Great Economic News Today!! Stocks Struggle, Nasdaq in the Red, Dollar Surges, Not Quite What You'd Expect...

Great economic news came out today on retail sales and consumer sentiment data that really blew away what economists estimated the numbers would be. So the Dow should be up 200 points right? The recovery is on track so it's Dow 30,000 in a few years right? Well the Dow has been trading up a meager 40 points all morning and the Nasdaqs have actually turned negative at this time with the XLF and Russell 2000 about to go red too. Why? It's all in the US dollar. The dollar rallied big this morning, which has put tremendous pressure on the stock market. Earlier this week I said in response to the stock market reversal and dollar strength after the great non-farm payroll numbers:

The stronger dollar and weaker commodity action is putting severe pressure on the stock market. This all started with the dollar rally after the good jobs report Friday. So if you follow financial news and feel it moves the market, then think about this: the stock market rallied primarily on dollar weakness as you can see from the inverse tight correlation to the US Dollar Index (DXY). This is all happening when the so-called "recovery" is getting its legs. Now a great jobs number comes out on Friday and the dollar rallies because investors fear the Fed will raise rates sooner than expected. This causes stocks to sell off. So the stock market is rising on the hopes that the recovery is on firm legs but sells off when things get too good because the Fed might raise rates. So if good news and a good recovery won't push the stock market higher, what will? Darned if it does and darned if it doesn't. The bulls are in a tough spot here. Click here for full post

Well today, similar action occurred. The retail sales and consumer sentiment numbers blasted estimates, coming out much better than expected. Yet the stock market is struggling to stay in the positive as a whole. Why? Because the dollar rallied again on this good news as you can see from my USD/CHF chart above. Most of the rally from the March 2009 lows have been on dollar weakness, so it was just that prices rose mostly on dollar weakness; not that any fundamental or intrinsic value in stocks occurred. So when the dollar reverses, so will the stock rally.

The dollar is surging hard against the euro and swiss franc, but isn't performing as well against the British pound and Australian dollar so I'd like to see to dollar make new highs against these other currencies soon. But as it stands now, the dollar bull run has resulted in commodity weakness; gold, silver and oil reversed sharply this morning; which will also put tremendous pressure on the stock market. So the market is set to fall on bad news, and struggle or fall on good news. Again, the bulls are in a tough spot here at this juncture. I spoke about this also earlier this week, click here to view that post.

With that said, on the 15 min S&P cash index chart attached you can see it traced out a 5 wave rally which was confirmed by the Dow, but not the Nasdaq Composite or Russell 2000. But with 5 waves up from the lows, caution is still warranted for the bears at this point. I'm still short term neutral (long term bearish) the stock market until we get solid evidence of a top, and I'm still short term and long term bullish the US dollar.

Market Remains Range Bound; Gains From Here Should be Hard Faught, and Short Lived

The market shot higher out of the gate this morning, fell back a little bit, then traded sideways the rest of the day. It rallied shortly after my post yesterday (click here for yesterday's chart) which pointed out the weakening momentum behind the downtrend, and then continued to rally higher this morning. The Dow actually created an inverse head and shoulders pattern on the 5min chart as well. This rally occurred at the bottom portion of the range, telling us the market isn't ready to break out of it in a decisive manner yet. Usually consolidations, or triangles, occur as a pause in the previous trend before spiking one last time in line in the previous trend's direction. In this case, that direction would be up. So it would not be surprising at all if we see some follow-through with this rally in the coming days, and probably get a spike to a new high on the year in the S&P cash index above 1119.

However with so many divergences in other indices and sectors, and the fact that even the euro didn't rally with the stock market today and precious metals continue to weaken, it tells me that any further rallying to new highs will probably be by the S&P, Dow and maybe the Nasdaqs all by themselves. The amount of indices, sectors and markets, charging higher to new highs is getting smaller and smaller. So any spike above 1119 in the S&P should be short lived, and worse case for the bears would be that it does a "blow off top" like gold did. But the reversal from that top will be just as fierce as the climb higher was.

So I remain short term neutral on the stock market and long term bearish. A solid close beneath 1085 will open the door to possibly a major top being in place, while a break above 1119 should be short lived and reversed shortly after.

Decline Weakening Short Term and at the Bottom of the Range; Decision Time for the Market

Precious metals continue to sell off hard, but the US dollar is having trouble maintaining its upward momentum and the stock market is looking very "bottomish" as its past two declines have been very choppy and hard faught as seen on the S&P 5min chart attached. This "bottomish" behavior is exemplified by the fact that the S&P is right at the bottom portion of the range its been trading in the past few weeks. So the door is open for a sharp rally from current levels, however it's not required.

So it's decision time for the market. A solid break and close beneath that range, around 1085, should lead to acceleration of the downtrend and possibly align the stock market with precious metals, the Russell 2000 and the XLF by forming a major top. OR, it will bounce off the support and rally within the range further torturing the bears.

I remain neutral the stock market in the short term until the range is broken significantly.

Stock Market in a Range, but Bearish Commodities and Bullish Dollar Will put Downside Pressure on it

The stock market was very weak today with internals registering 2.24 down stocks on the NYSE for every 1 stock trading up, and 82% of all NYSE volume to the downside. The stronger dollar and weaker commodity action is putting severe pressure on the stock market. This all started with the dollar rally after the good jobs report Friday. So if you follow financial news and feel it moves the market, then think about this: the stock market rallied primarily on dollar weakness as you can see from the inverse tight correlation to the US Dollar Index (DXY). This is all happening when the so-called "recovery" is getting its legs. Now a great jobs number comes out on Friday and the dollar rallies because investors fear the Fed will raise rates sooner than expected. This causes stocks to sell off. So the stock market is rising on the hopes that the recovery is on firm legs but sells off when things get too good because the Fed might raise rates. So if good news and a good recovery won't push the stock market higher, what will? Darned if it does and darned if it doesn't. The bulls are in a tough spot here.

In the short term this is irrelevant. But what my point is-is that it's primarily dollar weakness that fueled the stock market higher from the March 2009 lows. With a weaker dollar, stock prices, not values, rose. The weaker a dollar is worth the more dollars it will then take to buy the same stock a few days ago. So the real story is the US dollar here. And it appears that it has formed a major bottom.

My attached S&P cash index daily chart shows the S&P in a range. Until that range is broken significantly and closed outside of, then we'll assume we'll be bouncing around here for a while. But with commodities topping and the dollar bottoming, the evidence is building that the breakout of that range will be to the downside, and perhaps soon.

Now look at the daily USD/CHF chart attached and notice the strong surge higher after several weeks of bullish divergence on the RSI. The last several weeks of the dollar's decline was not only very very crowded, but also had severely weakening momentum with every new low during that time as you can see from the RSI which failed to make new lows with price. Now the shorts are getting scared and covering their butts. The more the dollar rallies, the more shorts will get "squeezed" out of their positions. As crowded as this trade is, it would not be surprising if it just kept rising more and more with little break.

The last two attached charts are of gold. You can see on the intraday chart that gold has been massacred after its huge surge near the $1,230 level late last week. As commodities often do, it appears gold made a blowoff top and is now reversing just as sharply as it rallied. The count remains valid and gold should move inverse the dollar just as fast.

So I'm short term bearish gold and silver; short term and long term bullish the US dollar; and neutral on the stock market until we get a clean breakout from its range.

Meredith Whitney; Big Financials Bear

For those of you out there that like the fundamental side of trading/investing, here's a video from CNBC with Meredith Whitney who has been stellar the past couple years in identifying strenghts and weaknesses in various individual financial stocks, and financials as a whole. What she is saying here in this interview is one of the many reasons I'm short the XLF, and have been for a while.

The market sold off today but so far has no follow through. It's possible to count the decline from the highs of the year as impulsive, but probably needs to subdivide one more time to a new low to be perfect. Once structure unfolds more and makes things clearer, I'll post my opinion of the short term direction and key levels to watch for. I remain neutral in the short term for now, but a break of 1084 in the S&P cash would get my attention for the bearish side.

US Dollar is Key, Precious Metals Probably Topped, Stock Market Should Follow Soon

Just a quick update this morning on a few things I think are significant. As I've said many times, the US dollar is key to the stock market's movement. A dollar bottom and rally should result in a stock market top and reversal. You can see from my primary wave count on the attached chart of the 4hr USD/CHF that it's possible to count the rally from the lows as impulsive. But as you can also see from my alternate count chart below it is that it's also possible to count the rally as just an A-B-C correction which will most likely lead to lower prices soon. This should clear up as time goes by and wave structure unfolds. But now that we have the two top wave counts, we can watch the action from now on and see what fits best. The bullish count does remain my primary count right now though.

The reason the bullish dollar count is my primary count though is because of the action in precious metals. Gold has been in a blowoff top for a few weeks now but appears to have made its top. Last Friday, and halfway into today's US session, gold has dropped $83, or 6.8%. You can also see from my attached gold futures weekly chart that in addition to this, gold made a bearish weekly reversal candlestick. If gold topped, it will be hard for the dollar to make a new low, which means the current dollar count should be bullish as of right now.

The stock market is struggling to find direction, but the indications in the US dollar, precious metals, and several of the smaller indices indicate that a major top is forming and can give way at any time to a major sell off. Until the stock market gives us clear signs of that top occuring, I have to remain neutral in the short term, and of course I'm still very bearish in the long term.

Observe the Power of the Dollar on the Stock Market

It looks like yesterday's late day sell off was just profit taking and protective posturing for the jobs number that came out today because the major indices rallied to new highs and the Nasdaq confirmed the Dow and S&P's highs from yesterday, which eliminates the short term bearish non-confirmation. The longer term divergences remain in solid place.

Today's better than expected jobs numbers has everyone doing cartwheels on TV about the economy and the stock market. However the dollar has rallied sharply this morning as you can see from the AUD/USD and EUR/USD charts attached which move opposite the dollar. The stock market rallied huge this morning but so did the dollar. The stock market's rally could not fight the huge headwinds that a dollar rally brings, mainly because most of the rally from the March 2009 bottom was due to dollar weakness to begin with. It was just an inflationary rally in prices, not a fundamental underpinning of strength in the market. So the Dow went from a strong triple digit gain this morning to negative territory where it sits today.

I, and many others, have been saying for a long time that the key to the stock market's rally and decline is the dollar. A dollar rally will result in a stock market decline, and vice-versa. If today's reversal holds, we'll see if it has legs and runs next week. But the fact that people sold good news and the dollar rallied on a great jobs report is definitely bearish, especially because the past several months have brought rallying on jobs report day. A change in recent trends are another sign of a top, and today we have another piece of evidence supporting that.


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.

Markets Fractured and Sloppy, on Many Levels, Among Various Indices/Sectors

I have a lot of charts and comparisons to go over and I'll try to do my best conveying my message with out it getting all "spaghettied" and confusing. The bottom line is that the markets are very fractured in the larger timeframes (daily), and now they are showing a fractured structure on the smaller timeframes too. The market is not healthy, and the underlying fracturing is weakening the market, despite the window dressing new highs in the Dow and S&P lately.

First, let's look at the top chart which shows an updated 2 hour chart of the Australian dollar vs. the US dollar (AUD/USD). Today's rally carried to the 100% retracement level of the start of wave 1 exactly at 0.9321. This is the absolute maximum retracement for a wave 2. So the count posted yesterday and today remains valid. The reason this is of importance is because this pair moves fairly inverse to the US dollar, and is sporting a clearer EWP structure and wave count that other pairs that better follow the dollar, like the USD/CHF and the EUR/USD. When the AUD/USD and EUR/USD top, the stock market should top as well. The pair cannot rally above today's high, and should be in for a wave 3 of (3), which means it should collapse very soon in a fast and ferocious manner for the count to be correct.

Second, look at the financials ETF (XLF) daily chart. You can see the financials topped in mid-October, even though the Dow and S&P have kept charging higher to new highs since then. The XLF is lagging drastically, along with the Russell 2000, showing the inter-market divergence and strucutural weakness in the overall market I've been discussing for the past few weeks. You can also see that the XLF made a nice clean 5 wave decline from the high, then rallied in a 3 wave a-b-c structure I labeled wave (2). After some consolidation, most likely a series of small 1 and 2 waves, we got a big 2% sell off today. That fits well into the wave count which calls for a wave 3 at various degress to occur soon, which basically means an almost straight line down. So this count too remains on track, and very short term bearish, along with the Russell 2000.

Third, look at the daily chart comparisons of the Nasdaq 100 (left) and the S&P 500 (right). Click on the charts to enlarge. You can see that the Nasdaq 100, and the Composite (not shown), failed to confirm the new high the S&P and Dow (not shown) made on a daily basis. this is just more fracturing now occuring on various levels with various indices. This evidence, combined with a strong selloff today is very bearish.

Fourth, this last illustration is a good example of how bearish a non-confirmation can be when other markets, indices, or sectors do not confirm new highs. They are 15 minute charts of the Dow (left) and S&P (right). Click on the bottom charts to enlarge. The S&P shot to a new daily high while the Dow failed to confirm it. The result was a sharp sell off into the close today. Now this is just an intraday divergence among two indices. Just imagine how much stronger a decline will be when several indices and sectors on the daily charts are diverging, just like what is occuring now, and decide to finally sell off. Big decline ahead.

Today's action is encouraging for the bears as it is evident the market is looking for a reason to extend an overextended market higher and is having trouble finding it as it's been having trouble making any significant gains the past several weeks. However the bears have not been able to gain control of the market on downturns either. Until the bears arise in strength, which will be illustrated with a high volume day and consecutive selloffs, the market probably won't be able to tank in wave 3 or C. I suspect that people were selling today to reduce their exposure to stocks ahead of the big jobs number being reported early tomorrow morning. Lately, people have bought the dips when the jobs numbers were reported, so a break of that trend would be a good start for the bears. A big down day tomorrow may be very telling and would be encouraging for the hungry bears looking for a major top to gobble up.

So I remain short term neutral at this time with a slight bearish bias heading into tomorrows session. A big sell off tomorrow on big volume and weak internals will be a big sign that the prior trend of market action is breaking, and that perhaps a major top is in. Tomorrow's action should be very telling.


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.

Market at Crossroads

The S&P cash index broke above 1114 into 1116 so that makes me short term neutral the stock market. The market has been consolidating the past couple weeks, moving sideways and getting nowhere. This usually leads to breakouts. With the market holding up and eeking out new highs, despite the evidence suggesting a top, it hints to me that it wants to move higher. Points of possible resistance are the 1121, 1150, and 1200 levels. I'm not sure we'll get that far in anything other than a wild erratic blowoff top, if any rally at all, but those levels are worth watching.

Looking at the Australian dollar vs. the US dollar (AUD/USD) it only has made 3 waves down from the 0.9410 high, which is a correction as it stands right now. It could be a series of 1s and 2s like I labeled it, but it needs to stay beneath 0.9321 to keep that count as a strong possibility, and of course 0.9410 is ultimately crucial to the bearish case. Remember, a bearish AUD/USD is a bullish US dollar essentially. A bullish dollar means that the stock market should decline. So since 1114 fell in the S&P, let's turn to the dollar again for clues on the stock market's future movement. So an AUD/USD break above 0.9321 would hint a stock market rally phase is underway, and an AUD/USD break above 0.9410 would confirm it.

Nothing really stellar to report on the stock market other than breaking 1114 in the S&P and the the fact that the high risk small cap and tech stocks are rallying much stronger today than the Dow and S&P, which is concerning for the bears. I'll be back when something of interest develops. And as always, I welcome all your thoughts and analysis as well.


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.

Market Divergences Remains the Key Theme

The embedded video is of technical analyst, Carter Worth, who makes routine appearances on CNBC. He was very good in projecting the meat of the October 2008 collapse so I tend to follow him to supplement the other bits of data I compile. Today he was on Fast Money talking about basically what I've been talking about recently in that higher risk markets are starting to break away from the bigger blue chip indices; and he illustrated this with Japan's Nikkei 225 index. It's worth watching because it's in line with what I've been pounding the table about the past few weeks, and it's always nice to see other reputable analysts who use different technicals and disciplines come up with similar findings and conclusions.

The market action today was fairly bullish in the sense that the market didn't selloff more, despite the strong short term technical evidence suggesting it would. But at the same time, the market didn't break the 1114 S&P level I've said was key either, and the money managers' buying spree on Mondays had little impact until the very end of the day, so the bearish case remains intact. The dollar bottom and rally still remains a possibility as seen with the lack of new highs in the AUD/USD and EUR/USD which move opposite to the US dollar. We can watch those pairs through the Asian and European sessions tonight to see if any big moves are on the horizon Tuesday (both pairs should move in the same direction as the stock market). It's possible that today's late day buying surge was the fund managers coming in and buying up stock; probably after they saw there wasn't going to be a meltdown today after the Dubai stuff fully sunk in after the holiday (click here to read the CNBC article regarding money managers buying up the market on Mondays the past several weeks).

As for the EWP count, the market has only fallen in 3 waves so far. So as of right now, it looks like a correction, but that can change with subdivisions lower in the coming days. Also, you can see how the market has formed a support shelf at the 1085 S&P cash level with the market making long candlestick wicks in that area. When the market breaks beneath that level strongly, and closely well beneath it, it should lead to acceleration of selling. So for now, we have to be patient and wait to see how the market unfolds in the near future here.

Not much of anything signficant really occurred today that's worth spending a lot of time on so I think I'll end it there and let the market action unfold so we can get a better idea of where it's headed in the coming weeks. Until then, I remain short term bearish as long as the S&P trades beneath 1114.


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.

Bearish Island Reversal in Place

Thanks to blog reader, JD, for pointing out that today's gap down in the stock market leaves a bearish island reversal in place right now (click here for JD's comments). As you can see from the attached S&P and Dow charts, the up gap from Monday was followed by a down gap today which is a classic reversal pattern from the previous trend. This is just more evidence of a short term top forming; and when combined with the longer term evidence it suggests that perhaps a major top is already in the stock market.

Thanks a lot JD for sharing that insight with us!

Post Turkey Day Update

I hope everyone who celebrated Thanksgiving had a great holiday with family and friends and got as full as I did on great food and wine last night :)

Well I said I wouldn't post anything unless something significant happened and that's exactly what occurred. A state run firm in Dubai essentially is defaulting on a big debt. Just a small taste of what's to come as wave 3 or C takes effect and ravages these markets. However, despite Asia and Europe selling off over 3% in some indices, the US market has spent the entire morning rallying since the big down open. I'm not surprised. With the very light volume and the US taking the latter end of the week off, I don't want to read too much into the action because things tend to get wild when Wall Street is gone on holiday. However that doesn't mean we should sweep under the rug the action that's occuring.

First, the AUD/USD (Australian Dollar/US Dollar) declined in a nice 5 wave pattern which I showed in a previous post (see post here). Thanks to Elliott Wave International's Short Term Update and FXCM curreny analysts for bringing this count to light. The pair rallied to one more new high above where I previous projected and has since declined sharply in an impulsive manner to a new low. See attached AUD/USD chart illustrating this. It appears the pair is a large wave (3), which is bullish for the US dollar. The EUR/USD is also reversing Wednesday's big gains, but the AUD/USD count is much clearer so I'll be following that a little more closely. Again, a dollar bottom and rally will be extremely bearish for the stock market. (a bullish dollar move would equate to AUD/USD and EUR/USD declines).

Also notice on the attached S&P cash chart that earlier in the week the Dow eeked out a new daily high essentially all by itself, creating a bearish non-confirmation. The same type of non-confirmations occurred in several other indices on larger timeframes as well. Then the S&P declined beneath the previous swing low at 1086, solidifying the bearish non-confirmation with the Dow. This action is very bearish.

Monday's have been notoriously bullish the past several weeks and this is also when a lot of investors/traders will re-enter the market from the holiday to sort out the action from this week. So the beginning of next week will be more telling of the short term structure than this week. The action this week is overwhelmingly bearish if the 1114 level on the S&P continues to hold, and it keeps me short term bearish as well.

Also, we had some good comments to my last post by Rob and Gustavo, so feel free to check them out (click here) and offer comments, questions and insights if you'd like. Thanks as always guys for posting good insightful stuff to help us all get an edge on the markets!


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.

Snoozefest in the Market Today

Just a brief holiday week update. Nothing spectacular in today's market snoozefest. I don't want to read too much into any signals or indicators right now with such light volume, but the one thing of interest includes this week's and prior week's data. Volume has fallen off a cliff. Look at the daily S&P cash chart on the past rally phase since early November. That huge rally was done on declining volume, falling significantly short of the 13 day moving average through most of the rally. Combine this with the Dow making a new 13 month high yesterday while virtually no other index or sector followed suit, you have a fractured and weak market. That doesn't mean the market has topped and will roll over immdiately. But with this kind of behavior after the market has rallied 50%+ since March this year, it's certainly not a time to start getting long, in my opinion.

With light volumes over the holiday week I can't say much of anything with a strong level of certainty, but I do still hold the short term bearish view from last week as long as the S&P cash trades under 1114.

I don't want to get all preachy but I do want to share something that's important at this juncture in the market and the year that I've learned while trading the markets. As the holidays approach it's good to always keep the markets in perspective and realize that its behavior and our portfolios pale in comparison to the importance of good family, friends and health. Enjoy as much as you can with them as the holidays approach, and remember that the market is just a game, and that true happiness will ALWAYS result from relationships we build with our family and friends, not the market. Tomorrow is a heavy news day so we may get something worth reporting. If not, I probably won't be back until the weekend or Monday.

Happy Turkey Day!!

Watching the Dollar, Stock Market Still Split

The market surged this morning as has been the case with recent Mondays as of late. A CNBC FastMoney trader has been saying that Monday's rallies have been due to Money Managers having available funds at that time and doing all their buying. Today was no exception. The financial news wires said the rally was on some housing data that came out this morning, but the EUR/USD rallied all throughout the Asian and European sessions before the housing data even came out this morning, signaling a big rally in the stock market was going to occur this morning anyway. So as usual, the "news of the day" has very little to do with market movement despite what the financial news folks say. EWP states that crowd psychology and the wave structure create the news, not the other way around. Today is a good example of that at work.

Internals are very strong this morning, suggesting only buyers in play today. It's a holiday week so volumes will most likely be light, perhaps giving the bulls an opportunity to rally this market big all week. The key will be to see what happens when volume returns. The last few times big volume re-entered the market, it resulted in selloffs. Today the Dow made a new daily high while virtually every other index did not. Again, as this market shoots higher, watch the behavior of the Dow compared to the other secondary indices and sectors. And keep in mind my post on the significance of this "fracturing" occuring right now that's causing the Dow to outperform everything else (see post here). I'm short term bearish as long as the non-confirmation between the Dow and S&P remain intact which means the S&P needs to continue to stay beneath 1114, however I have low confidence that will hold at this point.

An interesting structure and opportunity exists in the AUD/USD. Elliott Wave International and FXCM analysts have pointed out the clear 5 wave decline in the australian dollar/US dollar (AUD/USD). The pair has rallied to the 61.8% fibonacci level which presents a great opportunity for the bears to get short at current levels (0.9253) with a stop above 0.9410.

I'm visiting family and friends this week so I won't be posting much this week other than significant develops that unfold as I see them. Have a great holiday week everyone!


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.

Watching the Dollar for Signs of Stock Market Break Down

As I've been saying for weeks, the key to the stock market rally appears to be the decline in the dollar. As the dollar has fallen, stock prices have rallied. The euro/US dollar, or EUR/USD, is basically the "anti-dollar" and moves opposite the US dollar. So the EUR/USD essentially moves fairly parallel to the stock market. So watching the EUR/USD for signs of a top and break down will give us clues as to when the stock market will top and break down.

Notice on the 4hr EUR/USD chart I have above that the pair has consistantly failed to make a new high recently, despite the Dow and Nasdaqs doing so. Again, another non-confirmation bearish divergence in the markets, indices, and sectors that normally move fairly in line with each other. But more importantly, look at the series of lower highs and lower lows being formed in the very choppy sideways action in the EUR/USD. The market is telling us that the 1.4800 level is VERY important because whenever the pair reaches that level it gets bought up ferociously. But it still keeps inching out new lows before rallying, which ultimately has failed to make new highs. What this probably means is that the bears are slowly and steadily gaining the upper hand here because the bears push the pair down to new lows and then stop a rally to new highs. The more it hits the 1.4800 level, the more erosion to the bulls' support will occur there until eventually there's nothing left. As long as this continues, it's just a matter of time before that support barrier gives way and the EUR/USD collapses. Once that happens, it should move quickly to at least the 1.4650 area before finding support again. So many people are short the dollar and long the EUR/USD that once these people exit, the move will be "jaw-droppingly huge and fast".

When the EUR/USD breaks down, the stock market will follow. The stock market appears to be falling in 5 waves, but probably needs one more "up-down" sequence for the waves to count properly. Otherwise it leaves open the possibility that the entire decline was just an A-B-C drop as shown in red on the attached 15min S&P cash chart.