Grinding Sideways for a While; But Watch the Euro (or USD)

Internals today were slightly strong, providing better follow-through for the bulls after a big move which is more than what the bears could muster up after their big move earlier in the week.  Options expiration day probably contributed to volume making it above 1 billion shares, but overall it was still a quiet day nonetheless.  It should get even quieter next week with Thanksgiving on Thursday and a half trading day on Friday.  I don’t expect much action to occur in stocks, and usually the market floats higher during this time, so that would fit nicely with the wave count looking for Minuette wave (b) of a triangle forming.  But I will be watching the dollar intensely.  Thanksgiving is often a very volatile time for currencies, and the dollar is usually the benefit of big moves.  We’ll see if this turkey season keeps the dollar bullish trend alive.

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After breaking through the descending trendline to the upside yesterday, the S&P tested the top end of the trendline before bouncing the rest of the day.  This is typical behavior of a trend reversal in the making.  This doesn’t mean the market is a straight shot higher from here, but it does imply the Minuette wave (a) bottom will hold for quite a few more weeks.  I suspect a triangle is unfolding right now, and perhaps another down-up move will complete Minuette wave (b) of that triangle.  I tried to place a general projection of prices in the coming weeks for a Minute wave (iv) triangle in the above chart.  I didn’t place the triangle barrier lines in the chart because I thought it would just add clutter to an already cluttered chart.  But you get the idea; a sideways chop is ahead for us.

The bottom line: unless we get a sharp move below Minuette wave (a), I expect a fairly sideways market in the coming weeks.  1129.24 is the key level the bulls need to hold, and it’s quite far from current levels so they don’t have much to worry about at this time.

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The VIX has been crushed lately.  And today was no exception.  With options expiration today, and a flat week most likely ahead of us, I’m sure options investors know that a bet for low volatility is a good choice.  The VIX chart doesn’t follow typical technical analysis as well as the major indices do, so take this VIX call with a grain of salt: the VIX is at a previous floor that has repelled it before, but if we’re hoping for a triple bottom here then I think it’s a fool’s errand.  Triple bottoms are extremely rare, and the action in the VIX suggests it will move lower soon.  This should be bullish for stocks in the short term.

The financials ETF (XLF) is at an interesting juncture here.  Although the larger wave count eludes me, it does appear to have formed a triangle in October, and then thrusted from that triangle early November surrounding the QE2 hype.  Since then it has behaved just one would expect it to after a triangle and thrust, which is retrace back to the apex of the triangle.  Now this is where it’s interesting.  A move lower here beneath the lowest point on the triangle will signal that a significant top may be in for the XLF and that further selling is coming for weeks, maybe months ahead.  However, a reversal higher from the apex of the triangle would suggest just the opposite, that the XLF is headed higher in the coming weeks.  So any sustained decisive move from here should provide momentum to continue in that direction for the foreseeable future.  I’ll be watching this closely.

Nothing new to report on the euro.  My currency software is acting whacky so I’m not posting a chart.  No real need anyway, the euro didn’t do much today anyway.  It appears it’s about half way done correcting higher.  If so, I’d love for the euro to make some progress higher early next week because once the Thanksgiving lull hits the currency markets, it opens the door for the big US dollar rally, and euro decline, that I’ve been talking about.  So of all the markets I’m watching next week, I think the setup and action in the euro will be the most interesting.

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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.

Strong Rally Today Suggests a Temporary Bottom Might be in

Internals today were very strong.  Bulls managed a 1.2 billion share day today on a strong looking rally.  Bears managed a slightly higher 1.3 billion share day on the big decline earlier this week.  So the bulls are trying to regain control of the market here.  So far, the rally looks impulsive with a breakaway 3^rd wave gap occurring this morning, and the flat sideways movement the rest of the day being a 4^th wave.  Looking at the internals, the bulls were in full control as up volume and advancers overall were very strong.

As I mentioned in today’s addendum, the rally in the S&P today broke above the descending trendline I’ve been tracking the past few days.  It failed to close back under it, and when you combine that with the strong internals we saw today, we need to be prepared for more rallying ahead.  The only thing that will negate this view is a strong decline and close back beneath the trendline Friday or Monday. 

So what are our wave count options?  The triangle count looks best to me.  With the sharp decline for Minute wave ((ii)), EWP’s guideline for alternation suggest a more sideways correction for Minute wave ((iv)), and a triangle at this point seems to be the most likely scenario.   Above you can see my preferred count mapped out for the Minute wave ((iv)) triangle.  Minuette wave (a) lower completed yesterday, and now we’re in Minuette wave (b) higher.  We’ll chug along sideways through the holidays and into the new year where we should thrust higher from this triangle and into the Primary wave ((2)) top.  From there we should find ourselves another great attempt to catch the top of a lifetime.  There are other possible corrections besides the triangle, but I’ll discuss them if the triangle seems to become less likely.

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As for the bears, I don’t think there’s anything to get too excited about in the long term prospects here.  Above is my attempt at calling Primary wave ((2)) already complete, and a series of 1s and 2s lower from there.  My experience as an elliott waver tells me that whenever I have to label a count as a bunch of 1 and 2 waves for it to try and be impulsive, then most likely the count is wrong and it’s just a correction.  Well that certainly applies here.  Although it’s possible this count is correct, it just looks very unlikely at this point.  Although a sharp and deep decline, preferably below 1129.24 in a hurry, might raise this count to higher probability.  But as it stands now I think this above count is doubtful.  A break above 1207 would eliminate this count completely.

I cannot put an impulsive wave count on the euro with high confidence at this point.  Perhaps it needs to subdivide further, or I just need to be more creative.  But I will say that the slope and speed of the decline does seem impulsive.  It appears perhaps at least a short term bottom might be in, so I placed the Fibonacci retracement levels to watch for the correction to top out at.  It’s currently already finding resistance at the 23% retracement, but if it’s correcting the entire decline from the October high then it probably will continue higher to the 1.3862-1.3962 area before topping.

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Bears Rest, Bulls Fail to Strike; Dollar Unchanged

THURSDAY'S ADDENDUM

The rally today is quite strong but has so far stalled at its peak.  It appears the GM news is getting everyone excited again.  But the optimistic extremes in sentiment measures still suggest there's not much room left to the upside.  The S&P broke above the descending trendline I've been following, but has not made a new swing high above 1207.  A reversal and close beneath that trendline, that sits around 1192 at the end of the day today, would signal that today's rally was just a fakeout and that more selling was coming our way in the following days.  But another surge higher above 1207 would confirm that the decline from 1227 was just a series of overlapping corrective waves, and that at least one more new high should occur to cap off Primary wave ((2)).

So in summary, a move above 1207 would confirm that the decline from 1227 was just a correction and that eventually a new high above 1227 is on the way to finish off Primary wave ((2)).  But as long as the S&P stays below 1207, more selling pressure is certainly possible, and a close beneath 1192 today would be a strong signal that the short term trend remains firmly down.

WEDNESDAY'S POST

Internals today were slightly positive yet price in the major indices was basically flat.  Volume drop significantly today compared to yesterday so there was little interest in "buying the dip".  Just another sign of the trend having changed from up, to down. 

Not much to discuss as far as the market structure goes since today was a dud.  Seems like a 4th or B wave at some degree.  The short term wave count is unclear, so I'm sticking to the basics.  As long as the series of lower highs and lower lows continues, I'm bearish this market.  So the bears must defend 1207 until an impulsive decline can be counted from the early November highs. 

The bears appeared to take a breather today after selling off the market hard yesterday, but the bulls failed to step up and take advantage of it.  Volume was low and the market barely moved.  I think this is a morale killer for the bulls so I expect some more selling to enter the market as the week winds down here.  As long as 1129.24 remains intact, then we have to expect at least one more new high for Primary wave ((2)) to top.  But for the short term, staying below 1207 still keeps the trend pointing lower.

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The US dollar barely moved today, giving us the flat charts you see above.  The euro's downtrend remains well intact and the british pound may be in a 3rd wave suggesting that we'll see new lows soon.  This means the US dollar still has a lot of bullish potential still.  Doing so will keep a lot of pressure on stocks and commodities. 

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.

Short Term Downtrend Remains Intact

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The selling pressure in the stock market today was quite intense, and fits the model of a 3rd wave at some degree.  But we need the market to play out a little more to get a high probability wave count where that 3rd wave fits in.  Volume was a solid today at 1.35 billion shares on the NYSE, down volume was 93% of total volume, and there were 6.5 decliners for every advancer.  So the bears came in and took full control of this market.  And this comes after Monday morning's big surge that was reversed by the end of the day.  This market smells of exhaustion and this is just another sign that the bears are now coming in stronger than the bulls now; something we haven't seen for a long time.  Note: just ignore the S&P data on the right side of the internals.  It's showing the Nasdaq Composite's data and won't roll over into the S&P's data for some reason.

As always, the key now is follow through.  We could get a mild rally tomorrow, but ultimately the bears want the market to continue down again by at least tomorrow afternoon or Thursday. 

So the bears need to keep the short term downtrend intact to remain in firm control of this market.  Of course the bears want the market to just continue lower from here, but rallies are going to occur regardless.  The key is that rallies don't break the series of lower highs.  So the 1207 swing high here remains important for the bears to defend here.  It's critically important for the bears who believe that Primary wave ((2)) has already topped because we don't have an impulsive decline from the highs yet.  So if you believe Primary wave ((2)) has topped already (which I don't), then it's important for swing highs to remain intact until a full impulsive wave count can be established, otherwise a new high will create a series of overlapping waves and just confirm that this decline is a correction.  Ulitmately, only a break below 1129.24 would signal that Primary wave ((2)) has probably topped already.

The action in the US dollar was encouraging for the bulls today as it continues to surprise to the upside and break down resistance.  This means that the euro and british pound are falling against the dollar.  As long as this trend continues, it should continue to put pressure on stocks and commodities.  For more details and some wave counts, please see my addendum in my prior post.

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.

Stocks, Euro Continue to Work Lower, No Reason to Expect that to Change any Time Soon

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TUESDAY ADDENDUM, 1:30pm EST

The euro smashed through 1.3560 convincingly in the US session, giving the bears the advantage again.  Doing so opens the door for more euro losses.  I think the key for the short term is for the bears to get a strong daily close beneath 1.3560 to give even more evidence that the short term downtrend is still firmly intact.  The more surprises to the downside, and barriers broken on the downside, the more likely it is that the euro has formed a major top over the long term.  Even if you're not a currency trader, understanding the impact of the euro and the US dollar is still key for equities and commodities.  A major top in the euro, and major bottom in the US dollar, will put tremendous pressure on stocks and commodities over time.

The british pound is getting punished against the dollar this morning, hinting that some degree of 3rd wave is unfolding.  As long as this holds, it suggests that the dollar is going to continue surging higher and has most likely put in a significant bottom already.  What's also of note is the the US dollar has made a new high.against the swiss franc this morning at .9970, eliminating a previous impulsive looking decline from contention.  Oftentimes when these "barriers" are established in the majors it will either lead to some sharp follow through, or a sharp temporary reversal.   So whether the dollar pulls back a bit from here is not that relevant at this time since it seems that it has most likely formed a long term bottom already.  Any dollar pullback will just be an opportunity for dollar bulls again.

Internals today reflected the closing price action in the market well.  Early this morning they were very bullish, right in line with the big surge in price.  But as the day wore on, there was little follow-through to the happy Monday bulls’ early buying, and the market was faded into the close, leaving it flat.  The Nasdaqs were the worst hit of the major indices, while the financials actually did quite well.  Volume was very light today, only 877 million shares on the NYSE, and uppers vs. downers and up to down volume was relatively flat just as price was.

So nothing really stands out here other than the usual crew of Monday bulls that like to surge this market higher early in the week were unable to sustain that push higher by the end of the day.  And not only did price break down, but so did the internals.  This market is trading very heavy right now, and it suggests buying interest is exhausted and that the path of least resistance is down.

If you look at my daily chart from yesterday you’ll know that I’m expecting a “flat” or “triangle” correction for Minute wave ((iv)).  So far, this outlook is well on track.  So far, selling and volume has been quite tame, suggesting this is just a pullback to a larger trend bull move.  Also, the lack of any impulsive decline yet also prevents us from calling any significant top with a high amount of certainty at the moement.  Only a break below 1129.24 would mean that it’s highly likely that Primary wave ((2)) has already topped and that we should be looking for aggressively lower levels.

The 15min S&P chart above shows the opposite of what I was tracking on the previous uptrend.  Many of you may remember that I said for a few weeks that although the wave count may not be clear for the rally, the serious of higher lows and higher highs tells us that we were still in an uptrend and that we should expect higher levels until that trend breaks down.  Well now on the 15min time frame we see the start of that “breaking down” I mentioned.  Now we have a series of lower highs and lower lows being established.  They’re too close together to be counted impulsively, at least so far. But as long as this trend continues of lower highs and lower lows continues, I expect price to continue to work lower in the near future.

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The euro appeared that it formed an impulsive rally on Friday, but today’s deep retracement to a new low erased that potential and keeps us eyeing lower levels.  Although the wave count does not appear fully developed to label it impulsively yet, the steep slope of the decline sure suggests that a top is in and that the euro is declining impulsively much lower, probably for many months.  Right now, there’s strong support at 1.3560, and downward momentum is waning, so I’d like to see a strong sustained break below 1.3560 to instill confidence in the bearish case for the short term.  Without that happening, we have to be prepared some degree rally coming soon.

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Key Levels in Stocks and the Euro

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Stocks continued their correction Friday as a Minute wave ((iv)) takes hold.  According to elliott wave principle's guideline for alternation between correcting waves, since Minute wave ((ii)) was a sharp correction, then wave ((iv)) should be more of a sideways correction.  So I'm projecting a "flat" or triangle correction now.  The timing of a sideways correction here is good too.  As the Thanksgiving, Christmas and New Year's holidays approach, less and less market participants will be in the market, usually bringing a general malaise to the markets.  If we're forming a triangle, a good guess is to move sideways into the new year, then thrust higher from that triangle in early 2011, only to complete Primary wave ((2)) and reverse sharply to the downside for a long long time.

Only a break below 1129.24 would suggest that perhaps a top is already in.

Just an update here on the XLF vs. the S&P.  Financials made a valiant attempt surrounding QE2 to catch up to the overall stock market, but as you can see, once the QE2 euphoria dissipated the financials continued to aggressively decline again leaving a lot of separation from the S&P.  A long term stock market rally cannot be sustained without the financial sector participating; at least that's my opinion.

The euro failed to pick up speed to the downside which it should be doing since a 3rd of a 3rd wave is likely the next move if a top is in.  But Friday we got a very sharp rally off the lows, making me slightly concerned for the bearish outlook here.  What's of even more concerning is the 5 wave rise off the lows, then 3 wave setback.  A break above 1.3728 would confirm that late Friday's decline was a 3 wave correction and that at least one more impulsive rally should be in the cards.  That may complete a 5-3-5 zig-zag correction higher for some degree of wave 2, but it also may be the first signs that the euro has not topped and it may continue to rally impulsively to new highs on the year.  So we need to watch the action in the euro carefully here.  With stocks looking to be in a correction for several weeks/months, and silver look to have just completed a blowoff top, I still think the euro's bearish potential here is quite high.  So I remain bearish on the euro in both the long short term until it proves to me otherwise.



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.