Still Waiting....Wave Count Still Sub-dividing Higher

So the market grinds higher, giddy that the Fed's Quantitative Easing 2 (QE2) is probably all but certain at this point.  I view taking the approach to the market where you're buying stocks because things are so bad that the government will jump in and do something is not sane or appropriate for the stock market.  It's made the market into a Las Vegas poker game where it's not about investing, it's just about ouplaying the other guy.  And we know how well governments have done with holding the market up over sustained periods of time.  Refer to yesterday's USD/JPY chart of what happened after the Bank of Japan intervened with the yen.  Hoping for bad news to get government help is like getting hit by a car and on the way to the hospital in an ambulance you're hoping your injuries are really really bad so that you'll get pain medication and disability from work.  It's sad.  But the market is always right, and it wants to go higher.  So logic is irrelevant.  I see no signs of a top at this point so I have to look to higher levels.

The above wave count suggests an ending diagonal-type structure may be unfolding right now.  The preceding price action supports the interpretation that a 5th wave is unfolding, and the diverging RSI since the peak of Subminuette wave iii also supports the 5th wave interpretation.  The structure is struggling to obtain new highs, despite the feel that this market has done nothing but rally straight up for weeks.  So the market looks tired, but there are no signs of a top, in fact it appears the market wants to push higher with QE2 assisting that move higher.

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As I mentioned Tuesday, the big rally that day on high volume and strong internals concerned me a bit as a bear since that type of behavior usually acts as a launching pad for a strong bullish move in the coming days/weeks.  It appears that might be the case this time as well.  In order to reverse that bullish setup, I'd like the market to close beneath it's Tuesday intraday low which 1140.68 in the S&P cash index, and 10,711.12 in the Dow.  Doing so would be a good sign that a major top may be in place.

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In a follow up to a chart I posted earlier this week, the Nasdaq 100 continues to lag the S&P and Dow as shown on the above top chart over a 10 day period.  In addition, you can see that recently the XLF (financials) have started to peel away from the S&P as well.  On the hourly and daily charts you'll notice that the XLF has still failed to make new highs where the rest of the market has done so.  This is very bearish behavior since the overall market cannot sustain a big bullish move without the financials in my view, and if technology continues to lag then it's a good sign things are getting really bad internally.  It also fits well that the Nasdaq 100 is lagging over this 10 day period since it aligns itself well with the RSI divergence noted on the 2hr S&P chart I posted all the way up top which is typical for 5th and final waves.

Sentiment measure I've read recently have suggested a strong bullish sentiment in the market.  So those bulls need to feel compelled to switch to bears in order to flip this market's trend to the downside.  It might be tough with QE2 on the table.  But we'll see.  Europe has some underlying problems surfacing again so we'll see if that picks up steam or not.

Lastly, looking at the weekly stochastics for the S&P you can see that they're in overbought territory and will pinch and cross down at anytime.  One strong weekly close should do the trick.  In previous instances where this occurred since the March 2009 bottom we can see that it's led to declines, some much bigger than the others.  But notice that as the rally became more and more mature, the declines got bigger and bigger, for the most part.  This is not a good timing indicator at this point since momentum can remain at extremes for a long time, but once we get the cross down it should be a good signal that Minor wave 2 is complete.

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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.

Waiting.....

FOREX - ELLIOTT WAVE PRINCIPLE



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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.

Rally Goes Flat Quick

 ELLIOTT WAVE PRINCIPLE 

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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.

Bulls Not Following Through...........So Far

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Bulls Gore Bears Quickly and Control the Markets

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CURRENCIES

The euro made a new high, negated the possible 5 wave impulsive decline I was tracking yesterday.  It looks like it will be making a charge to the 1.40 level.  Again, when the euro tops, so should equities.


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.

Bears Don't Follow Through....Bulls Back in Firm Control

With today's rally to a new swing high, the decline from last Thursday's high (as shown here in the Dow) is a 3 wave move.  This means it's just a correction and suggests the market will charge higher in the coming days/weeks.

Not only is the decline in 3 waves, but the rally we're seeing now looks impulsive.  So the EWP evidence is strong that the market will continue charging to new highs in the coming days/weeks and at least attempt to enter my 1173-1181 reversal zone I've mentioned in the past.

One thing to note is that this big rally is supposedly in reaction to the Bank of Japan lowering interest rates to zero, and some other positive US data.  The move by the BoJ is more important to me.  These rallies from government intervention are often short lived and completely reversed.  So the action may have thrown a wrench into the wave count and make it difficult for wavers to get on board the short side.  Just like I want to see follow-through for the bears on the short side, I also want to see it on the bull side on rallies.  So tomorrow and Thursday will be more important than what happens today.

The euro made a nice 5 wave decline last night that I eluded to in yesterday's post. But the start of that 5 wave decline was exceeded early this morning so that count is invalidated.  When the euro turns, so should stocks.


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.

Pretty Good Action Today for the Bears......Now the Follow-Through?

Internals today tell me that the decline was quite strong and the modest bump up in volume MIGHT be a good indicator of what might be coming this week.  If the market continues to decline while volume increases, it will be a big indication that minor wave 2 has topped and we're in minor wave 3.  The decline today was led by the small caps and technology while the VIX closed up 4.58%, so risk was pulling back today which could be the first signs of full on risk aversion coming back to the forefront after the long "risk on" trade that resulted from the Fed announcing they're going to become everyone's trading/investing backstop.  I expect volume to continue to increase on the move down otherwise we'll have to consider this pullback to just be part of a correction before charging to new highs.  But we'll wait to see what happens first before we start thinking about all that.

So it looks like my count from late last week was more accurate than the one I posted Sunday night.  It appears the ending diagonal (Elliott Wave Tutorial, 3.1), which is better represented in the Dow, has ended with a "throw-over" spike higher and reversal.  As I stated last Thursday, in Prechter and Frost's Elliott Wave Principle they state that, "Within a parallel channel or the converging lines of a diagonal, if a fifth wave approaches its upper trendline...[on heavy volume], it indicates a possible penetration of the upper line, which Elliott called 'throw-over'" (p. 73).  Thursday's uptick in volume into the 1.2 billion shares level certainly qualifies as heavy volume since volume of the past several weeks has held steadily below 1 billion shares most of the time.  So we certainly have a good structure here for solid Elliott Wave Principle counts that can give us solid confidence that some degree of top is already in place.

So we now need to see the decline unfold in larger impulsive patterns to help confirm that the larger trend has in fact turned down.  The larger the 5 wave impulsive patterns we see to the downside, the larger the degree of trend that has been reversed.  So we need to keep establishing shelves of resistance that can keep an impulsive count on track at larger and larger degrees.  Right now I see the 1148.26 level in the S&P cash index as a key level that needs to remain intact for now in order for us to remain confident that a significant top is in, and not just a minor short term setback.

Although the financials looked like they were going to continue with some strength into today's action, they ended up closing at about the same percentage down as the Dow, which was the strongest of the main indices I track.  But the financials are still dragging massively from the S&P as you can on the hourly charts.  As long as this behavior continues, it flashes a big warning sign for the bulls.  The market cannot sustain any meaningful rally over the long term without financials in my view.

Today's S&P close was the lowest close since September 23rd, signaling that the market wants to head lower for at least the short term.  Also notice on the daily chart that the RSI was diverging lower while price continued higher and it has now resulted in the lowest price close in over a week. 

The daily stochastics also show a diverging structure, trending to the downside, and with plenty of room to run as well.  Another bearish structure seen through a basic technical indicator.

And now the MACD "squeeze" is occurring big time on the daily chart.  You can see the moving averages are pinched, creating the "squeeze" on the histogram (circled in red).  This is another bearish structure and signals a big trend reversal may be setting up, and could already be in the making as we can see from what I mentioned above.

Don't forget to download the free booklet, "How To Use Bar Patterns To Spot Trade Set-ups", for more basic technical analysis methods, like the ones I just mentioned, to add to your toolbox.

FOREX

Today's decline in the euro is a promising start to what could be the initial signal that the major top I'm looking for might be in.  I was really hoping we'd break to a new low beneath 1.3665 to confirm that the decline was a 5 wave drop on the 15min chart.  This would of course be a great sign that wave 2 had completed and the euro's descent to much lower levels is underway.  This would also be another piece of evidence that the stock market has also topped as well.  So I'll be watching the pair into the Asian and european sessions tonight to see if it can in fact break that 1.3665 level soon, and add another check mark to the list of evidence we want to see to confirm that a major top in both equities and the euro is likely in.

Right now the odds favor those major tops being in right now, but we're far from confirming it with high certainty.  But that doesn't mean I don't see good opportunities for the bears here with good risk/reward ratios in various markets.


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 Week Ahead; Also a Look at Forex (EUR and GBP)

Administrative note: it's come to my attention that some bloggers are posting my charts and posts directly to their blogs.  I have no problem with this AS LONG AS THEY GIVE ME CREDIT FOR THE WORK.  That primarily means leaving a hyperlink to my website (http://principleanalysis.blogspot.com/) and leaving my website address on the charts.  Thank you.

My stance still remains solid for a high to be in place as of last Thursday.  But the lack of follow through, SO FAR, has me preparing for further upside.  Perhaps the ending diagonal type pattern (Elliott Wave Tutorial, 3.1) will extend a bit further, leading to more choppy rising potential.  A sharp blast higher would probably negate this count and make the rise a thrust from a 4th wave triangle with an attempt to get into the 1173-1181 zone I mentioned in previous posts.

Above is just a time relationship chart I did over the weekend showing why I have less confidence in a top being in now than I did going into Friday's action.  That doesn't mean a top may not be in, but the chances just seem a little less likely at this point.

As you can see from the 5min S&P chart, the impulsive decline from last Thursday was 27 bars, or 135 minutes while the ensuing corrective rally has taken 127 bars and 635 minutes.  That's quite a loooooong correction relative to the impulsive wave down it's correcting.  So if a top was in Thursday, I expect heavy selling early Monday morning to eliminate some doubt.

On the daily chart of the S&P you can see the results of divergence on the ROC compared to price.  When the ROC has not confirmed a new high or low, it has resulted in a solid reversal in the past.  Currently, we have a potential divergence in the ROC from the S&P's price, so a turn down in price with a nice daily close down should confirm this and help us add to the evidence of a major top being place.

For other basic technical indicators to help supplement your trading, don't forget to check out the free "How To Use Bar Patterns To Spot Trade Set-ups"  trading booklet while it's still available for free.

The daily euro count is looking ready for a top and reversal, although there are no signs of that happening yet.  The RSI is entering significantly overbought territory on the daily chart, the rally is looking like a 3 wave move and has entered a strong fibonacci reversal zone.  I think when the euro turns, so will stocks.

As I've stated before, the daily british pound vs. the dollar chart shows a divergence between the euro vs the dollar daily chart as the euro has been making new highs will the pound has not.  The last time this happened, it led to thousands of pips being shed from the EUR/USD.  But it also should be noted that the divergence lasted quite a few weeks before the euro fell.  So the current divergence doesn't imply that it will top tomorrow, but I feel that it does show that the major top and decline I'm expecting is imminent. 

The hourly charts of the euro and pound also show a divergence.  The euro has climbed significantly in this respect while the pound has failed to make new highs and has been flat.  So as long as this divergence occurs on the hourly charts, it's possible we'll find a top in the euro very soon.

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.