We Have the Setup, Now do we Get the Follow-Through? Also, Thoughts on the Euro

S&P CASH INDEX WAVE COUNT





S&P TRIANGLE AND THRUST




So the market played out nicely with the "flat" correction and triangle scenarios I mentioned yesterday. The market continued it's thrust higher from the triangle to make a very slight new high above 1105.67 to 1105.91 and then reversed downward the rest of the day. So the flat correction suggests that wave (ii) was continuing the past several days and most likely has completed at today's high. This means extremely heavy selling should be on the horizon in the immediate future with a wave 3 at various degrees, i.e wave (iii) of 3 of [3] or C. A break above today's high would severely damage my current wave count above, and I'd have to analyze the current structure at that time to determine what the best wave labeling would be if that were to happen.

But keep in mind the triangle from Friday. The thrust is over and so the market should now decline to AT LEAST the apex of the triangle around the 1083 area before possibly trying to find a bottom. So that's almost 7 more S&P points that should be lost in the near future. If the market just blasts right through the 1083 level then it will be the first hint that the above wave count is correct, and that heavy selling is underway to much lower levels.



INTERMARKET DIVERGENCES

S&P Cash Index










Another bearish development today was the fact that there was an intermarket divergence between the Dow/S&P and the NDX/Russell 2000. Both the Dow and S&P eeked out new highs from a couple weeks ago while the Nasdaq 100 and the Russell 2000 did not. This type of divergence usually occurs at trend changes. So as long as the NDX and Russell remain beneath those highs, the market is overall bearish in my view.


THE EURO


Weekly




Daily



I've been getting a lot of emails regarding Prechter's call for a major US dollar top and its possible affect on the stock market. It's a legitimate concern, and I share it with many of you. I like to look at the euro, which is essentially the opposite of the dollar, and has been extremely oversold for a few weeks now and has been due for a big bounce. Obviously with a dollar top, the euro will bottom. As you can see from my above wave counts, it appears that a wave (iii) has ended and that a wave (iv) is now underway. So the euro is bullish and the dollar is bearish in the medium term in my view. But since it's a 4th wave, it may just be a sideways consolidation, or triangle, before shooting downward to new lows.

So what does this mean for the stock market? Well recently the euro's weakness has usually meant stock market weakness too. But there may be many various factors for that, and I'll leave that to the fundamental analysts to hammer out for eternity. While they're doing that, I'll be looking at the techincals and EWP to try and make some money. What I do know is that markets are not always correlated. They tend to be correlated strongly for given periods of time, and then move almost completely independent of each other during other periods of time. Just look at gold and the dollar. During the dollar's monster rally the past 7 months you'd think it would put some pressure on gold, but instead gold has been making new highs. Also, the euro has declined dramatically during that 7 months and the stock market moved up and down during that euro slide. So the correlation between different markets doesn't always hold true, and the euro can certainly rally, or move sideways, while the stock market tanks hard in wave (iii) of 3 of [3] or C. Although the euro bottom and rally is on my radar and is a concern for the bearish outlook in equities, I will not trade based on it. I trade based on the facts laid out in the EWP count and the other technical indicators. Anything else would just be a guess. And I don't trade based on guesses.

So I'm analyzing the markets independently with an eye on the euro/equity correlation as a backdrop. The euro looks to have found a bottom for the time being and the stock market appears to be at the beginning of a major decline phase.


PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.