Wednesday, March 23, 2011

Stocks and Euro Poised to Fall Sharply Soon

Internals today tell us that something bearish is just over the horizon. As this rally has progressed the past several days, volume has gradually decreased, suggesting a lack of enthusiasm and confidence in the move higher. Recall that the selloffs over the past couple months have been accompanied with volume well above 1 billion NYSE shares, usually around 1.15-1.20 billion. Today had a weak 877 million shares traded with advancers vs decliners and up vs down volume also suggesting a weakened move higher. The internals shown during this recent rally, and what we see today, suggest that this market is about to reverse sharply to the downside.

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This chart shows that the S&P’s momentum never really got off the ground. Not only are the waves clearly overlapping, the typical characteristics of a correction according to EWP, but the original 30 point rally from the bottom is the best it could muster up. The rallies haven’t even been close to that 30 point rise, and when you factor in that volume has also decreased steadily during this rally off of the 1249.05 low. It’s clear the market wants to move lower and that the recent uptrend is just a correction. A break below 1284.05 would break the trend of higher lows and give us a good signal that a top is in and that we should favor the downside when trading.

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Above is an aggressive bearish count suggesting Primary wave ((2)) has topped and that an impulsive decline is developing. The reason I’m not in love with this count is because it doesn’t adhere to the EWP guideline of the “right look” in regards to proportionality. Notice that Minute waves ((i)) and ((ii)) are smaller than Minuette waves (i) and (ii). Having waves at a smaller degree bigger than the same waves at one larger degree is not typical in an EWP pattern. It violates no EWP rules, so it remains valid, but it does violate a major guideline in my view so I’m cautious in getting too attached to this count. An extremely sharp move lower would strengthen the odds of this count being correct since it would fit in well with a Minuette wave (iii) wave getting underway as the count suggests.

This count makes more sense to me. It explains the lack of proportionality I mentioned above, as well as the imperfect nature of the decline relative to an impulsive structure. But even though this is a corrective structure, it also shows a sharp move lower coming soon. So either way you slice it, the internals and both top wave counts suggest a top and reversal to a new low are coming soon.

The euro has failed to make a new high as I thought it would. The US dollar did make a new low though so I took that as a new extreme for the EUR/USD pair in general, but instead there is a divergence in place between the USD and the euro which has significant bearish implications for the euro and bullish implications for the USD. Today the euro is breaking down a bit, and with that USD divergence in place, it could be the start of something big. Also note that the stochastics on the weekly chart are overbought and crossing down. So this pair may be gearing up for a major sustained decline. If so, I want to be on board this train to funky town. In other words, I want to be short this pair, like right now, with a stop at 1.4255.



Mlucas said...

Nice charts and nice analysis. I prefer the aggressive bearish count myself. At some point all this bad news, especially the nuke situation in Japan which I believe is going to get very bad, has to impact the market.

PrincipleAnalysis_Blogspot_Com said...

Yeah, it feels like even the slightest of global incidents will send this market falling again at any time. Now Lybia is heating up again as well as Japan.