For those of you that have been on a coastal region just before a big storm rolled in you'll appreciate the point I'm trying to make today, and the title I gave to today's post. Things are so quiet and slow in the markets it's quite eerie. The evidence I lay out today, and have done in previous posts recently, suggests that this is just a calm before a storm. Here's more on building that case:
Above are the internals that show an extremely low volume day at only 754 million shares traded on the NYSE. That's some of the lowest volume of the year, if not the lowest of the past few years. The enthusiasm in buying at the top end of this trading range from 1010 - 1130 has no doubt waned as volume has disipated this week.
WAVE COUNT
Above is the projected wave count. Although I don't like the 5 wave impulsive decline I counted here because the size and length of wave iv is so much small then it's partnered wave ii, and overall it just looks like a 3 wave drop, given the current situation of the market and clear 5 wave drops in the Russell 2000 and XLF I think it's worth putting this count as top choice for now.
What's really significant to watch at this point is the short term picture. We have a slew of basic technical indicators suggesting a large move is coming soon, and the VIX stock market sell signal that's in place combined with the ending diagonal structure suggest that the large move will be to the downside. Combine this with the fact that we're just 5 trading days from the exact time two years ago that a major stock market top was registered that led to thousands of Dow points being lost in just a few months, and you got yourself a VERY nice bearish setup with a great risk/reward since stops can be placed at the wave 2 highs in all the indices (10,719.94 in the Dow and 1129.24 in the S&P), or simply buy put options or put spreads to capitalize from a sharp move in price and a big spike in volatility I'm expecting.
VIX SHOWING COMPLACENCY
Speaking of volatility, above you can see a support level in the VIX that appears to be the level where complacency becomes extreme, and when fear or reality gets injected back into the market. The VIX is currently trading near that dangerous level now. With the VIX stock market sell signal in place, having such complacency at this juncture with so much evidence lining up to the bearish side for the stock market, it's a dangerous picture for the bulls and a good opportunity for hungry bears.
EUR/USD
As for the euro, I remainly firmly bearish and feel real comfortable holding my short position indefintely. See last few posts where I discuss the euro's structure, or just check out the charts attached to those posts: 9/3/10 9/7/10 9/8/10.
I thought this would also be a good time for you currency traders, or potential currency traders, who are new to elliott wave principle to check out a free EWI video on applying EWP to currencies in your trading. This is a great market to apply EWP since it's so liquid and has the largest crowd of any market, helping create really nice EWP patterns:
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So it appears the markets' sleepiness this week is setting up for a big move in the major indices, sectors and currencies. The evidence suggests that big move should be down. In the short term, we could get more consolidation with an upward bias, but it shouldn't last long and the big easy money should be made to the downside. And remember, a major high was formed September 19, 2008, and since that date falls on a Sunday this year, look for the end of next week or the beginning of the following week to perhaps show us how history can in fact repeat itself and form another major top.
Below are some basic indicators I thought I'd post to further support the short term bearish case and let you see a little of what I see and to understand why I'm so bearish right now:
CONSOLIDATION WITH RSI DIVERGENCE
The above chart shows an hourly chart of the Dow that I labeled to help illustrate three key times we've had a consolidation in price marked with the parallel red lines, and then red lines at the bottom for the corresponding RSI movement. You can see that the past two times we've had consolidation in price, the trending movement of the RSI is where price eventually shot hard to. So if price consolidated and the RSI was trending higher, the market eventually shot higher too.
Currently we have an upward slanted consolidation, probably an ending diagonal, in price but the RSI is trending lower. So this suggests a sharp move lower in price soon as well. And combining this with the ending diagonal structue, which is always a finishing move according to EWP, then this above chart supports the thesis of sharply lower levels very soon.
MOVING AVERAGE CONTRACTION
As stated yesterday, in pages 17-18 of Elliott Wave International's Ultimate Technical Analysis Handbook, they discuss the relevancy of this moving average contraction indicator. Here I identified several areas of moving average contraction on the hourly Dow chart. You can see that when the averages contract, price eventually broke out with fairly sharp and tradeable moves. Now, the moving averages are about to contract again it seems, and with the current evidence at hand suggesting a big bearish pullback, I suspect this indicator helps support the idea that a big move is just around the corner.
Now I know it's not hard to know when price is contracting and expanding simply by looking at the price action of a chart. But having colored moving averages blaring at you on a chart, really helps illustrate the expansion and contraction action of the market, and give you a better idea of what stage the market is on at the given time frame you're analyzing.
THE MACD SQUEEZE
Above is a 2 hour chart of the Dow. It shows bearish squeezes in the MACD histogram in the middle of the bottom indicator. I'm only showing the bearish squeezes because it would over-clutter the chart if I put the bullish ones in as well. The squeeze happens when the moving averages start to crossover each other, usually meaning a reversal in trend is occurring since one moving average is faster than the other. This "crossover" of the moving averages is illustrated with the histogram in the middle. The bigger the histogram bars are, the more wide spread the moving averages are, and therefore the stronger the current trend is. When the moving averages' trend starts to weaken and they start to crossover each other, the histogram bars get smaller and smaller creating a "squeeze".
So above you can see that several times the "squeeze" in the MACD has occurred on the above chart, and every bearish squeeze occurred in conjunction with a solid market decline. And as you can see with the blue labeling, the squeeze is occurring currently. And if history repeats itself here, then the market will fall very soon.
MACD ZERO-LINE REVERSAL
Pages 12 of Elliott Wave International's Ultimate Technical Analysis Handbook discuss the MACD's "Zero-Line Reversal". Simply put, this indicator occurs when the moving averages move toward the zero-line (middle line in the MACD) and then reverse at that level. If the moving averages are below the zero line and reverse down then it's bearish, and vice-versa to be bullish.
Above I labeled some of the previous zero-line reversal on the Dow's daily chart and you can see they resulted in some sharp price movement. Although we do not have a "reversal" yet at the zero-line on the MACD, the moving averages are approaching the underside of the zero-line to leave the potential for such a reversal. It looks like usually when this indicator is confirmed, you've already missed a good portion of the move. So in my opinion, I good to use this indicator in order to be aware of a possible reversal setup before-handm and then take other evidence from other indicators into account to determine if the reversal is likely to happen.
So I think that this is a good tool to use in order to help confirm a currently existing trade. So if I'm already short, and then the zero-line reversal structure occurs, then it's good confirmation that I can feel more comfortable holding my position a bit longer. At least that's how I'd use it.
Okay, a lot of info but I had the time and thought I'd share it.
Have a good weekend all!
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.
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