Friday, January 20, 2012

Stocks Push Higher, But Still Look Weak; Euro Looks Strong

Wake up everybody!  Wake up!!  I know the market is boring right now but we have work to do :-)  The market has continued it's slow boring hump higher on weak internals and volume.  Although this can continue even longer, the risk right now is with the bulls in my view.  Momentum indicators are overbought, volume refuses to accompany the rally, and the price action is very choppy.  All spell out that when this rally ends, the move down will be sharp, fierce and probably quite deep.  Today's volume was a bit strong relative to the previous days, but that's because today was options expiration day which usually means we get a surge in volume.  But relative to most options expiration days the past few years, today's volume was very light.  We usually see well over a billion shares traded on options expiration.

When you're a bear and growing impatient with a sloppy rally, we can tend to over-analyze every little thing on the bearish side and read too much into it.  I don't want to do that here.  But it's worth noting that the overall market today was fractured with the Dow doing quite well, the S&P barely eeking out a gain, and the Nasdaq closing slightly negative.  With options expiration out of the way, and the evidence of a weak rally the past few weeks, it's quite possible early next week could be the pullback we've been waiting for.  Timing is very difficult, as you can probably see from the last few posts I've put up which practically say the exact same thing.  So I simply want to be ready for a decline, but not be positioned as if the decline will immediately occur.  This choppy sideways-to-up action can continue for a while longer.  So keeping risk tight, and my finger on the sell trigger seems like a wise choice at this time.

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If all I had were elementary indicators like the overbought stochastic and a fractured Friday market to tell me the market is topping, then I might as well just throw my money out the window or burn it in a pile to keep warm because I'd be losing my money in the market anyway.  But the fact that the wave count and internals support the outlook of a major top forming, these small indicators simply add to the bearish outlook and can help us get our timing down a little better.  The stochastic has been maneuvering around overbought territory for a while now, and needs to come back to earth before another major rally phase can get underway.  Oftentimes the stochastic will start moving down prior to prices establishing a downtrend.  And since we don't have that yet, it certainly would not be wise to use this indicator to get short right now.  But if the stochastic starts trending down and prices don't, I might nibble on the short side a bit even if there's no sign of a top.  A long time overbought stochatic starting a downtrend after a weak rally in prices seems like a good shorting opportunity.

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The euro stopped me out a few times in the past week or so.  So I'm on the sidelines again.  With the previous swing high taken out this week, the short term downtrend has been broken so we need to look for higher levels until it proves to us it has reversed trend to the downside.  There's a nice confluence of support levels in the 1.2875-1.2900 area that I'm watching right now.  At 1.2875 you have the previous swing high, at 1.2885 you have today's low, and at around 1.2900 next week you'll have the base of an ascending trendline.  So it's quite simple, a a close below 1.2875 would get me to short the euro again with a stop just above today's high.  Until then, I think it's best the bears wait this rally out.  The euro has been declining almost non-stop for the past several months now and a sharp and deep corrective rally would not be out of the question.  Keeping risk tight here until the euro proves that the uptrend is no longer intact seems wise to me.



steveo77 said...

Well the Egg of Doom sure seems
to indicate that 2012 will be a bad year for equity value.  

A stealth flight to USD could bring down the indices. 

One problem I have with charts, and it makes no sense to me, therefore I have
to assume that it is intentional method of deception, it the way that
mathematical lines image differently on different time frame
charts.   Annoying --more than annoying.

You can see on the near term Egg of Doom, we are just touching the Egg line.

However, on the longer term Egg of Doom, we have already broke the shell and
into overthrow mode if that is what that is.

Anyone have any type of explanation at all on this matter?

OH and by the way, klik some adz, thank you.

TAfool said...

Here is latest USD chart. According this chart, EUR/USD has more upside once this pullback is completed.

PrincipleAnalysis_Blogspot_Com said...

So what's your longer term wave count supporting the bullish outlook?  I see you have a possible ABC unfolding, but I can't tell what the larger degree bull trend is.