CHART CORRECTION

Please take note that the first post had the wrong chart I erroneously labeled the S&P. I accidently labeld the NYSE chart the S&P. It is currently corrected on the blog.

Sincerely sorry!

Divergences Posted in S&P vs. the Russell 2000 and XLF

Today we had a nice reversal day which was "impressive" to say the least. This is the kind of movement we should come to expect for a long time, many months, when the collapse does in fact begin. We don't have confirmation of that collapse beginning quite yet though so I don't want to get ahead of myself. We must wait for much more to occur than just a 1 1/2 hour decline. I am in the process of developing a reliable trendline for the rally with exact point targets to where if there's a solid close beneath it, we can confirm the collapse is underway. I'll have that shortly.

NYSE breadth was solidly strong throughout the day, unfortunately I didn't get a snapshot of it at the time so I don't have the exact numbers, but I know that at one point advancers were over 2000 and decliners were under 1000, and up volume represented about 60%-65% of total volume. But, in the last 1 1/2 hours of trading this quickly reversed to end the session with NYSE advancers at 995 and decliners at 2031, and total down volume of 71% of total volume, on a pretty strong volume day overall. So the move was not a fluke, done on light volume manipulation, or any of that. THE MOVE DOWN TODAY WAS DONE WITH CONVICTION.

The S&P, Dow, and Nasdaqs all made new highs that confirmed each other today, however the Russell 2000 and the XLF (financial ETF) did not with the XLF not even coming close. The XLF has led this market lower and higher the past couple years, so it may lead us down again. So far it has. I posted the XLF weakness and 5 wave decline count in an earlier post, and as blog reader, Doc Steve, pointed out today, Goldman Sachs was very weak today which was a big warning sign apparently of what was to come later in the session. Goldman ended up closing down over 3% on the day. GS is a big leader in the financial sector, so their weakness lately is a big warning sign for the bulls, and encouraging for the bears.

The coming days will be very important. We need to see follow through and weakening NYSE volume, breadth, and overall internals accompanied by constant 5 wave declines. Without that, it opens the door to this just being another selloff and then bottom and reversal to new highs, again. I'm also waiting for confirmation of a US dollar bottom to confirm the top in the stock market as well. But that has not occurred yet.

So we wait, patiently, for the market to play out and let us know where we're at.

Stock Market Tanking Hard, Watching Closely

Quick post on some exciting action. The stock market is tanking extremely hard in a straight line down right now, characteristic of the collapse we're expecting. The Dow lost almost 150 points in the past 1 1/2 hours with most of those losses coming in the past 20 minutes.

If this holds into the close, it could be very meaningful.

Full update with thorough analysis at the end of the session later this afternoon.

Nasdaqs Lead Other Indices to New Highs, but Russell 2000 and XLF Lag

The major indices rallied to new highs, invalidating the previous 5th wave count I had. The dollar has declined severly this morning and I'm sure that's the main cause for the inflation in stock prices today. But the market should be up much higher with the good earnings reports and the severely weaked dollar, but it's not. Is this a signal of an exhausting uptrend. I believe so.

To add, the Russell 2000 and XLF did not make new highs with the major indices today, creating a bearish divergence at this point.

More later.

Dollar Should Bottom Soon - Rally Big

The US dollar should be nearing its bottom and undergo a major multi-month rally. Most likely this will coincide with the decline in the stock market. Primarily because as the dollar rises in value, it means you can buy more stock with less strong dollars, i.e. deflation. There are other factors in play, but that's the core.

Anyway, I'm looking at getting long the dollar and I put a small long position on the USD/CHF at 1.0110 and a stop at 0.9630. I know, wide stop loss, but it's a long term position and it's a small one. I'll add to it if it drops, and will wait for a bottom confirmation to add on rallies. Notice on the USD/CHF chart, it almost mirrors the Dollar Index chart, and it shows that wave C is ending and should lead to a monster rally. The RSI is showing a severe bullish divergence as well, so if the pair turns higher now it will confirm that sever divergence and be very bullish.

I'm also interested in shorting the GBP/USD with a stop loss at the recent swing highs (choose the recent swing high from whatever timeframe chart you prefer), because it seems possible that the GBP/USD has formed a top. The dollar bottom is not confirmed at all, but aggressive traders can possibly start getting long the dollar now, where conservative traders can wait for confirmation the dollar has bottomed.

High Risk Small Cap Russell 2000 Index Very Bearish Behavior

When looking for market tops I like to view the high risk indices like the Russell 2000, and the Nasdaqs. These indices tend to lead the way because they're higher risk. So when investors get some fear and tops form, they ditch their high risk assets first. The Nasdaq 100 is holding up well today on the backs of Apple and Texas Instruments, so that's not good indicator today. We have to wait for their earnings euphoria to pass like IBM, INTC and RIMM. Looking at the 15min Russell 2000 chart above we can see a very bearish structure. The index has struggle 3 times to convincingly get above the 624 level and has now reversed sharply in a clear impulsive decline and made a new low. Just like the XLF declined in 5 waves earlier this week, the Russell 2000 followed suit today, and now the S&P, Dow and Nasdaqs appear to be starting to follow suit as well.

We've seen these promising declines before. They last a couple days and then reverse so caution is warranted from getting too aggressively short right now to where one can't properly survive another fakeout decline. However, so far the evidence is very promising. This time the VIX was showing extreme optimism and complacency and the S&P filled a chart gap at 1099 and hit psychological resistance at the 1100 level right when this current top formed.

I'll keep you posted as this thing unfolds to see if it's the real deal. I'm on high alert right now for wave 3 or C obviously.

Bearish Signals Paid Off, Market Not Impressed with Apple/Texas Ins.

Late last night I saw that Apple and Texas Instruments were rallying due to earnings "blowouts" and wanted to make sure people had a proper perspective of the overall market and what's going on, so I posted that late update showing the Tech companies who all declined after earnings postings. Apple and Texas Instruments should follow suit. The overall market though was not impressed and the bearish signs I warned about the past few days are now taking effect. We'll see if this decline has legs and can build momentum. I want to see 4 things in order for this decline to hint to us that it's possibly part of a bigger decline (wave 3 or C), and not just another 2-3 day selloff before new highs are acheived. I want to see:

1) 5 wave declines to show that the larger trend is in fact down, and intact.
2) NYSE breadth and volume to remain very weak, showing that the bears have control.
3) The EUR/USD needs to break 1.4820 to suggest it has formed a top (US dollar bottom).
4) As the market falls, most of the media and market analysts talk about "buying the dip" and talking about what levels they will buy at. In other words, I want the masses to be buying on the way down. Without optimism on the decline, it won't last.

Above you can the S&P cash 5min chart that shows a nice 5 waves down, following the XLF which completed 5 waves down yesterday as I stated in a previous post. Also view the other chart, it shows a potential expanding decline suggesting a lot of violence and conviction in the decline. More importantly, this is what the market looked like before the previous wave 3 started in October.

So it's an interesting morning. We'll see what happens the rest of the day.

I also wanted to let everyone know that I wanted to get long the US dollar because I feel it's forming a major bottom so I went long the USD/CHF and will go short the EUR/USD on a break of 1.4820. More details on currencies later.

Tech Soars on Earnings, then Sells Off

The trend lately has been for tech companies to rally into, and sometimes just after their earnings are reported, then they sell off. Intel, for example, blasted estimates and rallied hard, but since then it's traded down quite definitively. Same with IBM and RIMM, although their earnings were worse off. But it goes to show you, good or bad earnings, these stocks are peaking. Apple and Texas Instruments posted great earnings tonight, and it should lead to a solid Tech rally in the morning. But look at the charts above of the stocks I just named and then ask yourself if this "earnings euphoria" will last? Is it the start of new bull run? Without the big dogs in Tech carrying it higher, what's going to do it? Apple is going to make a significant new high tomorrow, but are they really that much better off? Now what?

I just want everyone to look deeper into the action here, and see that it's all fluff, smoke, mirrors, and window dressing. These stocks are being sold whether their earnings are good or bad. People are just dumping them. I'm getting the feeling that earnings will be the last "blow off like top" that will finish this rally.

Hang in there, the big daddy wave 3 or C is coming soon. And although it's been a very long hard painful battle for the bears, once the decline starts, the bears will be happy quickly. Until then, enjoy the circus around earnings and the cartwheels from financial managers on CNBC.

XLF Divergence and 5 Wave Decline Should get our Attention

Above are 15min 10 day charts of the XLF and the S&P cash index. The ETF that tracks the financials, the XLF, which has led the market lower and higher the past couple years, is showing us bearish information. The XLF did not make a rally to new highs today like the Dow, S&P and Nasdaqs did, and has actually lagged severely behind the market lately as you can see on the above 15min charts. Also, and most importantly, the XLF has traced out a textbook clean 5 wave decline during the same time the stock market chugged higher.

When you combine the fact that the S&P closed a gap today at 1099, the VIX is at dangerously complacent levels warning of a major top, the XLF has not confirmed the stock market's rally higher and has in fact traced out a 5 wave decline, it tells us that the evidence strongly suggests a top is in, or forming right now. The risk/reward favors the bears right now. The market may chug higher from here, but the evidence and probabilities do not support that.

VIX Declinese Further Warning of Extremely Dangerous Complacency

Today the market rallied higher allowing the S&P cash to fill a previous gap left at 1099 from the previous selloff phase we had many months ago. More importantly in my view is the VIX. The VIX has dropped lower now and is almost in the teens now, it's broken to a new yearly low, and is testing the bottom of the bollinger band (see above chart with orange bollinger bands). A close beneath that bottom bollinger band and then a close above the same band later will be a strong bearish signal that the market will sell off hard. Most likely wave 3 or C. Despite this happening, the VIX tells us that at these levels, there is almost no fear in the market and that complacency is at its highest levels all year from this indicator. This occurs at tops, not at the start of bull runs.

A top is near. I'm waiting for signs of that top and reversal any day now, and will report them here when I see them.

VIX Warning of Extreme Complacency - Top Might be in Place

I almost missed this important event, but I heard Pete Najarian on CNBC's Fast Money mention the VIX and that it was down and I nearly fell of my chair. In the morning the VIX had rallied from the almost 4% drop to a new yearly low on Thursday and since the market continued with weakness into the close I made the mistake of assuming the VIX was up; WRONG. The VIX dropped another 1.3% Friday, despite the market falling fairly hard all day. This means that people were buying a lot more call options than put options on a fairly solid down day, and in doing so they pushed the VIX to the most complacent level it's been in all year.

This is big. This shows such a high level of complacency and optimism toward the market that it warns of a possible top in place RIGHT NOW. When you add the 5 wave decline in the futures and other data I mentioned in previous recent posts, it tells us that THE top might actually have just snuck up on us and be in place right now.

BE ON HIGH ALERT FOR A MAJOR TOP IN THE STOCK MARKET. THE VIX COMPLACENCY AND THE 5 WAVE DECLINES ARE HUGE WARNING SIGNS.

5 Down and a Nasdaq 100 Non-Confirmation in the Futures

The market battled back from its lows today but couldn't close the week above 10,000 in the Dow. If it did, it would probably be a bull trap and lead to sharp spike and reversal early next week. The S&P futures today make a nice 5 wave decline, then rallied in what looks like 5 waves up at the end of the day. However what should be the 5th wave that made a new high, was not confirmed by the Nasdaq 100 futures. You can see the comparison charts above. This divergence resulted in a sharp selloff into the close today, and also makes the Nasdaq 100 rally only in 3 waves, a correction. NYSE internals improved but were solidly negative. All in all, not quite the outstanding blowout week many bulls were hoping for in response to earnings.

So to end the week the Dow remains below 10,000 on a closing basis, internals and momentum waned significantly, we have 5 wave drops in the Nasdaq 100 and S&P futures, and a non-confirmed rally in the two indices followed by a sharp selloff.

Early next week should expose more what the market wants to do over the next few weeks. With all the evidence above in place, it sure opens the door for a market top. And if you look at my EUR/USD analysis showing the RSI topping levels and divergence, it only adds to the possible top being in place. This is just pure speculation at this point and we need further developments make a more solid assessment.

EUR/USD Position Worth Watching

A look at the daily EUR/USD chart shows a possible top starting to form. Notice on the daily chart above that the RSI is at a level that has previously market major tops (see blue arrows on chart) which is combined with an RSI divergence forming if today's decline holds. Now this behavior can remain for a while as prices work higher, but it's a sign of the end of a trend, not the beginning.

I'm watching the euro closely because as I've said before, when the EUR/USD tops so will the stock market.

GBP/USD Mixed Signals Now, I'm Standing Aside

After the GBP/USD thrusted from a small triangle and reversed right into the apex of the triangle for a textbook EWP move, I am now flat the pair.

The key now is to look at the GBP/USD bigger picture to know what it's going to do next. Is the 5 wave rally part of A wave? Is it a C wave of a flat correction? Is it the start of a larger 1-3-5 rally?

Attached is an 8hr GBP/USD chart. It shows that it's at levels that can end the entire rally and lead to the next leg down, i.e. the RSI has reached a level and reversed that has previously led to tops and reversals (see blue circles on RSI) and the pair is finding resistance right at the 61% fibo level (see blue circle on price candles). However, the entire rally was in 5 waves, which tells us that unless it's a C wave, then the trend is now up. I cannot count it as a C wave, so I have to assume it's part of a larger correction, probably an A wave, of an A-B-C rally. So I'm planning on a B wave to slowly and choppily grind lower before another power C wave occurs which should cap the entire rally move as long as it stays beneath 1.6744.

I rarely trade B waves as they're so difficult to trade, and there's conflicting signals is this pair, so I'm currently flat until structure unfolds some more.

Stock Weakness Today as Illustrated Yesterday

The stock market tumbled this morning which we had a pretty good signal would happen as shown from my previous posts; momentum was severely waning. Today is options expiration day so I don't want to read too much into the decline, so far. Internals are weak on the NYSE but it's still early. Plus, the euro and gold and silver are fairly steady in the face of the selloff so there's no real "deflation" or unwinding of high risk assets right now which might signal the start of something bigger occurring right now. It just looks like options expiration and profit taking occurring at the moment. But we'll see.

There are some things of interest though. Check out the daily S&P futures chart I posted above. If today's selloff holds, it will create a double bearish divergence on the RSI, as well as several other momentum indicators, in the recent rally. One RSI divergence on the daily chart is bearish enough, but to get two in a row is very problematic for the market and the bulls, especially after reaching and reversing at the "so important" Dow 10,000 level. We'll see if the divergence holds. The Russell 2000 and the Nasdaqs are somewhat weaker than the blue chip S&P and Dow so that shows a little bit of risk aversion on the table, plus the VIX is up 3% today after gettting to a yearly low yesterday, but option expiration definitely is effecting that. So an interesting day for a Friday which is typically uneventful.

As a bear, I'd like to see the market stay solidly negative and confirm the RSI divergence I just mentioned. So many bulls are waiting for a weekly close above 10,000 but I think if it occurs it will be a "bull trap". It will suck in all the bulls which will be a capitulation rally that forms a top and reverses.

So let's let the day play on see what develops. More later.