Midday Update (repost from 1230pm EST)

ELLIOTT WAVE COUNT


The Dow continued to follow the EWP forecast with a strong thrust from the triangle (see EWI Tutorial, sections 4.3 & 4.4 here).  The overnight session saw the futures really soar higher, I'm sure raising some concern for the bears. But although thrusts from triangles are very strong and sharp moves which we saw in overnight trading, they are also completely reversed to at least the apex of the triangle rather quickly which is what we saw early this morning in the US session. The structure in the Dow is no different. The only problem here for the bears is that since reaching the near the apex of its triangle it has failed to continue lower. A break below wave a of the triangle at 10,481 would be a really good sign that the top is in.

The setup here is nice if today's highs can remain intact. The triangle and resultant thrust higher and reversal lends itself to a top being in right now. As long as today's highs remain intact we can say with confidence that a top is in place that could be quite significant when we get to next week. If today's highs are broken, it means wave v of C of (ii) is subdividing higher. But that still shouldn't last long or go much higher from current levels anyway.



Yesterday I mentioned that the S&P Small Cap index made a slight new low but that it was unconfirmed by the Russell 2000 small cap index. I suggested that it can be viewed as bullish in some cases since there was a non-confirmation in place. But I argued that within the current context of the market at this time, I felt the S&P Small Cap was actually leading the market lower, and the break to a new low all by itself was actually a bearish sign. Well today the Russell 2000 also made a slight new low, confirming the S&P Small Cap index's new low yesterday. So as long as their highs on the week remain intact, this could be a fairly bearish development the market is signaling to us very quietly.



And to follow up on the stochastics "wedge" I mentioned yesterday, you can see here that the wedging continued on the hourly Dow chart but has recently turned down to attempt to break out of the wedge formation. The S&P stochastics (not shown here), are even more bearish as they've been trending down with lower highs for the past several hours.

Don't forget to check out EWI's free Ultimate Technical Analysis Handbook they're still offering right now for more basic technical analysis methods to help supplement your trading.



And lastly, on the S&P 4hr chart you can see the MACD "squeeze" is on. The moving averages are about to cross down and it's causing the histogram (in blue bars) in the middle of the indicator to get squeezed. This suggests that the larger timeframes are now trying to turn down as well. And even though prices remain elevated and we've had several higher closes this week, momentum indicators are continuing to drag down.

I'm a bit disappointed in today's action in that I thought it would be a bit more eventful. I'm not sure we'll get any big swooshing move to the downside today, but if today's highs can hold into the weekend, it would still be a very good sign going into early next week for the bears. So if nothing today, we just have to wait...


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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.

Midday Update

ELLIOTT WAVE COUNT

The Dow continued to follow the EWP forecast with a strong thrust from the triangle (see EWI Tutorial, sections 4.3 & 4.4 here).  The overnight session saw the futures really soar higher, I'm sure raising some concern for the bears.  But although thrusts from triangles are very strong and sharp moves which we saw in overnight trading, they are also completely reversed to at least the apex of the triangle rather quickly which is what we saw early this morning in the US session.  The structure in the Dow is no different.  The only problem here for the bears is that since reaching the near the apex of its triangle it has failed to continue lower.  A break below wave a of the triangle at 10,481 would be a really good sign that the top is in.

The setup here is nice if today's highs can remain intact.  The triangle and resultant thrust higher and reversal lends itself to a top being in right now.  As long as today's highs remain intact we can say with confidence that a top is in place that could be quite significant when we get to next week.  If today's highs are broken, it means wave v of C of (ii) is subdividing higher.  But that still shouldn't last long or go much higher from current levels anyway.

Yesterday I mentioned that the S&P Small Cap index made a slight new low but that it was unconfirmed by the Russell 2000 small cap index.  I suggested that it can be viewed as bullish in some cases since there was a non-confirmation in place.  But I argued that within the current context of the market at this time, I felt the S&P Small Cap was actually leading the market lower, and the break to a new low all by itself was actually a bearish sign.  Well today the Russell 2000 also made a slight new low, confirming the S&P Small Cap index's new low yesterday.  So as long as their highs on the week remain intact, this could be a fairly bearish development the market is signaling to us very quietly.

And to follow up on the stochastics "wedge" I mentioned yesterday, you can see here that the wedging continued on the hourly Dow chart but has recently turned down to attempt to break out of the wedge formation.  The S&P stochastics (not shown here), are even more bearish as they've been trending down with lower highs for the past several hours. 

Don't forget to check out EWI's free Ultimate Technical Analysis Handbook they're still offering right now for more basic technical analysis methods to help supplement your trading.

And lastly, on the S&P 4hr chart you can see the MACD "squeeze" is on.  The moving averages are about to cross down and it's causing the histogram (in blue bars) in the middle of the indicator to get squeezed.  This suggests that the larger timeframes are now trying to turn down as well.  And even though prices remain elevated and we've had several higher closes this week, momentum indicators are continuing to drag down.

I'm a bit disappointed in today's action in that I thought it would be a bit more eventful.  I'm not sure we'll get any big swooshing move to the downside today, but if today's highs can hold into the weekend, it would still be a very good sign going into early next week for the bears.  So if nothing today, we just have to wait...

COMMODITY TRADER FREE RESOURCES:

FREE SERVICES NOTE:  EWI is offering some of their commodity services for free until noon Thursday, Sept 23 (Eastern time).  Learn more and get instant access to EWI's FreeWeek of commodity forecasts and trading education now -- before the opportunity ends.

Article: Will Grains Gain OR Wane? Find Out For FREE

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.

Many Divergences Exist, the Rally is Struggling, Friday Could be Quite Wild

Quite a snoozefest in the markets today.  Looks like people were already positioned for options expiration day tomorrow.  Volume again hovered at the 900 million share mark on the NYSE, which is very low.  Various markets diverged today with some making new lows and others making new highs; it's a truly fractured and confused time for the markets at the moment.  This is very bearish at this present time.  A nice smooth uptrend should have all, or the overwhelming majority, participating more or less in sync with each other's highs and lows.  What's occurring now shows a struggling market in the final stages of a large and overextended rally.  One other thing of note is that the S&P was significantly weaker today than the other indices and you can see it internally as 301 shares closed down on the day with only 191 shares closing up. 

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ELLIOT WAVE COUNT

Above is an intraday 5min chart of the Dow.  It looks a lot like a triangle and thrust at this point, although it's far from perfect (see EWI Tutorial, sections 4.3 & 4.4 here).  So if the above count is correct, it means that the late day rally today was part of a thrust, which is a finishing move.  And if you look at my counts from yesterday (4hr S&P and 1hr Dow) the triangle and 5th wave thrust fits well to finish up waves v. of c of (ii). 

With the setup just continuing to look more appealing for the bears, we can add to our long list of evidence of a major top forming along with the fact that the VIX market sell signal is still well in place from September 7, the anniversary of a major top on September 19, 2008 may be "celebrated" Friday or Monday, and that options expiration day is tomorrow, probably means Friday and early next week can get real exciting for the bears.

If you're new to Elliott Wave Principle? Check out this FREE VIDEO CRASH COURSE

Just one more divergence today to add to many throughout the market and through various momentum indicators is the fact that while the Dow was thrusting from a triangle (see EWI Tutorial, sections 4.3 & 4.4 here) to a new high, the S&P lagged and could not make a new high at all.  Again, these little signs on the intraday charts MAY be trying to tell us that a top is essentially in already. 

Here's just another little technical indicator showing a top forming and a major pullback is coming ahead.  Here on the Dow's hourly stochastics you can see they are confused at the top end of the range as they have been flip-flopping all over each other and have actually formed a nice wedge into the upper right corner.  Just like in market prices, when wedges are formed they usually signal a severely weakened trend that results in sharp reversals. 

And speaking of basic technical indicators, for those of you who haven't done so already, check out the free Ultimate Technical Analysis Handbook being offered right now by EWI.  It discusses several basic technical indicators and methods you can use to supplement your current trading strategies.

Lastly, the S&P Small Cap 600 made a very slight new low today and has been lagging the rest of the market significantly along with the Russell 2000 and the financial sector (XLF).  This is a bit unusual because the higher risk tech index, Nasdaq 100, has been exceeding the other indices with new highs lately which is an unusual divergence in my opinion.  Usually technology and small caps are grouped together in the "higher risk" category and tend to make new highs and lows more in less in sync with each other.  This is not the case here.  Again, a sign of a fractured and confused overall market.  

Now the Russell 2000 did not make a new low with the S&P Small Cap 600, and normally I would consider that bullish.  But in this case I don't because usually that would be bullish if it were to happen at the end of a downtrend, and also because looking at how fractured this market is right now and all the bearish setups I see all over the place, I can't see that as a bullish signal.  I think within the current context of a severely fractured market, the small cap index is telling us that it wants to go lower.

Now all these little divergences can be cleared up with a strong push to new highs by all the indices tomorrow, but that still won't erase the overall bearish potential here at all.  If the charge higher is made tomorrow then I would take that as the markets just wanted to take out their August highs before making their tops and reversing sharply as expected.

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.

Grinding Higher into a Major Top

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The internals continue to show a similar story for the latter 90% of this rally since it started August 25th, and that's a picture of low volume on this price rise.  Today the NYSE barely breeched 900 million shares which is still very low.  Not good for the bulls if they wish to argue in favor of a sustained rise based on the current market behavior.

Also of note is the fact that despite the market ended higher today, the VIX was in solid positive territory today and up over 4% most of the day before it closed up only 2.5%.  So some fear and skepticism into this rally is creeping in here.  It also corresponds well to the VIX market sell signal that executed September 7th that calls for a huge spike in volatility and stock market weakness.

Above you can see what I'm talking about in the daily chart of the NYSE Composite.  Since the Composite topped August 9th, volume had 4 solid breaks above the 13 day moving average with a steady increase in volume as the market fell.  Since the NYSE Composite's bottom on August 25th, there were only 2 days that breeched the 13 day moving average, and one of those days was the bottoming day itself which probably had a lot of down volume in it, and the only other day was immediately following that bottom.  Since then there's been a substantial decrease in volume leading up to the current structure of the past few days. 

So for the bigger picture, this chart here does not bode well for the bulls who may be using this rally as a centerpiece for their long term bullish arguement.  To me, this says that there is a lack of interest in rallies and it's actually the selloffs bring in the big numbers and bring the real interest into the market.  That's bearish. 


ELLIOTT WAVE COUNT (FREE VIDEO CRASH COURSE HERE)

Above is a 4hr chart of the S&P (switched from the Dow in previous posts).  You can see here that this count has become quite unlikely at the moment since the August high of 1129.24 is almost broken, therefore invalidating this count.  But although some EWP guidelines have been broken here as far as the depth of wave (ii), no rules have been violated.  Wave (ii) can carry all the way up to the start of wave (ii) if it wants.  It just can go one tick above it. 

Notice also that the stochastics on the 4hr timerame are now showing a divergence as they tried to cross down with today's weakness.  This divergence also supports the above wave count since it shows that the action the past few days is a finishing move, most likely a 5th wave, and momentum divergences often occur at that point.

Also keep in mind that the market is fast approaching my key dates of September 17th and 20th which correlate well with the major top in September 19, 2008.

Moving now to the short term count I have to switch back to the Dow count (sorry for the switch back and forth but with that bad tick in there on my S&P chart, and the fact that I look at the S&P as the primary overall market indicator for EWP, I have to put the S&P in there whenever I can like I did above).  Here on the Dow you can see what I'm talking about with the 5th wave causing the divergence in momentum.  Just as seen in the 4hr stochastics on the S&P chart above, the 1hr Dow chart shows divergence in the RSI since wave iii. ended.  In other words, price continues to make new highs while the RSI does not.  Again this is typical behavior in 5th waves, and so this is one of the reasons I'm hanging on to this count for the moment.....it just looks like a 5th wave and I feel it fits the best in the bigger picture.  But we'll see if both the Dow and S&P's August highs hold.  I admit it's not looking good, but from a wave count perspective, we have to respect the potential laid out above. 

For those new to Elliott Wave Principle, you can learn the basics from Elliott Wave International's Free Tutorial here.

INTER-MARKET DIVERGENCES

Below are list of the very short term new highs, or lack thereof, in the various markets I follow.  Oftentimes near the end of rallies we'll see that some indices make new highs while others do not.  So the key points here are that the Nasdaq 100 exceeded its August high and yesterday's high, the Nasdaq Composite only exceeded its yesterday high, and the S&P and XLF failed to do either. 

So although these divergences here are very small, they're worth pointing out because you never know when this little small short term market action signals a huge market move to the downside:

Keeping an eye on the bigger picture is key here as the market has been wandering sideways for months now.  So here's another article from EWI titled Understanding Robert Prechter's 'Slope of Hope' that I feel is appropriate within the context of the current discussion and market structure.


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.

Almost There...

Please check out my post from right before today's close to help supplement this current post.

The internals today show similar weak volume as we've had over the past couple months, especially on rallies.  When the decline starts, a strong breech above 1 billion shares on the NYSE is expected, and can help us confirm or refute whether a longer term bearish move is kicking off.  Also of note is that despite indices closing flat or up today, the internals of the NYSE and S&P all closed negative.  Again another sign of a severely exhausting rally.

The above Dow wave count is the same as yesterday's.  (I'll switch to the S&P count as soon as the errors in all the momentum indicators from the bad tick clear up on my charting software).  Notice today I'm posting the 2hr chart instead of the 1hr chart I posted yesterday.  I did this to continue to illustrate how the momentum divergences are now working their way into the bigger timeframes since you can see that today's late turn down cause the RSI to turn down as well, creating a bearish divergence on this 2hr chart now.  The rally is clearly weakening.  Learn Elliott Wave Principle for free here.

Now I tend to get into trouble over-analyzing the small timeframe charts, so I don't have much confidence in this, but I just wanted to show this as something to at least watch for tomorrow morning's action.  Notice that finally, the series of higher highs and higher lows was broken today as you can see on this Dow 5min chart.  The Dow failed to make a new high late in the day and then actually fell to make a new low.  This COULD be the start of a breaking of the uptrend.  Although other indices have failed to follow suit and we do need to see it on the bigger timeframes to really get our attention.  But since it happened into the close, I wanted to point it out in case we're flat or weak tomorrow morning.  It may prove significant and allow people to position themselves accordingly.

As I've been mentioning the past few posts, Elliott Wave International's Ultimate Technical Analysis Handbook discusses the the MACD "Zero Line Reversal" on page 12.  Above is the daily chart of the Dow showing the moving averages right at the zero line area to where one big down daily close should cross the averages down and give us a nice setup for the this indicator.  This would be very bearish for the market and could lead to a massive decline last several days if not weeks.  Options expiration is Friday and it also surround the anniversary of the September 19, 2008 top which would be similar to the one we'd like to see happen here.  So things are lining up well for the bears here.

Above is a 4hr chart of the S&P showing what I was talking about in my post just before the close (click here for that post, or just scroll down to the previous post).  Here you can see that the stochastics are diverging from the new price highs on the 4hr time frame, and today's late day weakness has caused them to pinch in an attempt to cross downward.  And as you can see, this is a similar type of behavior that occurred at the last top in early August.  And you can see that the stochastics and market have a long way to fall if they repeat that last decline.

Lastly, the Nasdaq 100 has exceeded it's early August high, but has done so without the Nasdaq Composite, Dow or S&P doing so as well.  This is now two daily closes it's done which is potentially very bearish.  We had similar non-confirmations in indices at the last high in early August and look what happened there. 

The only potential problem I have here is that it's the Nasdaq that's surging to new highs with the blue chips lagging.  Usually the higher risk indices lead the market higher, so perhaps the Nasdaq 100 is just breaking out higher first and the blue chips will soon follow.  It's possible.  But the Russell 2000, XLF (financials), and the Nasdaq Composite are also higher risk markets and they've failed to make new highs.  So if the bulls say the NDX making new highs is bullish, it's a very weak arguement with other risky markets failing to follow suit. 

So the evidence leans in favor of the bearish side as far as this lonely new high in the Nasdaq 100.  If Nasdaq 100's lonely new high holds, then when you combine the VIX market sell signal with the multiple momentum divergences being registered, then you have a high possibility for a very significant top being in.  We'll see if the August highs hold in the other indices the rest of the week.  But we might find out as soon as tomorrow.

And remember, for all you longer term outlook folks, keep an eye on the bigger picture.  Check out the article, 3 Reasons Now is Not the Time to Speculate in Stocks, for perspective on this.


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.

Divergences Pushing Their Way to the Larger Timeframes



Just a quick note showing that despite the market chugging higher, the technicals show the new highs are weaker than the previous since now the 30min and 60min divergences are now traveling over to the 120min charts.  And all it will take is a nice decline and close on a 4hr bar and the divergences will travel to the 4hr charts as well. 

The 2hr stochastics are showing a bearish divergence and are squiggling and getting pinched in the upper right corner as they are trying to cross down.  This is all of course bearish overall, but it is uncertain when price will ultimately fail and start its decline.



Also notice above the 2hr MACD on the Dow shows a squeeze occurring at the zero line.  The indicator suggests a breakout coming so you'd expect to see a triangle or sideways movement but instead price is diverging and making new highs.  Again a sign of weakness.  Also notice that we had a similar "squeeze" on the MACD histogram (blue/red bars in the middle) back in early August and price too was grinding higher before forming a major top.  With the MACD above the zero line and an overextended rally on our hands, this chart suggests the breakout will be to the downside.  These divergences are measured with momentum indicators, so they just show a weakening of momentum, but don't hint as to the good timing of a reversal.  But with the VIX stock market sell signal execution now in its 5th trading day, time is running out for the bulls in my view.

TRADING TOOLS

While we're waiting for a top, for those of you who haven't done so already, consider checking out EWI's free Ultimate Technical Analysis Handbook while it lasts.  Good free resources should always be taken advantage of in my view so I'm going to keep pounding this home until the offer expires.

I always get emails from folks who are trying to learn EWP.  I think the best way is to first follow real time analysis from any reliable source you can find, like this blog :-) and try to pick up the basics in real time.  I also recommend dipping your feet into EWI's free tutorial on EWP, and use it as a constant reference. 


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.

The Market Sure Feels Like it's Going to go up Forever Doesn't it?

Again the Nasdaqs, financials and small caps led the market higher.  Not an encouraging sign for the bears.  It just feels like the market is going to continue higher indefinately and it's tempting to get in on the long side because it's just too much to tolerate, right?  If that's the case, then perhaps we can view it as a contrarian indicator and signaling a top is in fact forming.  If we feel the market is going higher indefinitely, then we're probably not alone.  Watching and reading financial media today I still get the short term folks talking about "taking profits" in this market, but the longer term folks were now predicting "Markets to Explode Higher Like a Rocket Ship" like one analyst said on CNBC today.  That's what I want to hear more and more of here as we top out.

The above screenshot is of today's market internals.  You can see that the rally today was strong, but again volume remains light as it didn't even breaking the 1 billion share mark.  Volume should re-enter the market Thursday and especially Friday since it's options expiration day.  Also, Friday the 17 and Monday the 20th are the two key dates I'm watching for a major reversal since it September 19, 2008 was when a major market top occurred that led to the meat of the massive credit crisis' decline.  But right now, with volume this light on rallies lately, I couldn't get too excited if I was a medium-to-long term bull here.

Above is an hourly chart of the Dow showing the potential wave count.  The ending diagonal structure I suggested last week was technically voided with the sharp deep rise today.  But the structure itself has left it's footprint of weakness on the charts anyway.  Notice that the RSI is still failing to make new highs with price.  A behavior similar to what occurred for that long drawn out wave C of the ending diagonal in July.  And that resulted in a major decline, something I believe will repeat itself here soon with the current structure.

Overall the EWP structure is not nearly as clear as an elliott waver would like it to be.  But so what, it's rare that the market will give us such a gift anyway.  We have other tools at our disposal to help us with the short term structure as we wait for the waves to reveal themselves.  In my view, there are various ways to count the action from this year's top, and right now it's looking like it's all just part of a big correction.  But even if this is the case, I don't think the correction downward is over, so we should at least see some significant pullback in the short term.  Most likely sometime at the end of this week or early next week. 

With that in mind, I think a break above 10,719.94 in the Dow AND 1129.24 in the S&P would really put a damper on the longer term bearish wave count.  But that still doesn't prevent a short term sharp selloff from occurring.  So I'm playing the short term at this point.  The easy money to the upside has probably already been made, the risk is to the downside here.

FAKEOUT COMING AT THE UPPER END OF THE RANGE?

Above is a daily chart of the Dow showing the range it's trading in which I'm sure the overwhelming majority of you are well aware of.  I put this up here because I think the market is going to try and fake out the masses somewhere near the top end of the range here.  This range has been mentioned over and over and over again in financial media so it's getting quite old and obvious at this point.  So I can't imagine the 1130 S&P level offering much of a reversal point for any significant pullback.  It is the level of the last high though, so a minor pullback may occur there, but a sustained decline I doubt.  It's just too obvious. 

Rather I expect the market to either decline near current levels, quite shy of that upper channel line, or it will top and reverse after a strong break above that trendline.  Either move would fool most people in my view:  if it tops and reverses prior to the top end of the channel a lot of folks will miss the move and might remain bullish and continue buying dips or just rush to sell everything since they believe they missed the top.  Both behaviors I feel would be important to sustain a nice long healthy decline; and if the market rallies above that upper trendline, it may suck in the remaining bulls into the market to finally get sentiment at such a bullish extreme to where the market tops out and reverses anwyay.

So watch the action carefully just below and just above that upper channel around 1130 S&P and around 10,700 Dow.

Above is a 4 hour chart of the euro.  The wave count of the short term movement is a bit questionable at this time so I didn't post one.  But it does look like it declined impulsively and the bulls haven't made any significant progress with new highs or anything, so I'm still bearish.  It sure seems like the euro wants to trade higher, but anyone trading currencies for a while knows that they sure do like to stop and reverse sharply on a dime whenever they feel like it.  Perhaps we're approaching that time.

Above you can see the stochastics are at levels they were at the last time the market declined sharply, and they're crossing and rolling down right now.  EWI's Ultimate Technical Analysis Handbook discusses other technical indicators, similar to the stochastics mentioned above and in last week's posts, in depth if anyone's still interested.  Although the stochastics is not really a good timing indicator for reversals, and the euro can easily continue higher from current levels and create an overbought extreme and bearish divergence during those new highs.  But with the recent high of 1.2918 just around the corner, I like having a stop just above 1.2918 as a good risk/reward short trade.  A break above 1.2918 will call for a new outlook for the short term possibly, but the longer term is still firmly bearish in my view. 

At this juncture, despite the larger picture perhaps being a little unclear as to the wave count and future movement of the market, the upside potential for equities seems very risky and limited.  I refer to EWI's recent article, 3 Reasons Now is Not the Time to Speculate in Stocks, for a little big picture perspective to help keep things in the proper context.  But for short term traders, I see some big moves coming soon, and the evidence suggests it's to the downside.

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.