Europe Not Too Confident in Earnings; October 13, 2009

Europe ended very weak across the board (see above) which does not suggest confidence and strength going into earnings. It could just be profit taking from the huge rally leading up to earnings; I mean afterall, with the huge run ups so far how much higher can they really go.

But with J&J's disappointment, the Goldman Sachs downgrade, and now Europe taking profits, perhaps it's a sign of what's to come in the next few weeks.

British Pound Bearish; October 13, 2009

Not pretty, but possible. The GBP/USD formed a major head and shoulders pattern and is decline in 5 waves, albeit an ugly 5 waves, but 5 waves nonetheless. This is despite the EUR/USD rallying to a new high. This divergence is bullish for the US dollar.

EUR/USD Makes New High, Minimum Bullish Potential Satsified; October 13, 2009

Last week I said that the EUR/USD appears to be charging toward a new high above 1.4843. The main reason was that the decline previously did not look impulsive as it was choppy and slow followed by a very strong impulsive looking rally. Again, EWP shows its superiority in analysis as it basically predicted a new high was coming in the EUR/USD.

But now that a new high as been acheived, it opens the door now to a major top and reversal any day now. Even though eyes are on earnings, the US dollar (opposite the EUR/USD) is still a main driver of higher stock market prices. The EUR/USD tops, so does the stock market. First area to look for a top is the 1.50-1.51 area.

Waiting for Earnings Deluge, Market Divergence Still in Place; October 13, 2009

The market divergence between the Nasdaq and S&P futures remains in place so it possibly sets up a nice bearish move if earnings are similar to Johnson and Johnson's this morning, plus Meredith Whitney (sound and logical financials bear) downgraded Goldman Sachs since it hit her bullish price target. That's interesting because everyone is now looking toward financials to lead the market higher, and Goldman Sachs is the premier financial institution that tends to lead the financials. So if Whitney downgrades them right before they're posting their earnings, it could be interesting if by some incredible longshot Goldman Sachs posts not so good earnings. This would be amazing though as they tend to break records whenever they announce, but what's more important, especially as an elliottician, is the reaction to the announcement. Earnings may be bullish but the reaction is to sell heavy.

As long as the mild market divergences are in place, it's possible for a top to be in and a selloff to ensue. Bullish underpinnings still cling to this market though and the path of least resistance still points up.

We'll see.

I remain short with long dated options and have small bullish position with a call spread on the XLF with a November 2009 expiration.

Minor Bearish Market Divergence in Place, But Strong Bullish Momentum in Place; October 12, 2009

Overnight the S&P futures barely broke to a new high while the Nasdaq futures did not. Also worth noting, the S&P cash index fell less than a point shy of a new high above 1080 while the Dow cash index made a clean new high. The high risk small cap Russell 2000 index was weaker with the Nasdaqs today suggesting that high risk holdings are being abandoned. This type of behavior occurs at market tops, and seeing as that we're looking for a major market top, it's worth noting this and watching it.

On the flipside though, the market is still very bullish as I can see it. It's rallying in what looks like subdivisions of an impulse rally, suggesting the larger trend is still up, internals are still strong suggestions that buying demand remains solid, this week is options expiration week (actually on Friday) which usually has resulted in a bullish tailwind for the week, and corporate earnings for the 3rd quarter are coming out in the next 3 weeks.

Let's focus on earnings some more. It seems pretty obvious to me that the earnings will come out and just blow the cover off the ball, and will also give great blooming estimates for the future. However this will be on the backs of massive layoffs and downsizing measures which will severely hinder this consumer based economy in the long run. That will be ignored most likely, and the great window-dressing earnings data we're about to see will be reason to surge this market higher.

So despite a very minor bearish market divergence, I see the market on firm footing to push higher in the coming weeks as earnings results come in. It's possible that people will "sell the news", but the bottom line is that earnings will be "outstanding" for the over-exuberant market bulls that do cartwheels on CNBC every day about how we're in a new bull market.

The target for the S&P is the 1100-1120 area. Once we reach that range I'll be on alert for a top again.

Market Correcting Before Rallying Higher; October 9, 2009

Typical Friday brings about floating around in the markets. Apparently Asia intervened to buy dollars due to export concerns of their own goods. This caused the EUR/USD to drop but it didn't effect the stock market. Governments tend to intervene at the end of trends, so again this proves that the US dollar decline is ending and a major bottom and rally will occur. Once it does, the stock market will top and reverse.

The count I placed yesterday still holds. After the correction is complete, it should charge to new highs and target the 1100-1120 S&P area before considering a top is in place. If the market meanders higher from current levels it either means an ending diagonal is forming, where if it makes it above 1080 it may mark the top right there, but if it doesn't get above 1080 then it will correct down and then rally hard in a week or so toward 1100-1120.

There are 3 key things I'm watching for a stock market top that need to occur:

1) signs that the US dollar has bottomed (EUR/USD topped)
2) 1080 in the S&P is broken
3) 1020 in the S&P is broken.

Until then, we wait.

Key Levels Defined for the Short Term; October 8, 2009

As I stated in my last post, the rally today broke out to a new high confirming that the drop of last week was 3 waves. 3 wave moves are countertrend, so a new high above 1080 is likely. The evidence strongly supports this as we have a 5 wave rally (see above 15min S&P chart) from the 1020 lows and it was done on extremely strong internals for 3 days in a row.

Today's action was a thrust from a triangle. Normally when thrusts are complete they return to the apex of the triangle, which in this case is the 1053 area. From there I expect the market rally hard in a small 3rd wave that will break through the 1080 high with ease.

The only thing that will negate this short term bullish call is if this month's lows are broken at 1020 before the 1080 level is broken. Now with 3 days of strong rallying and internals and the thrusting of a triangle complete probably, I do expect some pullback. But I'm doubtful the market will be able to reverse strong enough and find sellers to push through the 1020 level any time soon. But if in the event this does happen, IT WOULD BE EXTREMELY BEARISH. EXTREMELY BEARISH.

We'll see.

Overlap Confirms Decline as 3 Waves; October 8, 2009

Today's rally exceeded the previous high which was essentially the last ditch resistance level to maintain any viable 5 wave declining action and declare a major top in the stock market. And when you combine the fact that the break occured with 3 solid days in a row of extremely strong internals and virtually all bullish buying power with the 5 wave rally, it seems quite clear the market will make new highs soon above 1080.

This doesn't change the big long term picture for a crash, it just changes the short term expectation that were are currently in the crash right now.

The only hope for the bears is if the market breaks the lows of this month (1020 S&P) before it goes above 1080, then it will become extremely bearish at that time.

The S&P is Thrusting From a Triangle as Forecast; October 8, 2009

Yesterday I discussed that the consolidation we saw was part of a 4th wave triangle in the S&P and most likely a thrust to a new high was likely today. That's occuring today as you can see from the above 15min S&P cash chart. The problem for the bears is that this is a clear 5 wave rise yet it doesn't look like it will have enough steam to push to a new high above 1080. So most likely that means it's only a wave 1 within a larger 5 wave advance. So once this thrust is over, it will retrace back to at least the apex of the triangle around 1054 before surging a strong wave 3 rally that should easily get to the 1100-1120 area. This means we probably have a few more weeks of rallying. On top of that, the EUR/USD also traced out a 5 wave rally and did not make new high above 1.4843 either.

The five wave rallies in the stock market and EUR/USD without making new highs tells me the larger trend is still up and we still have a few more weeks and higher levels before considering a top again.

S&P Breakout Coming; October 7, 2009

As investors stand by on hold for earnings reports to kick off the S&P appears to be consolidating very tightly in a 4th wave triangle (see above S&P 15min chart). This will result in a strong rally thrust to a new daily high at least before reversing to the apex of the triangle at a minimum. If it breaks 1080, the highs of last month, and then sharply reverses well below the apex, then it may signal "The Top" is in. I'll be looking at the action of the dollar for clues as well. It's also possible the consolidation will lead to a break down to lower levels suggesting the triangle was a B wave and the thrust lower is a C wave. This would result in an eventual big rally above the previous wave 3 top at 1061 at a minimum before topping. But at this point, odds favor that the consolidation is a 4th wave that will lead to a thrust higher. The action after the thrust will help determine what type of top had formed.

So we wait for now and let the market play out the way it wants to.

GBP/USD Working a Triangle, Then Thrust to New Lows; October 7, 2009

The GBP/USD seems to be fulfilling the forecast from yesterday so far in that it's completing a triangle and will eventually thrust to a new low in a wave 5. Triangles and thrusts are finishing moves so a more significant correction will occur after that. That would imply dollar weakness. I'm guessing that-that dollar weakness might translate into a new high for the EUR/USD above 1.4843 where I'll be watching intensely for a top.

Outside of any big reversal move or a new high in the stock market or EUR/USD, I'm sitting and watching......waiting.

Watching the EUR/USD; October 6, 2009

The stock market closed on its highs with very strong internals for back-to-back days, plus today had some strong volume behind it. Usually this acts as a launching pad to shoot the market higher for days/weeks. Expect higher levels to be achieved in the coming days and the 1080 high in the S&P will most likely be broken very soon. I covered another very small portion of my long dated put options on the dip this afternoon and bought some more November call options no the SPY.

Above is an hourly chart and wave count of the EUR/USD. It calls for at least one more rally to complete a 5 wave advance. If wave 5 rallies to a new high above the 1.4843 level, then there's a good possibility that-that 5 wave rally will complete the entire rally this year and market "THE TOP". However, if the 5 wave rally fails to break above 1.4843, it means it's probably just a wave 1, and will undergo a wave 3 and 5 to probably test the 1.50-1.51 area over the next several weeks.

When the EUR/USD tops, so should the stock market.

GBP/USD Declining Impulsively; October 6, 2009

One more note, even though the EUR/USD is not declining impulsively and is now in fact rallying to a new high, the GBP/USD is. This would make sense because most likely the GBP/USD has already formed its top and reversed. The EUR/USD has yet to do so. So the GBP/USD is declining impulsively because it's made a top, and the EUR/USD will diverge and make a new high, then it too will decline impulsively, taking the stock market down with it.

British Pound Continues to Lag the Euro's Advance; October 6, 2009

Above are two 4 hour charts, one of the EUR/USD and one of the GBP/USD. Some of you may remember a week or so ago when I mentioned that the Great British Pound (GBP) was lagging behind the euro's advance and did not confirm the euro's 1.4843 high. Now look at the two pairs. You can see that the lagging of the GBP is becoming more severe, and that even though the euro has rallied 300 pips from the low, the GBP barely rallied 100 pips and can't even make a new high from last week!

This divergence tells me the EUR/USD's uptrend is severely exhausting as it's rising almost on its own. This is also pumping up the stock market as well so keep that in mind. Major divergences occur at major market tops. I expect this is one of those divergences occurring at the EUR/USD, and in effect the stock market, top. I expect to see stock market divergences form as well, i.e. S&P makes a new high but the Nasdaq and/or Russell 200 or XLF does not make a new before a big reversal.

We'll see.

All Eyes on the Dollar (EUR/USD); October 6, 2009

Again, I'm watching the US Dollar through the EUR/USD. The EUR/USD is considered the "anti-dollar" and basically moves the opposite of the US Dollar. So I tend to say dollar bottom and EUR/USD top interchangeably. Even though they don't always find tops and bottoms together, for the purposes of our discussion here on the blog, they both mean the same thing to me.

With that in mind, I'm watching the EUR/USD to find a top. The last top was at 1.4843 and you can see the decline was very choppy and hard faught. This looks very corrective and was a concern from the jump. However that concern was overshadowed by the big reversal day and solid negative internals in equities. But again, it appears the US dollar, or EUR/USD, are leading the way. The market gods are telling us that we really need to just follow the dollar for the direction of the stock market. So that's what I'll do. And I'll do it by watching the EUR/USD.

So notice the choppy overlapping hard faught waves down which look clearly corrective, then look at the rally from the lows into today's rally. Notice how smoot and easy the gains are. This tells us the trend is still up in the EUR/USD. It also tells us a new high is most likely coming, above 1.4843. It's only 100 pips from that level at which it can turn and reverse at any time, however I see 1.50-1.51 as the key resistance levels. I'll be watching it closely.

When the EUR/USD tops, so will the stock market.