S&P Rally Should Stay Below 1074

Today's rally on better than expected GDP from government spending.........uh......I mean "consumer" spending, has the markets very giddy. The rally is strong internally and across all sectors and indices. The wave count so far is unfolding nicely and places this rally as a wave 4 (see 15min S&P cash chart). If so, the rally cannot exceed the wave 1 low of 1074. A break of that level will cause me to rework the short term wave count. The key level remains the 1101 high though; that should remain intact for a very long time.

Today's action appears to be a relief rally removing the short term oversold condition left in the markets. Afterall, with such strong selling conviction across the board yesterday it was evident that everyone was selling who wanted to sell which really leaves a few bottom feeders to come in and fluff the market up on mediocre volume.

As long as the rally unfolds in a corrective manner, on light volume, and key levels remain intact, it will be overall bearish because it will alleviate the short term oversold conditions as well as the calm the VIX down to prevent the panic capitulation the bulls want to form a bottom.

EUR/GBP Still Declining as Expected

Just to update the EUR/GBP short trade. It continues to show weakness as expected, and has slipped more overnight. When I initially posted the trade idea it was trading at 0.9142 and it is currently at 0.8926, which is a 216 pip gain! It's usually wise to take profits on such a gain, you can always add back those positions on a rally. The key stopping point that should cap any rally now is the 0.9238 level. I expect the pair to eventually get into the 0.8400 area at least so I would keep some of the short position on still and manage your stops appropriately.

Extremely Weak Day in the Stock Market

Well the Dow/NYSE sell signal mentioned yesterday proved itself worthy again today with the Russell 2000 losing 3.51%, the Nasdaq Composite losing 2.67%, the S&P losing 1.95% and the Dow losing 1.21%. Internals continued to weaken into the close and so far are as follows:

- NYSE decliners outpaced advancers an amazing 8.63 to every 1 advancer
- NYSE had 2457 more decliners
- NYSE down volume was 90% of total volume
- S&P 500 had only 30 stocks close up today
- Volume was strong, and was its highest since Sept. 30th (another down day)

Also, the dollar continued to rally across the board and confirmed that it has in fact formed a major bottom and should rally for months, which will be a major headwind for the stock market.

Today's decline in the S&P broke and closed beneath the ascending trendline holding the market up since March of this year. And it broke through it convincingly. The S&P needs to hold below that trendline on a closing basis the rest of the week for it to confirm "the crash" in wave 3 or C is underway.

With such a sweeping across the board selloff with such weak internals that I described above, a snap back rally is possible, but not required. With the overriding trend down very strongly with wave 3 or C, rallies may be very small and short. One indicator I watch closely for bottoms and rallies in the VIX/Bollinger Band indicator. Notice on the chart posted that the last 3 times the VIX (red/green candle chart at the bottom) had a daily close above the top orange bollinger band and then later closed beneath that same top bollinger band, the S&P (blue line at top of chart) made a bottom and rallied. We did not get a VIX close above the bollinger band today, but I'll be watching it in the future to give us a sign that perhaps a big rally is coming.

That's all for now. Overall, the market is meeting expectations for wave 3 or C to be underway now, which will eventually lead to the S&P getting into the 400s and the dollar soaring significantly in the coming months.

Internals Extremely Weak on Selloff This Morning

The NYSE/Dow sell signal I mentioned yesterday held true today. Like I said before, the last time this signal was very reliable was back during the last wave 1 or A down from the 2007 highs to the March 2009 lows was underway. The fact that it held true again today, at least so far, suggests that we are in another large declining phase.

Looking at the internals of the decline today we see a very weak picture (see pic above). NYSE has a whopping 5.1 stocks trading down for every 1 stock trading up, which results in 2017 stocks more trading to the downside. NYSE down volume represents 87% of total volume. Also notice the S&P where only 53 stocks are trading up today. The Dow is weighted in an odd way and I don't even really look at it much as a reliable indicator of the overall market because of that. The Dow is stronger today, again, than the other indices, but the S&P and Nasdaqs tell a better picture along with the internals I just illustrated.

It appears that in combination with the NYSE/Dow sell signal yesterday, the Russell 2000 continues to lead the way and tell us ahead of time what's in store for the overall market as yesterday it made new lows while the other indices did not. Today the Dow and S&P followed the Russell and made those new lows. So I will be watching the Russell 2000 closely until it proves to me that it's not a good indicator of future action. But right now, it's doing a good job forecasting what's coming.

The larger trend is down and a major wave 2 or B in the stock market has most likely ended. The momentum and pressure to the downside is so extreme that I'm not going to try and play this day-to-day. I am short for the long haul. 1101 in the S&P cash should hold for a long long time. As wave structure unfolds I'll be able to lower key levels for stops for those interested.

With all that said, the S&P has broken through that ascending trendline I've mentioned on the daily charts which today is at about 1056 in the cash market (S&P is currently below that trendline at 1051). That trendline is significant, and the market knows it. It wouldn't surprise me if the bulls try desperately to rally the market above the trendline by the end of the day, so I'm cautious of a rebound today, although a rebound is not required at all. But if it does happen, the trendline will soon be reversed and retested. Every time it's tested it erodes the bullish protection to where eventually it will crush through the trendline. Whether it happens today or later on, a strong close beneath that trendline and holding it will confirm that wave 3 or C is unfolding which will take the S&P into the 400s AT LEAST.

More later...

Dollar Charges Higher After Making Significant Bottom

The dollar continues to rally hard across the board this morning, putting a lot of downward pressure on the stock market. Yesterday I suggested that with 5 waves up, a correction is due and a retest of the descending trendline was possible. Well after a very feeble decline that didn't quite touch the trendline, the dollar is charging higher. This is a signficant bottom in the US dollar that should last months if not years. Look for the dollar to continue higher from here.

EUR/GBP Makes New Low

The EUR/GBP just made a new low beneath the long held 0.9000 level as projected. There is plenty more downside potential as you can see from my wave count. But for those risk averse, consider taking some profits on your current position and/or dropping your stop loss to just above the wave (2) high at 0.9238. If the pair rallies, you can add on if you choose. Whether you protect profits or are all in for the ride, this pair should continue lower in the coming weeks.

Another Bearish Day for Stocks

Today was another bearish day for stocks. The Dow was positive at the end of the day, but that's about it. The Nasdaqs finally gave way and played catch up to the Dow and S&P with accelerated down moves today of well over 1%. NYSE breadth was also negative today with decliners outpacing advancers 1.88 to 1 with 924 more decliners, and total down volume was at 65%. All this while the Dow squeaked out a modest gain. This shows internal weakness and a small group of stocks, mainly in the Dow, holding the market up. This is not healthy. A healthy market has most stocks and sectors rising together.

During the big wave 1 or A down from the 2007 highs into the March 2009 lows, I remember that whenever the Dow closed the day in the positive, and the NYSE closed in the negative, the following day usually resulted in a big selloff. If the market has in fact topped for months/years, and we are in wave 3 or C right now, then I would expect similar behavior. So we'll see if the Dow closing up and the NYSE closing down today results in a big selloff tomorrow in equities. I suspect it will

The daily charts in the Nasdaqs and the Russell 2000 look especially bearish. I wanted to point out how the Russell 2000 appears to be the leader of the decline and is signaling the future of the blue chip S&P and Dow. Take a look at the above charts (click on image to enlarge). At the top row you'll see that the daily Russell 2000 chart made a double top and did not exceed its September high. Then look at the S&P chart and it shows a clear new high. This non-confirmation led to the current top and severe reversal we're in right now. So the Russell gave us a telling sign. Now look at the bottom row and notice the Russell again is leading the S&P lower with two new lows today, while the S&P held those levels. We'll see if the Russell 2000 is establishing itself as the leader of this decline as we watch to see if the S&P follows suit soon on Wednesday. When you look at the 5 wave rally in the dollar which looks to have bottomed, the impulsive looking decline in the major stock indices, the closing divergence in the Dow and NYSE today, and that the Russell 2000 is pointing lower, plus a lot of other technical data, the evidence is strengthening that this decline is of a very large magnitude.

One side note: in order for this decline to maintain itself I think we need an orderly selloff in the beginning with accompanying optimism. I really like the fact that the past week or so the market has started the day off rallying and then reversed sharply by the end of the day, but not with any real panic. This is a great "slow bleed" for the bulls. If the market does a panic selloff at this point, I think too many people will see it as a capitulation and then establish a bottom and perhaps rally in big volume to eventually make another daily high. I don't want to see panic, at least not right now. I want this trend to continue with good earnings, optimism on the declines with people saying "buy the dip" and "buy this stock for the long run", rallies at the open that are reversed, and no panic. That is the "slow bleed" that will kill the bulls and keep this decline on solid ground where eventually the rug WILL be pulled out from under it and we'll start getting some big Dow down 300+ days again.

Remember my Dow/NYSE sell signal in play tomorrow!

EUR/GBP Trade Tracking Nicely

Just a quick update on the EUR/GBP trade I mentioned in a previous post (http://principleanalysis.blogspot.com/2009/10/eurgbp-clear-five-wave-decline-bearish.html). The pair continues to fall after the 5 wave drop and 3 wave corrective rally. I recommended a short position here at about the 0.9142 level and it's now at the 0.9042 level, 100 pips in the profit. I expect the pair is at the verge of a significant decline, so I feel that rallies should be sold with stops at 0.9411 or 0.9238 depending on risk tolerance. A break of 0.9000 result in an acceleration of the downtrend.

As long as the pair trades beneath 0.9411, I will remain bearish for the foreseeable future.

Bulls' Desperate Attempt to Shift Money Around will be Futile

It's evident that the past couple weeks after earnings reports that money has been moving around. It's mostly been buying up pre-earnings stocks, then either dumping them on earnings day or shortly thereafter. Many of which trade much lower than when the stock announced "blowout" earnings numbers, a clearly bearish sign. Tech has been stronger lately as shown by the Nasdaqs' (Composite and 100) strength the past few days, mainly due to Amazon and Apple, and a few others. So it seemed that people were shifting money out of some stocks and putting them into selected Tech companies in hopes that they will continue the bull run and lead the rest of the market higher.

Today that Tedh hope appears to have faded though. If you look at the stocks above from the Nasdaq Composite that are leading the Nasdaq to much more weakness than the blue chip S&P and Dow, you'll see that the leaders to the downside are some of the stocks that were really that last hope to hold up the Nasdaq. The Dow is stronger today along with the energy sector, so it seems once again the desperate bulls are shifting money around frantically trying to hold onto to some kind of bull market somewhere. Yet despite their efforts, the Nasdaqs and S&P continue to trade in negative territory and the NYSE stocks are trading with a negative bias.

All this "fracturing" of different makrets is very unhealthy for the stock market as a whole, and is signaling a top. With the dollar appearing to have bottomed by breaking through key levels against the euro and the swiss franc, and the very bearish action in the stock market the past few days, I'm looking for lower levels in the near future for the stock market.

Evidence of Major Dollar Bottom Mounting

The USD/CHF, which almost mirrors the US Dollar Index (DXY or USDX) has rallied now in a clear 5 wave impulsive pattern suggesting that the US dollar has most likely formed a multi-month/year bottom. The decline can count complete with a 5th wave ending diagonal within another 5 wave decline within a C wave. The rally from the bottom has now done so in a clear 5 wave impulsive pattern, breaking, and so far holding above, a key trendline that has capped the decline since October 1st. But with 5 waves up that MAY be complete here, a small correction is possible, and the trendline is an obvious target for wave (ii) to find a bottom before an even stronger rally gets underway.

The evidence is mounting that a long term dollar bottom is in. Evidence supports the bulls, and any pullback in the USD/CHF I'd buy with a stop below 1.0032. If the larger wave count is correct on the dollar, it can rally 2500-3000 pips against its euro and swiss franc counterparts in the coming months!

The EUR/USD also broken through the key level of 1.4828 I mentioned yesterday that would give a strong indication that the euro topped against the dollar. A short EUR/USD position could be established with a stop just above the 1.5062 high.

Short Term Possible S&P Cash Wave Count

The attached 15min S&P cash chart is a speculative wave count based on current structure at hand. This can change at varying degrees as it unfolds, but right now this is what we're looking at. The choppy and fierce up down movements count well a subdivisions of waves 1s and 2s at different degrees. Seeing as that wave 2s' psychology according the EWP is that of strength that usually results in a large retracement of wave 1, this count is sound so far. The reason is that wave 2 psychology is composed of people not knowing or feeling that a trend has changed and so they look at declines as buying opportunities to get to new highs. This is why the corrections in wave 2s are so deep and strong. But they cannot make new highs above the start of wave 1 according the EWP rules, and they eventually give way to wave 3s, which tend to be the strongest of all the waves in EWP.

Today's decline was impulsive-looking, and rallies were choppy and weak and reversed fairly quickly. Most evidence points to a top being in and the larger trend flipping to "down", but I'm waiting for confirmation before making the official call. NYSE internals were weak today with 3.25 declining for every 1 stock rallying, and over 87% of all volume occuring to the downside, with overall volume being strong and exceeding the 13 day moving average. Volume was also high on Friday and the internals were weak as well. Conviction and volume is re-entering the market, and it's resulting in lower levels. Remember, as I've shown before, most of the rally from the March 2009 lows has been down on declining volume. This is very bearish, and typical of a bear market rally, not a new bull market.

Now we now need to look at the ascending trendline to be broken, closed beneath, and held. This trendline has held up the market since March of 2009 so when it falls, so should the entire rally from March of 2009. That trendline crosses about the 1053 S&P cash level tomorrow.

Bears Taking Control - Forming a Top

Take a look at the daily S&P cash chart. You can see the candlestick formation I pointed the blue arrows to. If you look closely at those daily candles, you see that the S&P reached its high around the 1100 level and was sold off. The bulls continued to try and rally the market only to keep failing. The bears have increased in numbers and ferocity, finally winning the bull/bear battle today with a nice daily reversal candlestick, and a break to new lows. In the process, it cancelled out the bullish triangle scenario and placed the immediate bearish count on the forefront. Today's action also coincided with a very impressive dollar rally, but a bottom is still yet to be confirmed as so far it's fallen just short of satisfying my requirements. But the dollar bottom and stock market top scenarios are looking very good at this point, and I'm just waiting for confirmation.

Dollar Close to Confirming Bottom - USD/CHF Needs Close Above Trendline

To supplement the EUR/USD analysis in the previous post regarding a dollar bottom let's look at the US dollar vs. the swiss franc (USD/CHF). You can see the wave count can be complete here, and the strength from the lows accompanied by bullish divergent momentum indicators, and the non-confirmation of not making a new extreme against the dollar like the euro did, all add up to a possible significant US dollar bottom at hand. Above I show the 4hr USD/CHF chart with a descending trendline that has capped the decline the entire 5th wave of C. A daily close above that level, which is at about 1.0200, would strongly indicate that a US dollar bottom is in.

The dollar picture is very important for the stock market view as a dollar bottom would indicate a stock market top.

Dollar Close to Confirming Bottom - EUR/USD Needs Break of 1.4828

The US dollar is showing the type of strength needed to confirm a bottom as I mentioned on Friday, and that the british pound exhibited earlier which evidently signaled what the dollar was about to do this week as I projected. The above 2 hour EUR/USD chart shows the bullish euro move against the dollar wave count as complete, and the straight line down signifying the dollar's strength against the euro today. A break of the previous wave 4 low at 1.4828 would be a strong indicator that the EUR/USD had formed a top, and therefore the US dollar had formed a bottom.

The dollar is important to watch because a dollar bottom means a stock market top most likely.

All Eyes on 1050 in the S&P Cash Index

Above is the ascending trendline I was talking about in the S&P cash index since the March lows. Sometimes I post things too quickly and don't realize my miswording until after I post it, so the email subscribers get the uncorrected errors. I am working on getting in the habit of triple checking my work before posting now that I've started sending email updates; so please bear with me.

The above chart shows the 1050 S&P cash level as to where the trendline meets today. A strong close beneath that leel, and holding beneath it for a few days after, will be a strong signal that "the crash" is underway. Until then, we wait.