Friday, December 18, 2009

Dow Signaling a Break Lower Out of the Range Soon

The market rallied this morning, lofted by the good RIMM and Oracle earnings. But after the cartwheels and riverdancing stopped at this "great" news the market sold off to new lows. The S&P is not that clear right now as to the wave structure and is sporting a similar garbled look that it has the past several declines that have been eventually completely reversed. However the Dow Industrials tell us a different story.

As you can see from the attached Dow Industrials 15min chart, the index has traced out a 5 wave decline, telling us that the short term trend is down, and that 10,264 will be broken before 10,510 will be broken. What's interesting is that this 5 wave decline led right to the bottom of the Dow's lower range then bounced (see Dow daily chart). This may be significant because it means that after a wave 2 or B corrective rally occurs, the Dow will charge lower beneath 10,264, and probably much further towards at least the 10,100 area, breaking down the lower end of the range. The significance of breaking out of the range to the downside will be examined when it occurs. A strong rally in the Dow right now would be a great risk/reward opportunity for the bears to get short with a stop above the 10,510 level.

As you can also see from the Russell 2000 chart, it too has declined in 5 waves and rallied in 3. The top of wave 2 at 612.81 should cap any rally attempt and 600.96 should eventually be broken.

Also notice the dollar has continued to climb. The series of higher highs and lower lows is still intact, so the short term uptrend is still intact. I drew a trendline that appears to be holding the rally up in place so far. A close beneath that trendline will break the series of higher lows, and the level that has hoisted the rally so far, so it would hint that the short term rally was ending.

Thursday, December 17, 2009

Dollar Rally Smacks Precious Metals and Stocks

The dollar rallied hard yesterday through today putting great pressure on commodities and stocks. Gold and silver lost over 3% and equities tumbled on the stronger dollar; again showing the real fuel behind the stock market's rally and strength. When the dollar rallies, stocks buckle. As you can see from my previous post last night, the dollar has formed a major bottom and should rally for months. The stock market will have a very difficult time making new highs under these conditions. Let's look take a look at the charts I have this afternoon:

1) the daily S&P cash chart shows that yesterday the market again was repelled by the top-end of the range it's been trading in the past few weeks, suggesting that the bulls still don't have enough force to push it through to the upside to new highs. So now we must focus on the lower end of the range around 1085 and see if the bears can come in and take control. A close beneath 1085 would be a good sign that perhaps the range trading has broken to the downside.

2) the primary impulsive S&P count shown is my top choice for 3 reasons: 1. the dollar appears to have bottomed and precious metals have topped so a major stock market top may be at our feet right now; 2. the decline looks very impulsive and one of the strongest and most clear we've had in a while, and the wave (2) correction is quite shallow suggesting there is a lot of downside pressure to this decline instead of just the usual ABC decline; and 3. the fact that other indices are looking very toppish and have made solid closes to suggest their downtrends have resumed (i.e. Russell 2000 and XLF). Also, this is a great risk/reward opportunity for the bears. The count is wrong with a break above 1101, just 5 points higher from current levels, and the profit potential is huge.

3) the alternate S&P count chart shows the other possibility in that we are in an A-B-C corrective decline that will most likely be halted within the range above 1085 and then rally again towards 1120 and possibly higher.

4) gold and silver have sold off sharply, fitting well into the "blowoff top" scenario commodities usually undergo when making a major top, just like oil did into its $147 top before it reversed to around $30. Gold and silver should make similar moves to the downside now. The attached gold futures daily chart shows a triangle in the middle of the rally over the past several months. Triangles only occur in B, X and 4th waves. This is obviously not a 4th wave, and the entire rally looks a lot like a clear 3 wave rise, so it's probably a B wave. A break of the wave A high at 1010 will confrim that the rally was a 3 wave correction, and that 680 will be broken on the downside before a new high above 1220 is achieved.

5) the gold futures 10min chart is self-explanatory. I just wanted to show that it appears the next round of selling is underway as it appears to be declining impulsively since making a modest rally attempt this week. Look for gold to continue lower, capping any rally beneath the 1140 level.

6) the XLF is a very telling chart. This is the most bearish market I can see right now next to precious metals. While other markets were churning sideways or making slight new highs, the XLF was actually grinding lower. Following a clear 5 wave decline back in October, the financial sector has made a modest rally and then chopped lower, capping all rallies beneath a descending trendline. Today's close was on the lows, and is the lowest close since the wave 5 bottom back in October. This sector should continue downward with rallies capped beneath that blue descending trendline marked in the chart.

7) the Russell 2000 daily chart tells a similar story to the XLF. After its 5 wave decline in October it has failed to make a new high, and actually has SO FAR rallied in 3 waves. Breaking beneath the wave "a" high is a good start in confirming that the rally was in fact 3 waves - a correction, but a print beneath the wave "b" low will ultimately confirm it.

So there you have it, a lot of bearish action occured today leaving the possibility for a major market top and reversal to be underway right now. However we still have a long way to go before confirming it as we've seen this type of action fool us many times before. But the table is set for the market bears to take over if they're ready.

The key things to watch for in the coming days are:

1) as long as the dollar uptrend remains intact, the stock market will be biased to the downside.
2) gold, silver and all commodities have been a big part of the stock market's rally, so continued bearish action in this sector will also be very bearish for stocks.
3) watch for the XLF to make a new low beneath it's October low.
4) watch for the Russell 2000 to break its wave "b" low.

Any of these things occuring will strengthen the short term bearish case for the stock market. As always, I welcome all your questions and comments on recent action in the markets.


Wednesday, December 16, 2009

Asian Session Sparks US Dollar Short Covering Rally; S&P Futures Print 5 Wave Decline

The dollar spiked higher as we went into the Asian session following the Fed statement today. Perhaps the dollar shorts are getting a bit nervous now. This nervousness and short covering should be a contagious action that will build in momentum in a relentless spiral within itself, raising the dollar higher and higher for several months. Of course, with the short term wave count unclear, a snap back wave 2 type decline can occur any time though. But the evidence is quite strong that a significant US dollar bottom has formed, and surprises and the least resistance should be to the upside. Until the series of higher highs and higher lows is broken, the short term trend remains up. Any significant drop that stops me out will only have me looking to re-enter on the long side at a better price.

The dollar bullishness has put some pressure on the S&P futures tonight and has created a textbook EWP five wave impulsive decline as you can see from the attached chart. So it's possible the current decline may be the start of something bigger, but we'll have to see how the wave structure unfolds from here. The S&P bounced off the top of its range today, so with this 5 wave decline tonight it appears that at least in the very short term the trend is now down for the stock market.

So that's all for tonight. Just wanted to write a quick post on this interesting action I noticed.

Fed Statement Today; Dollar Uptrend Intact; Stock Market Still Consolidating

The market rally is coming to an end and the fractured nature of various markets is taking hold. First the financials left the rally as measured by the XLF, then the small cap stocks left the rally (Russell 2000), now with the dollar rally the commodities are leaving the rally as well. The core of the rally is getting thinner and thinner. It's like Alexander the Great charging up a hill with his army only to reach his enemy and turn around to see just a few troops behind him. Even Alexander would eventually retreat under these circumstances. But Alexander hasn't turned around yet. So we still have to wait. Or maybe someone can throw a rock at his head so we can get him to turn around and see how mad he his for still running up the hill :)

The key remains the dollar. The dollar rallied big against the Australian dollar last night, finally catching up to the other dollar pairs. The trend is clearly up for the dollar with constant higher highs and higher lows the past several days. I attached an extremely aggressive US dollar (using the USD/CHF) wave count. But this count does not instill high confident because whenever an elliotician has to count a move as a series of 1s and 2s, it usually means it's wrong. However, I cannot come up with another highly viable short term wave structure at this point, so I'll use this until it's invalidated. If correct, it will soon undergo a wave 3 at various degrees which essentially means a straight line up. Only a break of 1.0230 would invalidate this count. No matter how aggressive of trader I am, I would not short the dollar at all, I would only be looking to go long, on any timeframe.

As for the stock market; blog reader JD brought up a good point regarding the fractal nature of the market now and back into the March 2009 lows (see discussion here with JD, as well as with Rob regarding the dollar's impact lately). I attached charts illustrating their similarities. Last year we had a consolidation lasting about 4 months that eventually led to a sharp drop lower to new lows which was quickly reversed and never looked back into present day. Today we've had similar consolidation, and as I've said before I would not eliminate a "blowoff top" from occuring before the wave 2 or B top forms. If history repeats itself, only inversely, then we'll get a sharp rally from this range we're in now, targeting the 1200 S&P area which will lead us into a major top and reversal. If it occurs, the rally should be short lived and completely reversed quickly just as it did into the March lows inversely.

Trading Strategy: If someone were to be conservative, I would think the best strategy would be to wait to go short the S&P on a strong close beneath 1085, preferably closer to the 1075 level. If someone were moderately aggressive they could also possibly wait for a breakout rally out of the range and start shorting when a reversal occurs with a stop at the recently established high. This would probably take repeated attempts to catch the top, but once someone can catch one, the rewards should be big. If someone were very aggressive they could get long on any pullback with a stop loss just below 1085. So those are the possibilities I see at the moment to trade.

Remember, at 2:15pm EST, the Fed will issue its statement and there tends to be a lot of volatility in the markets surrounding this. So I recommend everyone double check their stops and limit orders are in place, and are the ones they still want in place. The actual Fed statement is not important to us ellioticians, what's important is the wave structure that surrounds the statement, and also the reaction in the following hours and days after the statement's released.

Good luck to everyone! I'll be back if something significant develops after the announcement.

Tuesday, December 15, 2009

Dollar Surges Higher; Stocks Remain Flat, Directionless

Yes, I did make up the word "directionless" from the title above. So what :) That's not important, what's important is the US dollar's continued surge higher. The rally appears a bit overbought and momentum waning but the dollar was so oversold and over-shorted on a long term basis that the current rally may be relentless, offering little opportunity to enter. I'm still cautious of a snap back decline in the dollar, but with such a significant change in trend to the upside, surprises will also be to the upside. The dollar strength will continue to put a lot of pressure on equities and make it difficult for them to sustain any kind of rally, if not outright make them fall off a cliff. Continue to watch the dollar rally, it is the stock market's biggest enemy.

The S&P appears to be finishing up a 5 wave advance, if it hasn't done so already. If so, it may mean its final rally has ended, or will at least correct a bit of the 5 wave rally. Tomorrow is the Fed announcement so some volatility later today and the rest of the week is highly possible as investors jockey for position around the fed statement. A sharp erradic rally in stocks would fit nicely into the "blowoff top" scenario I mentioned in earlier posts, so I'm watching for that. If that does occur, it would be a good signal that "the top" is probably forming and the rally will be quickly reversed. That final spike will be the market's last attempt to eliminate the last of the already severely battered bears before it tries to collapse without them.

So the bottom line is that the dollar rally is very bearish for stocks, and a continuation of the dollar's uptrend should lead to the stock market's top and reversal. With the consolidation of the past few weeks in the stock market, I wouldn't be surprised to see a sharp final rally into the wave 2 or B high that will be quickly reversed. The Fed statement tomorrow MAY be that catalyst. Above all else, I'm looking for reversal patterns and 5 wave declines to signal a top is in. Until then, I continue to be short term neutral the stock market.

My positioning remains the same as yesterday.

Monday, December 14, 2009

Waiting for Next Big Move...

The market didn't help me out much today in sending any signals as to where the market will move in the short term, however it does appear that the upside is the path of least resistance still.

The key in the stock market is the dollar, which the stock market should move opposite of. The dollar appears to have bottomed and is in the process of unfolding in a 5 wave sequence. It's tough to get a good count on the waves right now because wave 2 labeled in the attached 4hr US dollar/Swiss franc chart doesn't have a corresponding 4th wave of similar degree. Also, the last few days of trading appears be unfolding a series of 4th and 5th waves, but does not fit well into a completed EWP count at the moment. The next big move in the dollar should help clear this up and give us a better idea of where we're out in the short term. But it does appear that upside momentum is waning, so a corrective dollar decline would not be a surprise. But I would use any decline at this point as a buying opportunity. I'm bullish the dollar all around right now.

If the dollar pulls back, the stock market should continue to rally. Notice on the attached daily S&P cash chart that the infamous ascending trendline has been broken with all this choppy trading lately; just another sign of a significant waning of uptrend momentum. Oftentimes markets will retest the underside of an ascending trendline, after its been broken, before it starts the major portion of its downtrend. So we'll see how strong of a ceiling this trendline acts like. The underside of the trendline will be at about the 1130 area Tuesday.

So unfortunately there's not much more to report at this point, and we'll have to wait to get more decisive action from this market before getting a better idea of the short term trend. So I remain:

Stock Market
short term neutral
long term bearish

US Dollar
short term neutral (as I prepare for a pullback)
long term bullish,

Precious Metals
short term neutral
longer term bearish