Market Correcting Before Rallying Higher; October 9, 2009

Typical Friday brings about floating around in the markets. Apparently Asia intervened to buy dollars due to export concerns of their own goods. This caused the EUR/USD to drop but it didn't effect the stock market. Governments tend to intervene at the end of trends, so again this proves that the US dollar decline is ending and a major bottom and rally will occur. Once it does, the stock market will top and reverse.

The count I placed yesterday still holds. After the correction is complete, it should charge to new highs and target the 1100-1120 S&P area before considering a top is in place. If the market meanders higher from current levels it either means an ending diagonal is forming, where if it makes it above 1080 it may mark the top right there, but if it doesn't get above 1080 then it will correct down and then rally hard in a week or so toward 1100-1120.

There are 3 key things I'm watching for a stock market top that need to occur:

1) signs that the US dollar has bottomed (EUR/USD topped)
2) 1080 in the S&P is broken
3) 1020 in the S&P is broken.

Until then, we wait.

Key Levels Defined for the Short Term; October 8, 2009

As I stated in my last post, the rally today broke out to a new high confirming that the drop of last week was 3 waves. 3 wave moves are countertrend, so a new high above 1080 is likely. The evidence strongly supports this as we have a 5 wave rally (see above 15min S&P chart) from the 1020 lows and it was done on extremely strong internals for 3 days in a row.

Today's action was a thrust from a triangle. Normally when thrusts are complete they return to the apex of the triangle, which in this case is the 1053 area. From there I expect the market rally hard in a small 3rd wave that will break through the 1080 high with ease.

The only thing that will negate this short term bullish call is if this month's lows are broken at 1020 before the 1080 level is broken. Now with 3 days of strong rallying and internals and the thrusting of a triangle complete probably, I do expect some pullback. But I'm doubtful the market will be able to reverse strong enough and find sellers to push through the 1020 level any time soon. But if in the event this does happen, IT WOULD BE EXTREMELY BEARISH. EXTREMELY BEARISH.

We'll see.

Overlap Confirms Decline as 3 Waves; October 8, 2009

Today's rally exceeded the previous high which was essentially the last ditch resistance level to maintain any viable 5 wave declining action and declare a major top in the stock market. And when you combine the fact that the break occured with 3 solid days in a row of extremely strong internals and virtually all bullish buying power with the 5 wave rally, it seems quite clear the market will make new highs soon above 1080.

This doesn't change the big long term picture for a crash, it just changes the short term expectation that were are currently in the crash right now.

The only hope for the bears is if the market breaks the lows of this month (1020 S&P) before it goes above 1080, then it will become extremely bearish at that time.

The S&P is Thrusting From a Triangle as Forecast; October 8, 2009

Yesterday I discussed that the consolidation we saw was part of a 4th wave triangle in the S&P and most likely a thrust to a new high was likely today. That's occuring today as you can see from the above 15min S&P cash chart. The problem for the bears is that this is a clear 5 wave rise yet it doesn't look like it will have enough steam to push to a new high above 1080. So most likely that means it's only a wave 1 within a larger 5 wave advance. So once this thrust is over, it will retrace back to at least the apex of the triangle around 1054 before surging a strong wave 3 rally that should easily get to the 1100-1120 area. This means we probably have a few more weeks of rallying. On top of that, the EUR/USD also traced out a 5 wave rally and did not make new high above 1.4843 either.

The five wave rallies in the stock market and EUR/USD without making new highs tells me the larger trend is still up and we still have a few more weeks and higher levels before considering a top again.

S&P Breakout Coming; October 7, 2009

As investors stand by on hold for earnings reports to kick off the S&P appears to be consolidating very tightly in a 4th wave triangle (see above S&P 15min chart). This will result in a strong rally thrust to a new daily high at least before reversing to the apex of the triangle at a minimum. If it breaks 1080, the highs of last month, and then sharply reverses well below the apex, then it may signal "The Top" is in. I'll be looking at the action of the dollar for clues as well. It's also possible the consolidation will lead to a break down to lower levels suggesting the triangle was a B wave and the thrust lower is a C wave. This would result in an eventual big rally above the previous wave 3 top at 1061 at a minimum before topping. But at this point, odds favor that the consolidation is a 4th wave that will lead to a thrust higher. The action after the thrust will help determine what type of top had formed.

So we wait for now and let the market play out the way it wants to.

GBP/USD Working a Triangle, Then Thrust to New Lows; October 7, 2009

The GBP/USD seems to be fulfilling the forecast from yesterday so far in that it's completing a triangle and will eventually thrust to a new low in a wave 5. Triangles and thrusts are finishing moves so a more significant correction will occur after that. That would imply dollar weakness. I'm guessing that-that dollar weakness might translate into a new high for the EUR/USD above 1.4843 where I'll be watching intensely for a top.

Outside of any big reversal move or a new high in the stock market or EUR/USD, I'm sitting and watching......waiting.

Watching the EUR/USD; October 6, 2009

The stock market closed on its highs with very strong internals for back-to-back days, plus today had some strong volume behind it. Usually this acts as a launching pad to shoot the market higher for days/weeks. Expect higher levels to be achieved in the coming days and the 1080 high in the S&P will most likely be broken very soon. I covered another very small portion of my long dated put options on the dip this afternoon and bought some more November call options no the SPY.

Above is an hourly chart and wave count of the EUR/USD. It calls for at least one more rally to complete a 5 wave advance. If wave 5 rallies to a new high above the 1.4843 level, then there's a good possibility that-that 5 wave rally will complete the entire rally this year and market "THE TOP". However, if the 5 wave rally fails to break above 1.4843, it means it's probably just a wave 1, and will undergo a wave 3 and 5 to probably test the 1.50-1.51 area over the next several weeks.

When the EUR/USD tops, so should the stock market.

GBP/USD Declining Impulsively; October 6, 2009

One more note, even though the EUR/USD is not declining impulsively and is now in fact rallying to a new high, the GBP/USD is. This would make sense because most likely the GBP/USD has already formed its top and reversed. The EUR/USD has yet to do so. So the GBP/USD is declining impulsively because it's made a top, and the EUR/USD will diverge and make a new high, then it too will decline impulsively, taking the stock market down with it.

British Pound Continues to Lag the Euro's Advance; October 6, 2009

Above are two 4 hour charts, one of the EUR/USD and one of the GBP/USD. Some of you may remember a week or so ago when I mentioned that the Great British Pound (GBP) was lagging behind the euro's advance and did not confirm the euro's 1.4843 high. Now look at the two pairs. You can see that the lagging of the GBP is becoming more severe, and that even though the euro has rallied 300 pips from the low, the GBP barely rallied 100 pips and can't even make a new high from last week!

This divergence tells me the EUR/USD's uptrend is severely exhausting as it's rising almost on its own. This is also pumping up the stock market as well so keep that in mind. Major divergences occur at major market tops. I expect this is one of those divergences occurring at the EUR/USD, and in effect the stock market, top. I expect to see stock market divergences form as well, i.e. S&P makes a new high but the Nasdaq and/or Russell 200 or XLF does not make a new before a big reversal.

We'll see.

All Eyes on the Dollar (EUR/USD); October 6, 2009

Again, I'm watching the US Dollar through the EUR/USD. The EUR/USD is considered the "anti-dollar" and basically moves the opposite of the US Dollar. So I tend to say dollar bottom and EUR/USD top interchangeably. Even though they don't always find tops and bottoms together, for the purposes of our discussion here on the blog, they both mean the same thing to me.

With that in mind, I'm watching the EUR/USD to find a top. The last top was at 1.4843 and you can see the decline was very choppy and hard faught. This looks very corrective and was a concern from the jump. However that concern was overshadowed by the big reversal day and solid negative internals in equities. But again, it appears the US dollar, or EUR/USD, are leading the way. The market gods are telling us that we really need to just follow the dollar for the direction of the stock market. So that's what I'll do. And I'll do it by watching the EUR/USD.

So notice the choppy overlapping hard faught waves down which look clearly corrective, then look at the rally from the lows into today's rally. Notice how smoot and easy the gains are. This tells us the trend is still up in the EUR/USD. It also tells us a new high is most likely coming, above 1.4843. It's only 100 pips from that level at which it can turn and reverse at any time, however I see 1.50-1.51 as the key resistance levels. I'll be watching it closely.

When the EUR/USD tops, so will the stock market.

Stock Market is on its Way to New Highs Above 1080; October 6, 2009

The bullishness from yesterday was not immediately reversed this morning and as a matter of fact today is even more bullish than yesterday. Observe the NYSE internals, they are stronger than yesterday's, and only 50 stocks on the S&P 500 are trading down. No one is selling, just like no one sold yesterday. This also creates overlapping waves and an apparent 3 wave ABC decline. This means new highs must be achieved for a top to form.

The difficulty of this rally to count and predict is making me thing that perhaps the first obvious 5 wave decline from 2007 was a wave A, not a wave 1. That would put us in a B wave. B waves are the hardest to count, and in my opinion, basically just do their own thing and are all over the place. That's what this is turning into. It still means that a large strong C wave will take place where if it equals wave A then it will take about 880 S&P points off once wave B tops. It's just that the market will bottom and reverse after wave C, and that it may not be as long or powerful as wave 3 would be.

I'm not there yet though, I'll wait to confirm a new high above 1080 before I start giving it serious thought. But with Robert Prechter appearing to be wrong in calling a top in September stating to Bloomberg, "Stocks peaked in September and are back in a bear market." (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azTL.7ZtDots), and NYU Professor Nouriel Roubini who has been at the forefront of the last market crash has become "less bearish" it tells me that if both of them ertr wrong (at least on a short term basis), something is amist. However we cannot ignore that the market fell in a very clear 5 wave pattern from the 2007 highs, and that means that the larger trend is down, and most likely it's going to be a wave 3 or C. So I remain a longer term bear.

GBP/JPY Broke Down as Expected; October 6, 2009

Attached is just a follow up to the chart I posted last night on the GBP/JPY showing a 4th wave unfolding and expected decline. It's dropped over 150 pips at one point since posting. What's strange is that this is just a combination of the GBP/USD and the USD/JPY. Both of the pairs are showing weakness, yet the EUR/USD is rallying strong and is probably on its way to a new high above 1.4850. This diverging behavior is peculiar and perhaps signaling a fractioning of the overall global market as far as risk appettite. It also tells me that the stock market rally is probably just based on the the dollar falling (EUR/USD rallying). When the dollar finds a nice solid bottom and rallies hard, the stock market should lose its last ditch ally in holding up its rally.

Quick Clarification on my Position; October 5, 2009

I just wanted to clarify where I stand overall. I was 100% short with options expiring over a year out. Those who trade options know quite well that time is your biggest enemy when you own options. With today's bullish stock market action and the EUR/USD finding support and rallying solidly and not declining impulsively before, I want to protect myself from some of that options time value erosion if the stock market rallies to new highs again before forming a top. To do that, I sold about 5% of my put options and bought call options on the SPY for November expiration. It allows me to buy more contracts and will profit nicely if the market rallies which will negate some of that money I'll lose on my long dated options. It's just a mild protection strategy.

So I"m not bullish overall, not all. I am merely protecting some of the time and price value of my long dated short option positions.

On a side note: the GBP/JPY broke out of that 4th wave I illustrated below at the previous post and completed another 5 waves down which is bearish for risk and the stock market. However, the EUR/USD broke above previous resistance at the 1.4680 level which is bullish. So there are conflicting signals here.

Bottom line: with today's strong bullish action I chose to protect my positions a little in case the market charges to a new high. If the market is not going to a new high, then it needs to decline hard first thing in the morning and reverse the bullishness it left today.

GBP/JPY Bearish, Tied to Risk and Stock Market; October 5, 2009

One thing I thought I'd mention since the EUR/USD does not appear to be declining impulsively and not giving a clear signal yet on whether a top is in or not is that the GBP/JPY is declining in 5 waves suggesting the one larger trend is down. Normally we look at the EUR/JPY to connect to the stock market and risk but I want something separate from the euro for indications.

The GBP/JPY (british pound/japanese yen) can be tied to risk and when it rises, risk and the stock market rise and when it falls, risk and the stock market falls. Well this has been in a downtrend for a while now and it appears to be declining in five waves which may signal risk aversion and fear is creeping back into the market overall.

Right now you can see on the 30min chart above that it appears to be in a 4th wave triangle. If correct, we should see a thrust to target at least the 142.00 area before a sizeable correction occurs. What's key to this outlook is the beginning of the 5 wave decline which is the 144.22 level. As long as the pair trades below that, it's bearish in the short term and could help us understand where the overall market is as far as "risk appettite".

Many Bullish Indicators Occurred Today; October 5, 2009

Many things occurred today causing me to cover a small amout of my shorts and put in a very very small short term call option (Nov 2009) position on in preparation for a rally to new highs. The short term bullish case is as follows:

1) NYSE breadth was very strong today with gainers oupacing advancers by almost 5 to 1. This is the highest reading in several months. The last time this happened was last month after another selloff it hit about 4.5 to 1. A rally to new yearly highs occurred soon after.

2)The rally in the S&P hit 1041 which is a small overlap of the 1040 bottom which could be a wave 1. This overlap also creates a 3 wave looking drop on the daily chart (see daily S&P chart above).

3) Financials led the way today being up over 3% today, and financials have led the market the past couple years.

4) NYSE volume was very bullish today with almost 90% of stocks on the exchange trading higher.

5) Silver and gold rallied hard, and both have been following the stock market.

6) The EUR/USD continued its rally and is not showing any weakness and it apparently has led the stock market lately. I presume primarily because a weakening dollar boosts equity and commodity prices therefore pushing this overextended rally higher.

All in all, it was a very bullish day on no news. However, it was done on light volume which is the only problem in the strong bullish case. The key level for the S&P futures now is at 1071, a break of that level will confirm that the drop was in 3 waves and open the door to a new high.

If a new high occurs, I will consider reworking the long term wave count and will probably lean more towards us being in an A-B-C correction instead of big wave 2. The choppiness and subdivisions of the rally from the March lows will have become too complex and the pressure downward appears to be waning.

One more key concern is that I've been seeing a lot of people in forums regarding EWP talking about the big crash and I just heard Art Cashin on CNBC on Friday mention that the "Elliott Wave People" are predicting a big crash. This "mainstreaming" of Elliott Wave and the big crash predicted by Robert Prechter concerns me. When a view becomes mainstream, it probably won't happen. Right now I'm very cautiously bearish in the short term and if the S&P confirms the 3 wave drop then I will rework the longer term structure to see what I can come up with.

Bearish Non-Confirmation Erased; October 5, 2009

The Russell 2000 and the Nasdaqs made new daily highs a moment ago, erasing the bearish non-confirmation I described in the previous post. Internals remain strong and this rise looks "healthy" for now. It appears to be a C wave in larger correction so that would explain the strength. I'll post more specific as to the larger picture of where we're at in the market right now as clarity comes through. I remain short term bearish below 1071 S&P.

Rally Today Strong Internally, But Momentum Waning Now Perhaps; October 5, 2009

With no news really out today the market is drifting higher on light volume and strong internals. There's no reason to sell today as most seem to have already dumped their shares last week who wanted to. Now the vultures are coming in to "buy the dips" and cherry pick the stocks they've wanted for a while. The internals are strong so I'm not sure this market's rally can really stop any time soon, however on the five minute chart of the Dow compared to the Nasdaq 100 (see above chart, click on pic to see it bigger) you can see that the orange Nasdaq 100 line is not confirming the Dow's latest new high, and neither has the Russell 2000, both indices are high risk indices and often lead the market. Also notice at the bottom that the stochastics (momentum indicator) is also diverging lower. Now this is just a 5 minute time frame and the bearish case can easily be erased with one strong push higher, but as of right now, the blue chip Dow and S&P seem to be rising on their own which many times leads to a top. As long as this little divergence exists, then it's possible a top is forming. However with the strong internals and no catalysts out there, it seems hard pressed to selloff at this point. We'll see.