Com said...

Thanks for sharing that info. I'm a bit unsure myself, price action has been choppy but up until now there's been a series of lower highs and lower lows so I was riding the trend short term and seeing what happens long term. A break above 1294.26 would make the wave count for an early impulsive decline unlikely. Not impossible, but unlikely. I guess we just have to let it play out right now.

PrincipleAnalysis_Blogspot_Com said...

Thanks, we'll see if the wave count is right though :-o Not looking good this morning.