Monday, April 25, 2011

VIX Giving Stock Sell Signal; but only Shorting Euro NOW

Internals today show us a very interesting picture when you take into account the VIX stock sell signal in place right now.  Volume on the NYSE has to be one of, if not THE, lightest volume days of the year at less than 700 million NYSE shares traded today.  I know many traders are filled with ham and pies after the Easter holiday and are waiting for the Fed meeting this week, but still, 695 million shares.....that's some light volume, and a telling picture of how attractive the stock rally is at these levels.  Things should get exciting again when the Fed speaks later this week.

The VIX closed beneath its lower bollinger band last week and then closed back above it shortly after.  This is considered a stock sell signal which is often pointed out early by Elliott Wave International's Steve Hochberg.  Lately, this stock sell signal has not worked well, so I'm counting on it loosely here.  When it does work, there is usually a 2-5 trading day delay between when the signal executes and when a sharp selloff occurs.  So in that respect, a sharp selloff should ensue anytime between now and Wednesday, more or less.

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We've been here before wavers, and the short term we often get right, but then we end up getting our faces ripped off when we hold our short positions too long in hopes of the decline turning into a larger Primary wave ((3)).  This is why I insist on only playing the short term action and trailing stops, this way if the decline turns into something real big then there is a good chance we'll ride it all the way down anyway.  But if it's another fakeout, then we can protect capital with the trailing stop.  Right now the market is setup again for at least short term pullback soon.  The RSI is falling off a cliff and a small 5 wave rally appears complete, and when you combine that with a VIX sell signal, it suggests at least a modest pullback.

There are two things to keep in mind here for the bears:

1) the uptrend is not broken yet, so shorting here is very speculative and very risky.  More conservative traders might want to be patient and wait for confirmation, or at least some evidence of the uptrend breaking down before taking a position.  That's what I'm doing.

2) From the Minor wave 4 bottom there is not a clear 5 wave move higher, suggesting the rally is not over yet.  Sure, one can count it as a 5 wave move and complete, but it definitely wouldn't have the "right look", which is an EWP guideline.  So expecting a top here from an EWP purist standpoint would not be wise.

With all said and done, my thinking on this is that it's quite possible the market is forming another top (at whatever degree), but with too many loose ends here, I'm waiting on the sidelines for more evidence that the uptrend has in fact broken and that the short side should be favored.

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On the other hand, the currency majors appear to be breaking down.  The euro is sitting on a support shelf while the AUD and GBP have already broken down it appears.  Since the currency markets are so highly leveraged I tend to take more speculative positions since waiting for confirmation would make placing stops too far away for comfort.  I'm shorting the euro now with a stop just above last week's high.  Although this is a very speculative position I'm taking here, I think the potential reward is well worth the risk since the euro's larger trend is firmly down and I expect it to eventually get to parity once that larger downtrend resumes.


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