Friday, June 1, 2012

Stocks Tank, in Line with Forecast; Euro Daily Candle Warning to Bears

The weakness in stocks continued to a new low as forecast in last post.  There are several different ways to count the decline, most of them are impulsive suggesting the larger trend is firmly down for the foreseeable future.  The only question is at what degree should the waves be labeled?  Above are my top choices.  Both have one thing in common, if the counts are correct prices will stay below the wave (ii) high at 1415.32 (S&P cash index).  So I'd have stops just above that level for now and let the market play itself out.  As the pattern develops more, hopefully I can drop my stop lower to reduce risk. 

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The action on the daily EUR/USD chart is very telling, and is worrisome for the bears.  It shows an RSI that is trying to recover from being deeply oversold accompanied by a daily outside reversal candlestick forming on the daily chart.  If that candle holds up through the close today, the EUR/USD looks to have put in a bottom today.  When you add the fact that the euro has historically made a lot of major reversals on news days like this, it is telling the bears to take be careful.  I've removed half of my short position already and am considering removing more before the close today.  Euro bears beware here.

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Just to add on to my previous thought, the 4 hour chart above shows a long and drawn out bullish divergence occurring between the euro's price, and the RSI.  Priced continued to make lower lows while the RSI was making higher lows.  This build up has carried over to the daily chart where the RSI is bouncing hard out of oversold territory, and is doing it on a big news event today and an outside bullish reversal candlestick forming.  Euro bears beware.



Vinniesj said...

That's a pretty sharp turn up on your SPX chart to about 1340, though plz correct me if that level is not right. How does that apx correlate to what the DOW would be trading at? I tend to use 10 SPX points=100 DOW points on average.
That's a pretty darn good relief rally, and what is the catalyst for this other than severely oversold? Is it one of those ending diagonals today? Dollar reversal?Consensus among many techs, the first two weeks of June will be strong upward movement, followed by sharp decline lower than the 200dma. Your chart seems to point to this as well.

Vinniesj said...

We landed pretty close to your 2nd chart choice where the wave labeled (iv) hits. Taking into consideration a very strong A/D line all day, almost no pullback to speak of in the SPX, orderly consolidation, where might we end up in this relief rally by the end of June? You've been nearly dead on in every direction, quite uncanny, while others label and blabber about waves as excuses for being so wrong. The exception being Abigail Doolittle, who you would enjoy speaking to.

PrincipleAnalysis_Blogspot_Com said...

Hi Vinnie, there are several ways to interpret the waves right now but all of the most likely ways are impulsive and down.  So the larger trend is down.  That much is clear.  What is not clear is the degree of trend, and the exact way to label the decline.  Because of that, it's hard to trade this market very short term.  At a minimum, the S&P cash should get to at least the 1330-1350 range for a top if my 2nd count above is correct.  Seeing as that today's high is 1329 where it reversed sharply gets my attention.  The EUR/USD is also trying to put in a topping reversal pattern which could also be a sign for stocks as well.  But it's way too early to say that these reversals are conclusive enough to get short right now.  I need to let the market play out more and see how the close goes.

Another count to note is that a five wave decline is now complete from the high on the year.  That means a much more sizeable rally will occur, probably more towards 1400, if correct.  I'll put up a post later putting all this together with charts and labels.