Wednesday, October 5, 2011

Stocks Continue Higher, Continue to Build Case for a Bottom; Euro Fills Gap at 1.3385, is that it for the rally?

Today's move was solid, and while the percentage of volume to the upside was similar to yesterday's at 84%, overall volume decreased today to 1.2 billion shares, down from 1.7 billion shares.  So this alone is not a confirmation that a bottom is in and Intermediate wave (2) is underway.  But the structure of the decline is far from perfect for an impulsive 5th wave, if that's actually what's occurring.  So the outlook right now is mixed, which is just another reason in my view to be neutral here and reduce risk on the short side.

Stocks: Buying Opportunity or "Free Fall" Ahead? Bob Prechter's Free Report Expires October 7th

If Minor wave 5 is in fact in right now you can see that it's a very imperfect wave, and would probably have to be labeled as an ending diagonal even if it's not symetrically correct.  This would be a good illustration of what I meant by 5th waves unfolding unpredictably and imperfect, making them very difficult and stressful to trade especially when you know a major reversal of the entire 5 wave move is about to occur at any time.

But is Minor wave 5 and Intermediate wave (1) complete?  I can't say so with a high degree of confidence.  A week or so ago I said I had little doubt that we'd get a new low in stocks before a major rally phase got underway.  And we in fact finally got that new low this week.  But now what?  What I can say is that I feel good being neutral here, and that the downside looks very risky while trying to find a good time to get long is more appealing.

Put EWP aside for now.  Notice that yesterday and today the Nasdaq has been on fire compared to the blue chips.  Again this is a bullish sign as long as it exists.  And when you combine that with the divergence between the Composite's new low not confirmed by the 100 this week, it makes me think a larger move higher might be getting underway.  Also notice the price action the past 2 months.  Price has been choppy and sideways, creating a push-pull battle between bulls and bears.  Then a break down to a new low Monday, followed by two fairly strong days Tuesday and today which took price comfortably back into the congestion area.  In my opinion, that tells us that the bears threw everything they had into pushing the market lower to continue the prior Minor wave 3's work.  But it took everything the bears had to make a slight new low before the bulls pushed the market back almost immediately to close back with the "battleground" area again today.  That tells me that it's quite possible the bears have run out of steam and momentum to push this market much lower at this point, and if the bulls choose to strike here they have a good chance of taking out the exhausted bears with a continued surge higher.  Again, the theme here is to reduce risk on the short side. 

Bottom line: the risk seems to be to the downside and I'm looking to get long for a big Intermediate wave (2) rally that should last a few months.  A move above 1195.86 would be a good sign that Intermediate wave (2) up is underway, depending on the internal strength of the move.

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Yesterday I said the euro would charge toward 1.3400 and close the gap from Sunday and we could say that it has done so with its move to 1.3385.  I'm unsure it will continue higher from here though so I like being only 50% short with my long term position.  Any follow through higher should lead to an eventual attack of 1.4000 again.  A break down from here would probably mean new lows were just around the corner to get it to 1.3000 at least.  And it will probably take stocks down with it.


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