Shhhh......listen........it's so quiet.......and peaceful........but those storm clouds look angry......

INTERNALS




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.

Can History Repeat Itself? The Bearish Setup is Strengthening

A REPEAT OF HISTORY?



Above is a daily chart of the Dow showing a major high that was put in on September 19, 2008. Once that high was registered, the Dow fell over 5000 points in just a few months. September 19th this year falls on a Sunday, so perhaps sometime late next week or early the week of the 20th the stock market will form another major top. It lines up well with the VIX stock market sell signal being talked about as well as other overbought indicators I'm tacking. We'll see.



Looking at the 30min Dow charts on the rest of this post it seems evident that at least in the very short term, the evidence is building toward a decline. The RSI diverged quite drastically from the recent price high the Dow has made, suggesting that the follow-through to last week's rally is truly running out of gas.



Also of note is the fact that the high risk small cap Russell 2000 index did not confirm the new highs today that most of the major indices registered. The Nasdaqs have been on fire lately so I'm not sure if that cancels out the weakness in small caps here. But it's still something to watch, and it's just another piece of evidence suggesting a top is forming.

As for the EUR/USD, it hasn't quite broken out yet but is trading heavy right now. The path of least resistance is to the downside but a breakout higher into the high 1.2700s would just bring about a better opportunity to get short.


EXPERIMENTAL STUDY




On pages 17-18 of Elliott Wave International's Ultimate Technical Analysis Handbook they discuss a tool that can alert you of future price expansion. The idea being that the market continually expands and contracts, and using these 3 movning averages it helps illustrate the expansion and contraction phases to give a better idea of possible breakouts. When the averages become contracted and "spaghettied", then price should soon expand in the near future. It also appears that as long as the moving averages are trending expanded, then profitable positions can be viewed as "safe" for the time being.

So I thought I'd experiment with it here. Above you can see a 30min Dow chart that shows the moving averages contracted and spaghettied with each other. So we see the market is in a contraction period, so a price explosion could be coming soon. Also notice the MACD at the bottom of the chart showing the same flat formation near the zero level. It too wants to break out as well.

Unfortunately these indicators don't help us with direction, we need to use other methods to give us an advantage there. But with the case I've been laying out over the past few days, I think the expansion should result in a move down in my view. However I do want to be clear that I'm using a 30min chart here so the move, whether up or down, might only be a move for a day or so. But with the evidence piling on that a major top may be coming soon, I'm paying close attention to any short term tops that arise since they can easily turn out to be a big one.



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.

Patience is the Companion of Wisdom (St. Augustine)

Not much occurred today to get excited about either for the bulls or the bears in my view. The market is not declining impulsively so far, but can easily develop into an impulsive decline as time goes on. But until then, higher levels are quite possible in the very short term. We have a nice bearish outlook setup here and the key now is "patience". I can't emphasize that enough. That means both pscyhological patience, and risk management patience - in other words, make sure you don't overleverage into a position that you can't withstand some minor upside potential in the coming days to where you get knocked out of the market before it tops.

The internals today again show a lack of interest in the market overall with only 879 million shares traded on the NYSE today. Today's push higher was weaker than the push lower as today only had 2082 advancers while yesterday had 2203 decliners on the NYSE, and on the S&P today had 362 advancers while yesterday it had 413 decliners. So as a very minor piece of evidence for perhaps a bit of a change in short term attitude, you can see that with volume practically the same in back to back days, the bears were a bit more aggressive than the bulls. This is the type of stuff I'm watching for signs of a top. I don't see anything compelling yet, but history tells us that we can easily see a sideways or upward choppy grind in the coming days before a top is registered. A day or two more like this will suggest that the market is consolidating, perhaps in a triangle, which would mean one more upward push before a top. But we'll see what Thursday and Friday have in store for us.


VIX CHART OF THIS YEAR'S STOCK MARKET SELL SIGNALS




Above is the daily VIX chart which shows the 3 times we've had a stock market sell signal execute this year. I circled them in red. Just to recap, the signal executes when the VIX's daily bar closes below the lower bollinger band and then does another daily close back above it.


VIX SELL SIGNAL JANUARY 12, 2010




Above you can see the daily S&P chart showing the market action leading up to, and after, the VIX stock market sell signal execution. In this case, the stock market was in an uptrend when the signal executed, then continued the choppy grind higher for 4 more days where it made a major top and led to a 105 point S&P decline


VIX SELL SIGNAL APRIL 13, 2010





Then above you see the daily S&P chart showing the market action surrounding the April 13, 2010 VIX stock market sell signal. In this case, the market again was in an uptrend when the signal executed, only the market held up for 9 trading days this time before topping out and leading to a 192 point decline in the S&P.

So these signals in the VIX are rare as you can see this is only the 3rd time all year we're getting one. But the signal doesn't mean the market falls immediately, in fact both of the last two times the market made new highs before topping. But so far these past two indicators were very accurate in predicting major market tops occurring within a short period of time.

So the key here is patience. It's all about trying to block out the short term noise that will occur in the coming days and the mental sword fight that occurs in all our heads when the market does do what we want it to do. Let the market have some time to work through its topping process. I will be adding to my short positions as new highs are made in the coming days. I'm using put options in the SPY and QQQQ for this move since this is the rare occasion when I don't want to worry about price stopping me out since I strongly feel a major top will occur in the next few days.


EUR/USD




After letting the euro structure unfold to the downside we see a nice 5 wave impulsive decline from 1.2918 with a small 3 wave correction so far. With that structure in front of us, I have no problem adding to my short position now with a stop just above the start of the 5 wave decline at 1.2918. Otherwise, the other shorting opportunity I see is on a break below 1.2625 because it would be a good sign that the longer term trend has returned to the downside

Side note: EWI is offering a free technical analysis handbook until September 22nd. I looked through some of it today and found some of it pretty useful. It's worth checking out since it's free and I'm sure many of you could find uses in at least portions of the booklet like I did:

Learn more about this free eBook, and download your copy here. Hurry, this valuable eBook is offered free until September 22, 2010

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.

Market Rollover Appears Imminent

Internals were quite bearish today although nothing to get excited about. The key takeaway from what I see here is the volume today. It was very low, coming in at 829 million shares on the NYSE. Looks like investors got bored with the big rally last week already. This also coincides with the VIX sell signal for the stock market that was in fact confirmed today with a close above the lower bollinger band. This doesn't mean the market will tank ferociously tomorrow immediately. But it does suggest the easy money to the upside is over.

In my opinion, this evidence suggests that the rally last week was a "panic buy". It was a rush to the buy buttons to jump into stocks as fast as possible since they were all convinced the all clear on the economy and market were sounded. But with that sharp, deep and fast move comes exhaustion, and now there's no one left to buy so the market's path of least resistance should soon be down.

The decline today does not look impulsive yet, and it wasn't necessarily a ferociously strong decline, and volume was light, so it's not out of the question for the stock market to perhaps eek out another high, or just flop around sideways for a day or two, before reversing to the downside. But I think the bearish potential here with the setups I've been talking about bring about a good opportunity to start getting aggressively short this market in preparation for a short term decline in the coming days.



I'm using a Dow chart above since my charting software has a bad tick in the S&P today and it's skewing all the data. I just wanted to show you this very basic indicator to keep things honest. You can see on the 2hr. chart, and many other intraday charts, that the RSI had reached an overbought area Friday. An area that the last time it was reached led to a strong decline for a while (see red circles).
However notice that the last time this occurred, the market recovered and grinded out a few more highs in what looks like an ending diagonal. So the same thing can happen again.

So playing the market for a short term decline is how I'll approach it at this point. Once the decline gets underway, we can hopefully get a better idea of the bigger long term picture and align our longer term positions accordingly.

CURRENCIES

FRIDAY'S EURO CHART



Above is Friday's chart suggesting that a top was forming in the euro since a 5 wave rally completing a wave C with a 4th wave triangle it appeared to be in its final stages since the RSI was diverging from price drastically.

THE RESULT



Judging by today's chart of a nice solid impulsive decline, it appears the wave count and bearish indications were correct.

Breaking below 1.2625 would confirm that the rise from 1.2586 was in fact a 3 wave corrective rally and that the odds are high that a major top is in at 1.2918.

FRIDAY'S USD/JPY CHART



Above is the USD/JPY chart I posted Friday that had a nice reversal formation in the middle of it which suggested a short term top at least was in for the pair.

TODAY'S RESULT



So far the pair is moving in line with the forecast. The bigger picture wave count for this pair is not clear, but the reversal I pointed out Friday does suggest lower levels should be acheived in the coming days while Friday's high remains intact.

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.

VIX on Verge of Issuing Stock Market Sell Signal at Today's Close

Just some follow-up to the latest post from Friday. The VIX looks like it's going to close back above the lower bollinger band today which will be a sell signal for the stock market. The market may flip flop around for a day or so, but within a few days the market should be headed lower in the short term, but possibly much longer. When you add the fact that we are entering a normally weak time in Sept/Oct for the stock market, the market has rallied too much too fast, intraday momentum indicators are severely overbought, and the wave structure in some markets are pointing a very bearish picture......this VIX sell signal should be seriously listened to.

Often I don't feel speculating with near term put options with no protection since timing market moves is extremely difficult. But if the VIX sell signal looks like it's going to execute going into today's close, I'll be buying September and October put options on the QQQQ and SPY.

The euro also looks to have topped and is declining impulsively. If people feel the VIX sell signal is legit and want to trade currencies as a result, I'd consider shorting the euro, USD/JPY or AUD/JPY since they tend to move fairly correlated to the stock market.

More later....

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.