Friday, May 14, 2010

Five Waves Appear to Have Formed From the Top

The S&P blasted right through 1145, and did so with a 5 wave impulsive decline from the highs. Internals are extremely bearish right now as basically only seller are in the market. The bears are in firm control. Obviously, the start of that 5 wave decline at 1174 is key to the short term bearish case. So risk can be placed above there for short term bearish trades in my opinion. With 5 waves down from the high it suggests that the larger trend is now down and that we have AT LEAST another down leg after a relief rally. The S&P's low on the day is 1128, so that also eliminates the bullish count I have been tracking the past couple days as well. So two key levels were broken through in just the first couple hours of trading. So today's decline has been productive for the bears. 1110.88 is the next key level for the bears to obtain, and a break below 1100 would all but confirm that a major down-phase is underway.

Just as a side note, for those interested I placed this morning's CNBC interview with Prechter below.


Thursday, May 13, 2010

The S&P Should Target the 1150 Area, Then Tell us What the Larger Trend is

Daily S&P Cash Index

Yesterday's post laid out two scenarios: one bullish and one bearish. I know, saying the market will go either up or down doesn't really do anybody any good. But at this time we just need to keep both counts in our sights and let the market play out so we can see which one appears more likely to be unfolding. Looking at yesterday's bearish and bullish charts you can see that something like an ending diagonal was occuring in both, and that at least a near term pullback would occur no matter which count proved to be correct.

We see in the above daily chart that the resistance zone I cited yesterday remains well intact. That area is a major congestion area and very important for the bearish case. If that ceiling doesn't contain this current rally, then the short term bearish case is in severe trouble. But so far it's held, and today was a nice impulsive looking reversal that closed on the lows for the day. Something that hasn't happened in a while. So resistance held, and we finally see a solid sign of weakness in the market. On top of that, today's internals were quite flat as the market was flat most of the day. But the late day selloff soon changed that where closing NYSE downside volume was 78% of total volume, and pushing the Dow down over 100 points. So the bears really roared back into the close. Plus, the VIX closed up 4.55%, so there was definitely some fear at the end of today. Not exactly what I'd expect if the "all clear" signals were raised since the Greek bailout. But with that said, the S&P has still rallied at total of 108 points from last week's low, so the bulls do have something to hang their hats on.

S&P 60 min Chart Bearish Count

So let's look at the wave count. Above is the bearish count from yesterday (click here for yesterday's bullish count). Both the bullish and bearish counts remain valid and quite possible. So how do we find out which one is most likely correct? Glad you asked. The fact that there is an apparent ending diagonal that just occurred, it's more likely that the bearish count is underway because it's much more common for such a structure to occur at the end of a wave 'C' than it occurring at the end of a wave '(iii)'. In the bullish count, it's possible the ending diagonal was wave '(v)', instead of wave 'v' of '(iii)' as shown in the chart. But the problem is that wave '(ii)' and wave '(iv)' would not proportionate in time or size at all as wave '(ii)' is much bigger and longer than what wave '(iv)' would be. So I think it's best to label the bullish count wave 'iv' at a smaller degree. If so, it means that it's a wave '(iii)' ending with an ending diagonal. That's fairly rare.

An ending diagonal, or similar structure, is a signal of the market trend exhaustion. It's a sign that the preceding trend is really tired and going to be reversed soon. Because of this, we often see sharp reversals that retrace most of the diagonal pattern quickly, if not much more. So regardless of whether the bullish or bearish count is correct, we should see the S&P get to at least the 1150 area soon. Retail sales data is coming out tomorrow, to which I could care less about, but some people in the market will have a lot of interest in those numbers so we may get some movement in the morning from that data. It may also be important to pay attention to how the market closes tomorrow. If the market closes down fairly big and the VIX spikes higher, this may be very bearish since it shows that people don't want to be long going into the weekend and that they're buying a lot of option put protection. Bulls having a lot of fear going into a weekend is not the sign of a healthy market, rather it's the sign of a market on the brink.

So let me list the following levels that will strengthen the bearish count more and more as each level is taken out:

1) breaking below 1145 in a strong impulsive manner is a good start for the bearish case, but the market still has a lot of work to do to convince me wave (iii) of 3 of [3] or C is underway.

2) breaking below 1129.32 would mean that the bullish count I have labeled right now is invalid since wave '(iv)' would enter the price territory of wave '(i)', which is a big rule breaker in EWP. So this would make the bearish count much more likely.

3) getting to 1110.88 would close that huge monster gap left from Monday's "the world is saved" rally and erase all the Greece bailout gains. That would be very bearish and almost confirm that the market was headed much lower from there.

4) breaking below 1100 would pretty much officially eliminate all of the viable and likely bullish scenarios I can see, so this would confirm that at least last week's lows of 1066 will be broken soon.

In today's late day selloff, it appears that we may have wave 1, 2 and 3 down from today's highs. Let's see if we can get waves 4 and 5 to unfold tomorrow morning. From there we'll watch how the market behaves around 1145, i.e. if the market shoots right through it then that's bearish, but if the market flip flops or reverse around it then it MIGHT be bullish. And lastly, let's watch to see if people are buying or selling with any intensity into the close, and if the VIX is soaring from fear going into the weekend. Hopefully we'll get some good movement tomorrow to give us a better idea of the larger trend going into the weekend. But right now, I feel the bearish count is slightly more likely than the bullish count simply because of the ending diagonal pattern fitting better with a wave 'C' than a wave '(iii)'.


Wednesday, May 12, 2010

Market at Crossroads and Needs to Perform to the Downside Quickly if Wave [3] or C is Underway

S&P Key Resistance

I don't have much time to get into great detail this afternoon so I spent most my time having the charts do the explaining to me. The strength in the market is not really conducive of a correction at this point. So the bearish outlook I've been talking about lately has decreased in likelihood. Goldman Sachs also made a new high, negated the 5 wave drop I mentioned yesterday. However since the current rally is supposed to be a wave (ii), we can expect similar-type strength to occur. However, I feel it's gotten to a point where it's almost too much to be the characteristic of a correction. Don't get me wrong, there is plenty of evidence to support the wave (ii) scenario, but now there is evidence building quickly for the bullish side as well.

I have to draw a line in the sand so I know when to start abandoning the wave [3] or C outlook for now. 1180-1185 in the S&P cash index has been a prior congestion area as you can see from the above chart. If the market can get solidly above that range and sustain it, then I would be reluctant to maintain aggressively bearish positions at that time. The behavior around that level is key. If the S&P struggles and reverses the 1180-1185 area, then the bearish view is still on track. But if it cuts through it like it wasn't even there and then holds above it for the close or for a few hours, then I will interpret that as the market wants to make new highs on the year and that wave [3] or C is NOT underway at this time.

I feel we're left at crossroads today, with two possibilities that now unfortunately have equal weighting as far as their likelihood. One is bullish and one is bearish (see below). Notice that both counts below suggest an ending diagonal is forming (see ascending triangle on charts). So just because we may get a sharp selloff soon, that doesn't necessarily mean that wave [3] or C is underway again. We still need to be mindful of the bullish scenario that allows for a correction before resuming its uptrend as well. A break below 1140 would drastically reduce the bullish count's odds of occuring, a break below 1130 would be a very strong signal that the bullish interpretation below was unlikely, and a break below 1110 would confirm that the bullish interpretation is not occurring.



Tuesday, May 11, 2010

The Market is Seteup for a Possible Major Decline Soon

Internals Mixed

Above is a screenshot of today's finishing internals. You can see that there were more advancing stocks than declining stocks on the NYSE, yet downside volume well exceeded upside volume; and enough so that the NYSE closed down more than any of the other major indices at -0.50%. So a lot of stocks were up today, but not with much conviction. The conviction was on the sell side with a concentrated amount of stocks. That's bearish. Also notice that the S&P had more decliners than advancers. So after a monster 400 point Dow rally and saving Greece from immenent destruction, the markets could not get any follow through today. After yesterday's rally, it's already out of gas, which makes it more likely that yesterday was more short covering than anything. Just my opinion.

Updated 5min S&P Cash Index Chart

So above is an updated 5min S&P cash chart that I put up a few minutes after placing my full post up yesterday (click here for yesterday's chart). As yesterday's chart shows, it appeared we needed one more up-leg to finish off wave (v) of C before looking for a top. This top I'm looking for may be significant since the ensuing decline would be a wave 3 at various degrees, which means an almost straight line down. So I'm on high alert for a potential top to make sure I maximize the possibilities at this juncture.

Today the market fulfilled the expectation for that one up-leg and then met resistance and reversed at the 1170 level. With it now possible to count 5 waves up complete for wave C right now, the internals turning negative immediately after a 400 point Dow rally and Greece bailout, the reversal late in the day to turn the major indices mixed into the close, and the structure of Goldman Sachs' decline late in the day I talk about below, I think it's possible a major top is in. If correct, the amount of selling pressure will be enormous. If we don't get enormous selling pressure real soon, then most likely at least my short term wave count is wrong and that we'll eventually see higher levels soon. If that proves to be the case, the low 1180s should prove to be a very difficult ceiling for the bulls to break above. So regardless of the short term behavior of the market in the coming days, I expect tough resistance in the 1180-1185 area.

Goldman Sachs Declined in 5 Waves Today

One thing I noticed today was the fact that Goldman Sach declined in a nice 5 wave impulsive structure as you can see above. It doesn't get much better than this as far as EWP wave structure goes. Goldman's top back in April signaled the tops in many indices in the broader market back then (Goldman's April 16th top compared to the Dow and S&P's April 26th top. So even though this is just a 3min chart and not as reliable as a daily chart, perhaps these 3min charts above showing a late 5 wave decline is Goldman again is signaling to us that the broader market is topping too. We'll know soon enough. As long as Goldman stays below 145.50 then I view the overall market as extremely bearish. Above are the two possible counts for the corrective phase following the 5 wave drop and have equal weighting of probabilities in my opinion.

Judging by the non-impulsive looking declines in the major indices, it's possible they will pop up for one more new high while Goldman Sachs does not. In this case, the first scenario on top calling for at least one wave C rally before topping should be the preferred count. Goldman may then rollover while staying under 145.50 and the major indices may do so from new highs. This is very speculative, but the declines so far in the major indices do not look impulsive so it's possible they may have short lived new highs before topping. So watch Goldman Sachs and the 145.50 level tomorrow!

Bigger Picture

With all that said, let's look at the bigger picture so we know what we're focusing on. Wave (ii) should be topping soon, if it hasn't already done so today. The market opened down about 100 Dow points but rallied all morning into almost triple digit positive territory. So the bulls grabbed the reins and took control. However the rally was hard faught and choppy with moderately postive internals. Then later in the day, the bulls ran out of gas and the market rolled over, closing with bearish internals, and the indices started rolling over right after Goldman had already started to roll over mind you (Goldman Sachs appears to be leading the overall market lately). That reversal held into the close and it formed a nice reversal candlestick on the daily charts for the S&P.

So when you take this evidence and combine it the short term analysis I mentioned above, I see a good setup for the bears here to possibly catch a wave (iii) of 3 of [3] or C, which would be an extremely strong and sharp decline, well below the lows established last week. So because of the magnitude and profit potential for the bears at this point, I'm on high alert and am very actively trading right now to try and catch this top and reversal. If a top is in right now, there should be little mistake about it. The market should decline in an extremely sharp and unrelenting manner in the coming days.

Decline Structure Similarity

One note today that may put some doubt in the immediate bearish case. Looking at the above S&P structure on the 3min chart today bothered me. On the one hand we had Goldman Sachs, the market leader lately, declining in a beautiful impulsive manner, and on the other hand the major indices declined in this funky-looking structure. I recognized this pattern and knew I didn't like it. Then I looked back at the daily charts of the S&P and pulled up the last time most elliott wavers, including myself, thought the big wave 3 was underway back in January/February of this year. Notice that the structure of the decline then (see above daily chart blue circle), is very similar to the structure of the decline today on the 3min chart above. In both instances, you get this sharp decline that leads to a large bump and cluster at the bottom. The reason this concerns me is because this may be some type of corrective structure today on the 3min chart since back in January/February we saw the market bottom and rally to new highs after it occurred. Even though this may be true, and the market may make new highs above today's soon, I will still be watching Goldman Sachs closely to see if it also makes a new high or not. Goldman appears to be key right now for short term clarity.


Monday, May 10, 2010

Triple Whammy Fueling Rally; What is the Wave Structure?

The rally today was mildly unexpected, more due to its size than just the fact that it rallied. The S&P easily broke the 4th wave triangle interpretation I laid out last week as it blasted through 1138 first thing this morning. As you can see from the above screenshot of the internals of this market, the move up is very strong, and the bulls are in full control. The internals, sharpness and strength of the rally suggests it's a 3rd or C wave at some degree. I discuss the possibilities below.

I think there are 3 things (triple whammy) at the core of today's action:

1) Greece got a bail out

2) Shorts are covering on the news of Greece

3) The typical Monday fund manager buying spree is in effect again.

So the combination of the 3 above factors has lead to this monster rally today, in my opinion. Let's look at the possible wave counts:

Correction Closeup (chart added late)

Primary Wave Count

This is my primary count because the rally from the lows is quite steep and long, and most other bearish counts put this as a 4th wave. It just seems too big for that. The strength and depth fits more of a wave 2 rally. But there is a slight flaw in this count anyway. If you look at wave 1 and compare it to wave (i), you'll notice that the larger degree wave 1 is much smaller than wave (i), so it doesn't have EWP's "right look". But it's still a possibility, and this may simply be due to the major battle of bulls and bears that occurred to form the top in place which throws the perfect wave count structure off a bit. But it violates no rules, so its still well in play. Regardless, the magnitude of the selling prior to this rally, along with this rally on the heals of a Greece bailout everyone knew would happen, leave me believing that this count is the most likely of the choices we have.

First Alternate Count

The above count is also a possibility but the size of wave (iv) compared to wave (ii) makes this count more unlikely than my primary count. Normally wave 2s are sharp and deep affairs and wave 4s are flat muted affairs. This count suggests the opposite, so it raises a red flag with me. The good thing about this count is that if it's correct, the S&P cash index cannot enter any of the price territory of wave (i) which starts at 1181.70. So a break above 1181.70 invalidates this count; making it easy to trade around.

Second Alternate (bullish)

Lastly, it's possible the market is still in a bull run, and this recent selloff was just an ABC declube as charted above. This suggests new highs on the year soon, but the strength and depth of this ABC decline does suggests that the entire bull run from March 2009 is probably weakening and very near an end anyway.

So there it is, two top bearish counts and one bullish possibility. I do see opportunities for the bears at current levels, and even more opportunities if the market continues higher from here. Risk is also easily defined at the wave (i) low at 1181.70 or 1219.80 for the bears.