Stock Market Getting Complacent, Overly-Optimistic per the VIX

I wanted to wait for all the late orders to come in so we can get an accurate breadth count on the NYSE and Nasdaq today. And now we have them. Advancers and decliners were practically up volume was barely higher than down volume. All-in-all, it was practically a divided and flat day, yet the Dow and S&P were solidly higher. Not much of a follow-through "at-a-boy" rally for the stock market after Intel posted great earnings spurring yesterday's big rally. The Nasdaq Composite on the other hand was solidly bearish internally today as you can see from the above chart on the top right. Quite a bit of profit taking in the tech sector that started the rally from Intel yesterday. The XLF, financials ETF, was down today after soaring over 3% yesterday, again offering no follow-through.

On top of all this waning momentum evidence we have the VIX, which made a new low on the year at 21.49. This should worry the bulls because it shows a high level of complacency and over-optimism in the market right now. There's no fear or skepticism in the market, and that's a recipe for a top.

There's no way of telling right now if the market has made a top, and in fact there's no real signs of it. But there is signs that top is forming at some degree as upside seems limited from here.

GBP/USD Consolidating in Triangle, Then Thrusts Higher

The GBP/USD looks like it's forming a triangle patter as seen in the 5min chart above. If so, 1.6211 should be broken before a new high. I showed you the longer term outlook for the GBP/USD a couple posts ago; it's bearish. However in the short term it's possible higher levels will be achieved. For short term players, the long side might be wise with a 1.6211 stop. Once the thrust to a new high occurs, protect profits by moving the stop loss to break even. Then trail the stop higher until stopped out. Don't get greedy, triangles are terminal moves and are quickly reversed once they've topped.

I closed my long position this morning at over a 200 pip profit. No need to hold onto that one after such a nice run. I'm looking for signs of a top so I can go aggressively short with a stop above 1.6744. But in the very short term, it seems that the pair has more upside.

Stock Rally Losing Momentum

Notice on the 15min Nasdaq 100 chart that the sharpness of the rallies since the bottom has waned. Each rally has gone more and more sideways to where my red lines look like dominoes getting ready to fall over. And if you look at my previous post giving a wave count for the NDX, it shows the wave count as a completed 5 waves up right now. The market may gring higher, but clearly momentum is waning. Also notice that the internals are weakening as well as shown by my circled NYSE and Nasdaq indicators. Breadth and volume is negative, and after such great earnings and the big rally yesterday, it's showing that the optimism has faded quickly. This current rally is exhausting and should result in a pullback. I'm not sure what magnitude it will be, but since all the major indices, except the Russell 2000, have made new highs and appears to completed a 5 wave rise from the recent lows, it opens the door to the possibility for a wave 2 or B top.

We'll see. But right now it looks like momentum is severely waning and a pullback or at least a pause in the uptrend is occurring right now.

GBP/USD Long Term Bearish, Short Term Bullish

With my stop hitting on the GBP/USD short it's time to look at the bigger picture. This is one of the more clear and promising structures in many markets right now. There is a classic head and shoulders pattern seen on the 4hr chart above as you can see, as well as a clear 5 wave decline it just completed. Now here's the real test. In order for the decline to remain impulsive, with the trend, it must stay below 1.6744 which is the start of the 5 wave decline and the right shoulder of the head and shoulder pattern. Breaking above 1.6744 would turn the decline into a 3 wave drop and make it a correction, and therefore this pair would rally strongly to new highs on the year. So we can assume that this count is correct and that 1.6744 will hold. We can play the bullish side against 1.5700 if we're aggressive, or we can just wait for signs of a top and short it later on with a stop above 1.6744.

Long term, this pair is bearish, short term though it looks to have higher levels to obtain. 1.6100-1.6200 should be fierce resistance as it's the prior 4th wave area, two fibo retracement levels, and a severe congestion area.

Elliott Wave International Article on Earnings; October 14, 2009

Elliott Wave International (EWI) has a good article on stock market behavior related to earnings reports. I recommend everyone trading the stock market in the next few weeks to read this article. Check it out on the right side of this blog
They also have other free articles posted daily you can check out on the list located on the right side of this blog, titled "Earnings: Is That REALLY What's Driving The DJIA Higher?" in the Elliott Wave International box.

EUR/USD Bearish Reversal Candle Confirmed on Hourly Charts; October 14, 2009

With the turn of the hour the EUR/USD chart made a nice bearish reversal candlestick giving the bears a great short opportunity for the short term with a stop just above 1.4943. Profit levels will be determined later as we see if the bearish reversal candle carries over to the larger time frames, especially the 4hr and daily charts.

GBP/USD Rally Ending, Capped at 1.6024; October 14, 2009

The british pound has rallied strongly against the US dollar since the 5 wave drop preceding it (see 1hr chart above). This should be the end of wave ii within a much larger decline in the GBP/USD. The EUR/USD is forming a reversal candlestick on the hourly chart and will signal more bearish potential if a reversal candlestick occurs on the daily chart.

For the short term, the 1.6024 level is where the five wave decline started, so this level will most likely not be exceeded in the short term. As with EWP most of the time, the bearish setup brings about a great risk:rewad opportunity where it's possible to short the GBP/USD (currently at 1.5969) with a stop just above 1.6024 and a profit target of at least 1.5700. So it's a risk of about 55 pips to possibly make 269 pips!

EUR/USD Possible Bearish Setup; October 14, 2009

The EUR/USD has formed a wedge, possibly an ending diagonal. According to EWP, ending diagonals are ending moves that signal a severe ending of the previous trend. This is exemplified by the typical throwover above the trendline (see above EUR/USD 1 hour chart) and then reversal which is creating a reversal candlestick on the hourly chart. If the reversal candlestick holds and a new high on the day is not achieved, it could signal a significant reversal for the EUR/USD and bring an advantage to the bears.

Right now, only the GBP/USD is offering a clear EW pattern, and it's very bearish right now and in a small wave ii rally.

Thrusting From a Triangle; October 14, 2009

Intel's earnings along with better than expected retail sales data, still negative though, thrusted the market from a triangle as you can see from the above Nasdaq 100 cash chart. There's a huge gap from this morning's open left by the over-aggressive bulls and that should be filled soon or it will hint that a top is near. As I said earlier, I fully expect earnings the next few weeks to absolutely blow estimates out of the water and be very very very good. This will probably send the market higher for weeks.

This does not change the long term bearish picture.

Intel Reaction Warrants Bullish Wave Count; October 13, 2009

With the reaction to Intel's earnings really really good, we need to expect a large surge in the stock market tomorrow morning. It fits well into the Nasdaq 100 cash wave count as you can see on the above 15min chart. The rally tomorrow may complete the entire rally of the big wave B or 2, or it's just a wave 1 and will continue with waves 3 and 5 to higher levels. If it's the last 5 wave rally of wave 2 or B then it should take the S&P to the 1100-1120 target easily before finding resistance. If it's just a wave one of a larger 5 wave move, then it will open the door to the 1200 S&P level. With all said and done, the market continues to be very bullish in the short term.

Intel "Blasts" Earnings and Forecasts as Expected; October 13, 2009

Well I said this morning that I can't imagine companies not configuring their books to present a rosie picture of their financial statements and post what appears to be great earnings and forecasts and Intel proved that after the bell today. That wasn't important as I knew that would happen most likely, and Intel is a key bellwether for Tech and even the overall economy. What was important was the reaction to the announcement. So far it's extremely positive and bullish as Intel shares soared 5% on the news, and that's after a huge run up into earnings. We'll see if it holds.

The next step is the stability of the financials. We'll see the market's reaction to their earnings in the coming days.

Here's the CNBC Intel article: http://www.cnbc.com/id/33293029#

Watch Intel After the Closing Bell; October 13, 2009

As elliotticians we don't believe news or earnings drive the stock market, we believe that sentiment and the wave count drive earnings and news. Since we're at a crossroads here it might be worth watching the market's reaction to Intel's earnings report after the closing bell today. Intel doesn't drive the market, the wave count does, but it's worth watching the market reaction to Intel because we seem to be at a crossroads of either having a top already in with the mild divergences mentioned earlier, or we're soaring to new highs into the 1100-1120 area. Intel's reaction may give us a clue which one is correct.

Here's the CNBC FastMoney story: http://www.cnbc.com/id/33293260#

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.