Monday, May 16, 2011

S&P Gives us Clear Breakout Levels; Euro Topped

Internals posted after the US session ended.  The rest of this post below was posted around midday through the US trading session.

Hello all, it looks like the market listened to me for once and sold off the past week or so.  Now the big question is, "where to from here?"  Well we wavers have been faked out so many times the past year or so that we've learned to be more cautious in our calls for Primary wave ((3)).  I think even the professionals in EWP have done the same.  Today is no different.  I want to focus on the short term action and play everything as a short term trade while leaving the possibility open to let profits run indefinitely just in case Primary wave ((3)) down is underway.  What I mean by this is that I normally like to place stops at strategic EWP levels and trail them down with the market, being stopped out automatically by the market when it violates my aggressively bearish wave count.  By having the market take me out, instead of me doing it manually, helps eliminate the human emotion which might destroy some wavers if they use wishful thinking to keep themselves in the market on every downturn as they expect Primary wave 3 is underway.

With that said, I see some big picture signs here that may mean that this downturn is more than just a simple one or two week event.  For the short term I posted the breakout levels I see are important to watch.  A solid break above 1359.44 should signal a shot higher to new highs on the year soon after.  But a solid break below 1329.51 should signal an acceleration of the current downtrend for at least a few weeks.  And by "solid break" I mean a break that lasts more than a few hours and with strong internals.

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Earlier I mentioned bigger picture signs that something big might be unfolding to the downside.  One of the reasons I said this is because of the weekly momentum picture as seen here through the RSI and stochastics.  Both diverged from price at the latest high, the stochastics have now crossed and are trending down nicely, and the RSI has turned down as well.  The larger the time frame, the more reliable I see these indicators, and right now, both of these indicators have lots of room to run to the downside on their weekly charts before reaching oversold.  So the market is sure primed for a selloff to last at least a few more weeks.

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Also of note, the Nasdaq 100 and financials ETF (XLF) have dipped out of the stock market rally early. The NDX has already broken out to the downside, and normally the blue chip indices like the S&P 500, follow the higher risk Nasdaqs.  If so, the NDX's price action suggests that the breakout for the S&P will be to the downside.  So look for 1329.51 in the S&P to get taken out soon.  It's also worth noting that the financials dipped out of the stock market's rally months ago, perhaps an even more deadly sign for stocks.

So the market hasn't yet given us any conclusive signs of a major top that will last several months or even years, but the door is certainly open for that to occur in the coming weeks.  As a trader, until that happens I'll continue to the play the short term as I see it.  That means I'm watching the breakout levels I posted above and will play the market accordingly to what happens to those levels in the coming days.

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The euro top is looking good here.  We had several daily dojis occur that was followed by sharp selling in an impulsive manner that suggests a major top might be in.  I'm playing the short side every chance I get.  Today's rally allowed by to start getting my feet wet on the short side.



pebblewriter said...

Nice work.  FWIW, I think we're on the same wave (pun intended.)

Guest said...

Stopped right at your break line.  pretty cool but a bitch to trade.  Nice work.

PrincipleAnalysis_Blogspot_Com said...

I know, the markets love to torcher us.  Vulnerable in the overnight session for continuation now, but without a cash market confirmation I'm cautious. Regards 

PrincipleAnalysis_Blogspot_Com said...

yeah, glad to see you're cautious here as well.  nothing conclusive yet to think otherwise.

david christoph said...

 Bullishness declining, divergence from price$BPSPX&p=D&b=1&g=0&i=p11391426412&a=164488777&r=3232

PrincipleAnalysis_Blogspot_Com said...

Another indicator diverging from price at that last high.  Thanks for sharing David.