Market Again Sets up for a Slam Dunk by the Bears; Will They Step up?

So the market surged higher this morning as I expected, but then spent most of the day declining off the highs.  As I said late last week, we knew the market would surge higher this morning, but what happened after the rally was more important.  The action off the highs is not encouraging for long term bears.  Although the rallies continue, and are persistent, they continue to show signs of weakening internally that show the rally cannot be sustained for a long period of time. 

Today's internals were a little better than I expected them to be with the reversal off the highs and modest up close.  Volume was solid today relative to the past few weeks and advancers and up volume was quite solid as well.  So the internal picture is not a bearish one in my view at all.

Elliott Wave Principle

I'm starting my wave count withe euro tonight because it leaves the potential for very bearish action in the AT LEAST the short term.  The euro did not make a new high against the dollar, and with the decline from 1.4159 being a 3 wave affair, it keeps me skeptical that a top in the euro is in.  However, with a major top coming at any time in the euro and equities, we need to be on high alert for any signs of topping action.  The 15min EUR/USD chart shows a 5 wave impulse decline suggesting the larger trend is down now.  As long as it continues to subdivide impulsively lower while staying beneath 1.4080, I'm very bearish the euro and bullish the US dollar.  This, of course, could translate to a very bearish picture for equities as well.  But equities have not unfolded in an impulsive manner from the highs though.  So watch the euro and the US dollar for signs!

Although not all momentum indicators are diverging as long as the stochastics, it's still worth showing what some indicators are doing with the current rally.  The daily stochastics on the S&P are ready to fall, and the weekly stochastices are overbought, waiting for a turn lower.  Today's smushed candlestick may be a signal of a top, but it's just a guess at this point.  With the uptrend still well intact technically, I have to expect the market to go higher.  The market will have to break that uptrend in order to prove to me it wants to move lower.  Breaking below 1159.71 would be a good start to breaking down the uptrend.

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And lastly, the XLF continues to diverge drastically from the S&P.  The XLF spent most of the day in negative territory despite the big rally in the S&P.  And so on the daily charts, you can see the massive separation continuing here.  The stock market cannot sustain a long term rally without the financials.  As long as this divergence continues, it paints a very bearish picture for the overall stock market.

So the setup for the bears to take control is again present.  We'll see if the bears can step up tomorrow and break the uptrend.

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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.