Tuesday, March 15, 2011

Stocks Should Continue Lower; Euro Still Searching for a Top

My thoughts and prayers are with our Japanese friends across the sea, and with those who have family and friends affected by the disaster there. It’s such a sad and tragic event. Growing up in southern California I’ve been through several earthquakes and the biggest was a 6.0 magnitude that I was literally right on the epicenter of. It was insane. Sitting in my house felt like sitting in the back of an old small beatup pickup truck driving 50 miles an hour over thousands of speed bumps. Our house had separated from the hillside it was on and soon determined to be uninhabitable by the authorities, so it was completely torn down, along with around 30% of my neighborhood. I can’t begin to imagine being even remotely near an 8.9 magnitude quake, then getting hit with a tsunami right after. Tragic.

As for the markets, in yesterday’s post I said:

“Tomorrow [Tuesday] will be a key day as more traders will be at their desks and hitting the go-buttons. Below I mention the bears' breaking point to the upside, so the bears need to see that level hold and volume increase on moves to the downside if a larger downtrend is fact underway. …Watch for volume in conjunction with the price action.”

I wanted to focus on price action and volume because volume was tame on Monday with a whacky indecisive move in price which is usually followed up by a breakout on strong volume. The direction of that breakout should determine the short/medium term trend. Today you can see that we in fact did have strong volume on today’s decline at 1.28 billion NYSE shares. Advancers vs. decliners and up/down volume was not jaw dropping like I’d expect from a 3rd wave at various degrees, but the late day rally probably skewed those numbers a bit into the close for the bulls. Although the wave count in the S&P is not perfect, all signs point to lower levels ahead. I believe the buy-the-dip crowd is assuming the Japanese catastrophe and Libya unrest are only temporary speed bumps in a very healthy bull market, and are buying now for long term investments. This buying power is preventing a capitulation, or washout, which usually causes the market to bottom. So ironically, the buy-the-dip crowd might actually be facilitating and lengthening the decline. So today’s late day rally doesn’t concern me at all.

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The above count remains on track although far from ideal. And with the series of lower highs and lower lows being the trend right now, I’d stay short this market. Needless to say I’d really like to see all the recent swing highs remain intact until we get a nice clear 5 wave impulsive decline on the table. But ultimately 1325.74 remains the breaking point for the bears. Prices must stay below that level in my opinion if the bears want any chance of controlling this market longer term. There are several gaps left open the past few days so we’ll have to watch those when a sizeable bounce occurs. Every day for the rest of the week is a “POMO day” so there might be some buying power entering the markets midday. But without a solid rally with explosively bullish internals, I would treat any rally as a shorting opportunity. As long as 1325.74 remains intact, expect lower levels in stocks for the foreseeable future.

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The euro made a new therefore negating the call for a top with an impulsive 5 wave decline.  However the hourly chart shows a candlestick reversal pattern after making its new high.  This is too short of a time for me as a swing trader, but for short term aggressive traders I see this as a short term short trade with a stop just above today's high as a good risk/reward trade.  I'll be waiting for a 5 wave decline or a similar reversal pattern on the 4hr charts or bigger.



ozzieaustin said...

I think the breadth figures do not support your count at all:
22/2/11: 2729 NYSE decliners
10/3/11: 2524 NYSE decliners
16/3/11: 2379 NYSE decliners

Despite the gaps and lower lows, breadth is just not supporting and diverging= this aint an impulse.

Nice blog, keep it up


Hargrave Matt563 said...

We broke the intermediate term uptrend a few minutes ago.Primary down channel still in affect.It was a bear market rally.TODAY WE DROP

PrincipleAnalysis_Blogspot_Com said...

Thanks for the note. You make a good point. However I think it's a bit early to conclude it's NOT an impulse, especially since price action hasn't led to solid evidence that it's just a correction. We still have lower highs and lower lows which keep an impulsive count in play. Until that trend breaks, I still think the evidence leans towards the start of an impulsive decline so I have a bearish bias......for now anyway. My opinion.

PrincipleAnalysis_Blogspot_Com said...

Well I hope you're right, but at the moment the Nasdaq is soaring higher and about to go into the positive and the price action looks buoyant. A selloff to a new low would definitely be welcome here.

PrincipleAnalysis_Blogspot_Com said...

Nice call Matt, the downtrend accelerated. The market's price action from the February high is now looking very ugly. VIX has exploded today too, almost 24%