Bears Need to Take out 1065 and 1057

Not much new to add from this morning's post. The bullish potential still remains, but the bulls have not broken above any key levels so the bear stance remains intact, although less likely at this point. The way this market has been see-sawing up and down the past week or so it wouldn't surprise me to see a big down day tomorrow. With that in mind, as a bear I'd like to see the 1065.25 level broken to severely weaken the bullish wave count. A break below 1056.88 would then put the bears back in control in my opinion because at that point the two 5 wave rallies I labeled in this morning's post would create a larger 3 wave rally which would probably be a zig-zag correction. But as long as 1065.25 remains intact, I'd have to slightly favor the bullish case at this point.

One thing to note is that again volume appears light with NYSE volume barely kissing the 13 day moving average. So for the bulls to get me to go long I'd need to see follow-through to the upside tomorrow above 1100 on at least decent volume.

So a break above 1100 on above average volume would get me bullish with the meat of a 3rd of a 3rd wave up possibly underway. A break below 1065.25 would probably get me interested in the short side while a break below 1056.88 would have me aggressively looking for shorting opportunities. Until one of those scenarios occurs soon, I remain neutral in the short term.


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 Rallying in 5 Wave Moves, and Declining in 3 Wave Moves

A quick look at the internals this morning show a very strong push behind this rally today. Although it is very early and this can reverse in a blink of an eye, I just wanted to show you what I see. The closing numbers are what really matter.

Normally sharp moves as a reaction to government action has lead to reversals shortly afterward, and since those sharp moves usually have been rallies in the past, I wanted a big rally yesterday off the Fed's testimony so I could short into that rally. Instead we got that sharp selloff that I thought was the kickoff to the next 3rd wave. But instead, it was just a sharp move due to government action that was immediately reversed today. Just the opposite of what usually happens. Oh I love the stock market and how it slaps me around from time to time :)




The market is rallying in 5 waves and declining in 3 waves. So from a basic EWP stance, that means the trend is up. Although it's possible that a zig-zag, or a series of zig-zags are unfolding, the bearish wave count I've been following has become much less likely at this point. Wave 3's, especially at various degrees very rarely will flip flop around and just glide down lower. They almost always are very sharp and decisive moves that are very destructive. I don't see that here.

Above is a 1 hour chart. It's possible to count the decline from the highs in April of this year as a WXY double zig-zag correction, and the 5 wave rallies we've seen from the bottom of wave Y is the kickoff to new highs on the year. This is only a "POSSIBILITY" at this point. I've always been aware of this occurring, but didn't mention it because I thought it was unlikely. But the failure of the big wave [3] or C to break down this market, and the choppy corrective looking decline from the April highs and now the 5 wave moves higher on the table, as an EWP follower I have to see the bullish potential there. Again this is only a POTENTIAL and POSSIBILITY at this point. It's just something to be aware of right now. I might put this back in a locked box underneath my bed again soon if the market reverses sharply and puts wave [3] or C back on track. We'll have to see. But right now I do not have confidence in the immediate and aggressive bearish case. I actually put in some hedges on my put options and covered my short term short positions at the moment but will re-enter on signs of a reversal.




Above is a 15min chart, and it supplements the 1 hour chart above well since both are showing the 5 wave rallies and 3 wave drops I was talking about. From a basic EWP objective standpoint, at this time we have to acknowledge the bullish potential this structure represents.




Above is a possible bullish inverse head and shoulders pattern forming in the S&P on the daily chart. I mentioned this was occurring on the XLF yesterday. Although it's not perfect since the "flash crash" low is quite a bit lower than yesterday's low, but if you chart it on a closing basis it looks much better. So the XLF's inverse head and shoulders pattern now appears to be becoming part of the major indices as well. This also opens the door to a big bullish move in the coming weeks.

Lastly, I wanted to point again that this crazy structure (dubbed "Wolfe Wave" by a subscriber) has once again proved to be a thorn in my side. I warned about it in last Friday's post (click here). It's a sharp downward move probably done by big institutions and then the bulls get scared out of the market and only a small few bears ride that downward momentum the rest of the way, creating a slow choppy grind lower until all the bears have done their damage and don't exist anymore. Then the bulls come in with no more bears left and create a huge pop that sends the market sharply higher. Well the action the this week surely proves again that-that sharp declining structure and grind lower is not bearish at all, and is actually quite bullish.

With all that said, I just want to be clear I'm not abandoning the larger bearish case at all. It's just that I've touted the immediate bearish case for a long time and haven't shown much of the other bullish possibilities. This is mainly because I thought the bullish possibilities had quite low potential. Now the bullish potential has increased significantly so all I want to do is point it out and make us aware of it. I'll post a follow-up to this post and try to get a better foothold of which side should be favored in the days/weeks ahead.


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's Flip-Flopping = Bottoming? or A Series of 1 and 2 Waves Before a Crash; Euro Has Good Shorting Opportunity

Strange day today as Ben Bernanke didn't come in and manipulate the short term market behavior like he usually does. I actually wanted that to happen to get a big spike higher so I could add to my shorts in preparation for an imminent reversal. But the market just sold off hard instead. Internals were moderately weak, but nothing to really focus on; volume was average as it kissed the 13 day moving average in the NYSE.

The market appears to be ignoring earnings for the most part and is just focusing on the economy and recovery as a whole. Once the evidence swings in favor of a good recovery then the market swings higher, but when the evidence swings back to favor a weak recovery then the market falls. This up-down behavior is similar to either a series of 1 and 2 waves at various degrees, or a bottoming process. I favor the series of 1 and 2 waves because the market is trading under key moving averages and has broken down various key levels to suggest the trend has turned to the downside.

Plus, the series of 1 and 2 waves makes sense here on the charts and psychologically since the charts obviously show a series of sharp ups and downs lately which is conducive to the behavior and structure of 1 and 2 waves. Also, the fact that the market is trying to get ahold of what the actual status is of the recovery and buying and selling sharply also fits in well with the characteristics of 1 and 2 waves.

But just stepping back and looking at the market itself you can see that the decline is far from creating clear and smooth impulsive patterns. And although it can be labeled with impulsive moves, at face value it looks more like a correction. A sharp and sustained move lower beneath the 1010 level will just about eliminate the potential for a bottoming-type structure taking place here, and it would also fit in well with the wave count that suggests a massively strong and sharp wave 3 at various degrees that should be getting underway any time now. So I'm looking for that sharp decline to confirm the wave count above. It should happen any minute now. The longer it takes to occur, the less likely the count above is correct, in my opinion.

One thing to note: I noticed the XLF (financial ETF) might be forming an inverse head and shoulders pattern. This is a very bullish reversal structure. Today's decline should finish up the pattern which means a sharp rally should occur very soon. I didn't really find any viable patterns in any of the main indices (with the Nasdaq Comp coming the closest), and I'm not sure how much of a market leader the XLF is, so I didn't post a chart. I'm not sure it's significant or even likely. But I did want to mention it for something to watch and if anyone trades the XLF.


EURO/USD







So the topping candlestick pattern I mentioned yesterday has so far paid off with the euro. I called a similar top a week or so ago and it proved to be wrong obviously, so I want to be vigilant in monitoring this short position. It appears that a 5 wave impulse wave is unfolding to the downside from the high and I'm waiting patiently for that to occur. Once it does, I will aggressively add to my short positions on any rallies. It's even possible to count the current structure an impulsive decline as it sits right now, but the proportions aren't desirable so I'm expecting it unfold a bit more to complete a full 5 wave drop from the highs.

As you can see from the daily euro count on the top chart there, if a top is in then we're in for a doozy decline ahead. I originally labeled the wave 2 as a wave 4, but the current rally's extension higher has made it too disproportionate to the corresponding wave 2 to make it likely. So it appears the euro has traced out a completed 5 wave decline already, and that a monstrous wave 3 down is underway. If correct, the profit potential is enormous, with a little less than a 1000 pip profit for the shorts at a bear minimum. But if a wave 3 is underway as the count suggests, then it will fall much much farther than that. This count also lines up well with a major equity selloff as well since a crashing euro might put pressure on stocks too.


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.

Stock Market Waiting on Bernanke; Euro Falling

The market is flip-flopping around waiting for the Fed to "save the day" with some new banking package that will dedicate more hard earned tax dollars to allowing rich bankers to continue being ruthless with our money. The 5 wave rally from yesterday is concerning, along with the fact that there has been absolutely no follow-through to Friday's big sell off after almost 2 1/2 days of trading. Again, not the characteristics of what I'd expect from a wave 3 at various degrees. With that 5 wave move in place, I'd love to see a sharp rally after the Fed statement today around 2pm EST. This would be the perfect rally to fade (short) since almost every government intervention plan that has come out in the past couple years that led to a rally has been quickly reversed. And since we have a small 3 wave decline today, a sharp rally after the Fed statement can make the rally from Monday's low a 3 wave zig-zag affair. So I'm hoping for a sharp rally to where I can add to my short positions.


YESTERDAY'S CHART





TODAY'S CHART




The euro has fallen quite a bit since showing signs of a top. This happened last time I tried calling a major top and it proved to only have been a minor top. So we'll see if we get follow-through to the downside which will help us determine at what degree this top actually is. Right now there are only 3 waves down from the high, but that can easily morph into a 5 wave drop. Doing so would strongly suggest that a major top was in and that the euro was probably on its way to new lows on the year.


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.

Bulls Try to Regain Control

The market's decline this morning and reversal in a smooth methodical manner is not at all what I'd expect to see in a 3rd wave at various degrees. I'd expect to see a sharp and quick rally at best. Internals were sold today with volume just getting above the 13 day moving average so today wasn't really a fluke it appears.




That crappy consolidating pattern after a sharp decline has come to haunt us again as we again get a sharp rally when the choppy gring lower ends (I talked about this in last Friday's post here). The sharp selloff and then complete reversal in a 5 wave rally is concerning for the bears here. So the evidence for the bullish case is building. Although all is not lost for the bears since the bulls have not taken out any key levels and plus it's possible the 5 wave rally is a C wave at some degree, which would explain the strong internals accompanying the move. It may just be a last effort to suck in the rest of the bulls before a big swoosh downward tomorrow or Thursday. If so, the rally from today should be near complete and will lead to a very sharp decline to new lows as long as it doesn't rally above 1100 first.



Looking at the daily candlesticks of the S&P the past few days you sure wouldn't expect that a wave (iii) of 3 of [3] or C was underway would you? I mean you have a bunch of green candles and one big red candle, and that red candle was done on a whacky options expiration day no less. Not encouraging for the bears. Also, today's bullish reversal made a nice bullish reversal candlestick that suggests higher levels in the coming days.

But as I stated above, the 5 wave rally could just be part of a C wave correction meaning that today's rally will be completely reversed soon and that today's bullish reversal was just the market's way of suckering the rest of the bulls into this market before it falls hard again this week. So although the evidence on the surface that was left today suggests that the bulls are in control now, it would only take a nice down day tomorrow or Thursday to reverse the bullish implications of today's move.


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 Might be Declining Impulsively; Euro May have Topped

The S&P is taking it's sweet time to decline in a wave 3 at various degrees, and although the decline can be counted as an impulse wave, it can only be done so in a very ugly manner. The main problem is the decline from the high which is an obvious 3 wave move. The only way to count the entire decline impulsively in my view, is to count that initial 3 wave drop as part of a flat correction where wave 'b' exceeds the end of wave 'i', then rallies in a wave 'c' to complete wave 'ii'. So far, the decline is a slow sideways down move where I'd expect to see more a sharp and almost straight line down if we were in a wave (iii) of 3 of [3] or C. That can certainly change at any moment, or the decline may just be a "slow bleed" that just continues for weeks. But so far, I'm not impressed with the decline to fit into the current preferred wave count so I'm watching the market carefully to identify any possible turn that might mean new highs ahead. I still remain short term bearish, although I'm "cautiously" short term bearish at least until we see a big swoosh down with real price destruction to equities that a wave at this degree usually brings.

The conlusion I'm getting from the companies already reporting earnings the past week is that they are not doing well on the top line but are doing well on the bottom line. Correct me if I'm wrong, but that tells me that revenues (total sales or gross income) are down and less than expectations meaning that the consumer and economy are not recovering as expected since total sales are down. However companies are still beating earnings expectations on the "bottom line" because they were able to slash operating expenses, which usually means layoffs and closing plants to fatten up profit margins. So through smoke, mirrors, and clever management trimming the fat, they were able to still show profits for their companies' bottom line which is great for the company's shareholders to which executives are ultimately responsible for. However, not meeting revenue expectations and essentially downsizing to meet profit expectations is not good for the overall economy. On a fundamental basis, this is very bearish for the economy as a whole in my view. I welcome any thoughts or differing opinions on this.


EURO




I've been looking for a euro top the past two weeks now and have been wrong a few times in calling one. Once a top is in it should lead to over a 1000 pip move to the downside, so calling a top at this magnitude undoubtedly will be difficult. Today I see another possible top in the currency. The hourly EUR/USD, as shown above, shows a spike higher and then reversal to a new low where it currently sits. A daily close beneath 1.2903 and especially 1.2870 would strongly suggest a major top in the pair has occurred and the short side should be favored in my opinion. Stops can be placed just above today's high.

Although the correlation between the stock market and the euro has not been that strong lately, a 1000+ pip decline in the euro would equate to a massive dollar rally and would create a very steep upward battle for stocks in an already difficult earnings report season.


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.

A Look at the Week Ahead

Friday was a great day for the bears who needed to come back and try to take back control of this market before getting too close to the "breaking point" of a wave (ii) possibility being underway. Although it fell shy of the 78% fibonacci retracement of wave (i), it did fail miserably at at the 1100 level. The market was severely overbought on an intraday basis, and momentum indicators such as the RSI recovered well enough out of oversold territory to now support a large decline. The large decline projected is of course wave (iii) of 3.

Friday's internals were quite bearish as you can see above. Only 8 S&P stocks traded higher and 95% of NYSE volume was on the sell side. Volume was also high, but it was an options expiration day, and in that context volume was fairly light. Again, it appears people are on the beaches and enjoying the summer more than trading the markets. According to CNBC, the last several options expiration days have resulted in down days, with a bit of a hangover the following week as well. This would be welcomed by the bears since the structure of the market Friday is not one I like as a bear. I've noticed that the past few times this structure occurred, it has often led to large snap back rallies that proved the decline to be just a correction. I pointed this out in a brief Friday post how the sharp decline followed by a choppy grind lower defines this structure I'm talking about. The one exception is when the market just accelerates lower with another sharp decline. Interestingly enough, this usually occurs in 3rd waves. So in order for this potentially bullish structure formed on Friday to be negated, I'd like to see a sharp follow-through selloff Monday. If that occurs, I will disregard the bullish potential and look to lower levels.



The short term decline from the 1100 area is far from perfect for an impulsive wave (iii) decline to be underway. But that doesn't mean it's not happening. It's quite early in the wave and lots can happen to help clear things up. The big daily bearish candlestick after failing at the 1100 level and the failure to recapture the 200 day EMA shows that the bears have come back in control. The bulls have failed so far, and now it's the bears' chance to see what they can do. They still have work to do to support a wave (iii) of 3 decline in my view, but right now they hold the reins and the burden is on the bulls to show they still have some fight left to reclaim this market.

If wave (iii) of 3 is in fact underway, I'd expect to see heavy selling this week. And any rallies, although they may be sharp, should be short lived and completely reversed quickly. The market has been flip flopping around for quite a while, all while elliott wavers are counting different levels of wave 3s occurring. At some point, perhaps now, the market should finally give way and tank hard and relentlessly to support these wave counts. Otherwise, we need to remain open to other possible scenarios occurring.

CASH MONEY AND SHINY METALS

My forex and futures charting software is on the fritz right now so I can't post charts, but I did want to comment on precious metals and the euro. Notice Friday that the euro rallied, and went flat, all while the stock market and precious metals fell hard. This divergence may be part of a major topping process as metals and stocks turn lower and the euro soon follows. The euro counts well as a 3 wave rise on the daily charts, but so far has not shown signs of a top. So I'm only currently short the euro 30% of my total desired position, and if there's an open gap up later this afternoon or signs of a top that arise soon, then I'll add to that short position. I also expect especially silver to fall hard along with stocks as well. Judging by the short term behavior in precious metals with the sharp selloffs and in an impulsive looking manner, it appears their uptrends have been broken and lower levels should be achieved soon. With the euro, gold and silver lined up for declines in the the days ahead, and stocks poised for a major fall, it paints a real deadly picture for the financial markets in the coming weeks.


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.

We've Seen this Structure Before

I need to come up with a name for this structure since I've seen it so many times. It's a sharp drop followed by a little or no rally, then just a choppy grind lower. This usually leads to a very sharp rally and eventually to new highs. It's a corrective structure. Although this outlook will be negated if we instead get a sharp drop lower again. But as long as that choppy grinding mess lower exists, beware of a sharp snap back rally.


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.

Strong Selloff on Options Expiration Day

The economic data continues to reverse and disappoint with consumer sentiment dropping much more than expected, and banks are selling off after earnings reports as many investors are concerned about the amount of loan availability in the economy and the fact that a lot of earnings was generated through tapping into reserves. The internals of the selloff this morning are very bearish with only 10 stocks in the S&P trading up, and 94.5% of volume on the NYSE on the sell side. Volume is big but it's options expiration day so we can't read too much into that.




As for the wave count, from an objective viewpoint, looking at the short term here it definitely looks like a corrective setback from the highs of the week. The waves are very choppy and composed of 3 wave moves. So I'm still expecting this to be an X wave of a triple combination. That means one more 3 wave rise for wave Z and then wave (ii) will be complete.



The very bearish internals, failure of the S&P at the 1100 level, the break-away gap this morning, and the sharp nature of today's decline after yesterday's big rally into the close has me looking at an immediate bearish option. I looked at the Nasdaqs and other indices and it's really tough to get a good 5 wave decline from the high that I'm confident in. And I'm already trying to shove a square peg into a round hole with the above count, but I do want to be aware that wave (iii) MIGHT have started today.

Going around the EWP forums and blogs it's obvious that everyone is on the lookout for the next be wave 3 down, so I know that it's likely the market will again do something to fool us at the highs to keep the elliott waver masses hesitant. Perhaps this current structure is it. The fact that the market subdivided in 3 waves from the high and then failed to make a new high in a sharp spike that was completely reversed the next day perhaps is the market's way of "fooling" us. If so, wave (ii) completed yesterday with a "truncated 5th wave" (failed 5th wave). This means that wave (iii) is underway now and should be composed of extremely heavy selling to well below 1000 in the S&P before bottoming. If this is the case, then we should have little patience for the market to flip flop around sideways or undergo long time consuming deep rallies; in my opinion. The market should be headed very firmly down if this count is to take precedence. Otherwise, I'm counting today's decline as part of an X wave with new highs still to come.

Also, I mentioned a week or so ago that the precious metals uptrend appeared broken. Well today silver has sold off sharply again today, and all while the euro has been surging higher. Also the USD/JPY (US dollar vs. the Japanese yen) has sold off sharply as well. This suggests that risk aversion is coming back to the markets. And that doesn't bode well for equities going into next week.


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 Corrected Today; But Far too Brief to Alleviate the Severe Overbought Condition Achieved From the July 1st Low

So the S&P broke below the 1090 level with ease this morning, suggesting that at least a correction was underway and that the short side should be played. But just as quick and easily as that level was broken, it was regained in the last 30 minutes of trading. The decline was far to quick and shallow for the market to fully correct the rally from the July 1st low and alleviate the severe overbought condition left on many intraday indicators.

The wild swings today may be chalked up to light summer volumes, several economic indicators that came out this morning, earnings reports hitting the wires, BP capping their oil leak, Goldman Sachs getting their SEC decision announced, and options expiration tomorrow. But the damage to the likelihood of the top bearish count continues to be done. The rally from the July 1st low looks very impulsive, and is extremely deep for a 2nd wave that's supposed to be within a 3rd wave. I would expect to see more of a sharp quick less deep rally for a correction within such a large wave 3. It's not required to have those features, but it is often the case that it does have them. Although it doesn't violate any EWP rules, the likelihood of this count remaining on track has decreased in the last few days.

A big reversal signal tomorrow or early next week while staying below 1131.23 will re-ignite the probability of this count. A spike to the 1105 area and reversal would be a good start.




Since the top count's probability has been weakened this week I wanted to look at other possible counts. Above shows us in a large flat correction for wave 2. I never really liked this count because wave 1 is far from perfect and adding a far from perfect corrective count just makes it less likely overall, plus wave b of 2 should be a 3 wave move and it's more like an impulse move, and the whole correction would be very large and time consuming. With that said, it's still a possibility since it doesn't violate any EWP rules so I want to keep an eye on it. It would also explain the sharp impulsive nature of the rally since the July 1st lows since that rally would fit nicely into this count as a wave C of 2. If this count is correct, it means we'll most likely get a quick shot to just above 1131.23 before topping and rolling over in a big wave 3.

Remember, tomorrow is options expiration day and when combined with light summer volume it could get kind of wild.


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.

Morning Update

The internals today are quite week, but not alarmingly so. On the NYSE, 73% of stocks are trading down and 81% of volume is to the downside. On the S&P, only 75 stocks are trading higher. So the internals are weak, but not so much to fully support wave 3 at various degrees.....YET. It's still early and there's plenty of time to get some momentum behind this decline and accelerate it lower.




The S&P had no problem taking out the 1090 area I cited yesterday so at least a short term correction of the July 1st rally is underway in my opinion. For the larger bearish count to be in play here (wave (iii) of 3 of [3] or C), I'd like to see this trend of lower highs continue until we can count a nice completed 5 wave impulsive decline. Right now, 1090 should act as resistance, but the 1095 area should hold, otherwise it would signal that this decline was just a correction and that eventually we'll see new highs in the coming days.

More later...


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.

A Top and Reversal Coming Very Soon; Will it be Wave (iii) of 3 of [3] or C, or Just a Minor Correction?

INTERNALS




The market had trouble continuing its monster rally from the July 1st lows. The extreme overbought condition the market is in right now on the intraday charts has finally caught up with it. Although the market closed mixed across the board of various indices, the NYSE internals were slightly negative. So the amount of stocks pulling the market up is decreasing. Two days ago we had a similar scenario where at the end of a long push higher for days, the market closed very mixed with negative internals. The following day (Tuesday), the market surged higher with very strong internals. I don't feel this time we will see that again. For one, it's too obvious; and second, this time it is occurring after only one day of fierce rallying vs. several days of rallying for the last time. The current market rally is nearing its end, but that's not really what the big debate should be about. The market is overbought right now in the short term so a pullback is coming, that's a given. The real question is "at what degree of trend is this top going to be." Is this just a correction for a 5 wave impulsive rally from the July 1st lows as I proposed in this morning's post? Or is it the wave (ii) top we've been looking for?


S&P WAVE COUNT





Above shows my top S&P wave count. The wave (ii) rally is much too steep and impulsive-looking for my liking, but wave 2s do tend to be quite sharp and deep and with light summer volumes hitting the markets now, perhaps this rally is just exaggerated. We'll see soon enough. The late day surge today tells me the market might not be quite ready to give up on this rally quite yet, and that we might see a push to the 78% retracement level around 1105. That's awfully close to the 1131.23 critical level for the bears so I'd be aggressively shorting in this area since my risk (stop losses) would be fairly close by. I'm already 75% short of what I want to be for my short term positioning. A break above 1100 will get me thinking about adding more. A nice pop rally and reversal around the 1100-1105 level would be a good sign that the bears have come back in the market to take control.


MOMENTUM INDICATORS






The top chart shows how much the daily RSI had come out of oversold territory to where it is now at current levels. The RSI has made a new high above where it was at during the wave 2 high. Some may say that's because the RSI is showing that it's leading the market higher and will get price to above the wave 2 high as well. I disagree mainly because on the intraday timeframes momentum is severely waning with bearish divergences on numerous indicators. Plus, with a wave (iii) of 3 of [3] or C perhaps gearing up here, it would need to get as high as it could to shoot down as far and fast as it's going to in order to support a decline of that power and magnitude.

The bottom chart simply shows the stochastics, another momentum indicator. Although this is a much less reliable indicator than the RSI, I still wanted to show it because it's currently at the same level it was at the wave 2 top, and you can see that they are starting to "pinch" for a cross downward with plenty of room to run on the downside. I could go on and on with these momentum indicators showing topping behavior, but I think you get the point.


MINOR SUPPORT SHELF AT 1090




In the short term, I want to know what needs to occur for me to gain confidence that a top, whether short term or long term, has formed. Looking at the 3 day chart above, I see a minor support shelf at 1090 that seems to be important at the moment. If the market can break through this level convincingly and impulsively, then I think it can be safe to say that a top is in. Once the decline gets underway we should know fairly soon if we should favor the bullish or bearish count. Right now my money is still on the bearish count since 1131.23 has not been broken and the market is severely overbought intraday to where I'd still make money on even a short term pullback.


THE EURO




I mentioned the other day how I thought the euro had topped. I was wrong obviously as a new high was made. But there was little sustained follow through today, and the intraday RSI is showing a bearish divergence for quite some time as you can see above. The rally from wave 3 low is also a clear 3 wave move which is a correction. And when you take into account that the stock market appears to be topping at some degree, it would also make sense that the euro may be topping as well. The fact that there are about 800 pips to go to make a new low for wave 5 in the euro, it would be wise to look for shorting opportunities in the euro, or long opportunities in the US dollar, in my opinion.


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 Severely Overbought; Structure and Strength of Decline Important for Determining the Larger trend

Just a quick note. It appears the market's severe overbought condition has gotten the best of it, for now anyway. With 1131 still intact it leaves the larger term bearish case still very much possible. However a lot of damage has already been done, so the bears have a lot of work to do. The biggest piece of damage in my view is the impulsive-looking rally from the July 1st lows. This is quite a large, long, sharp and deep correction for what should be a wave 3 of [3] or C. Not really characteristic in my view. But the bears can still erase this bullish look with a strong and sharp impulsive decline of their own here. The structure, strength and volume on the decline will help us determine if this setback is wave (iii) of 3 of [3] or C, or if it's just correcting a 5 wave rally that started July 1st.

More later...

Rally is Strong

Well the fracturing of the various indices and low volume yesterday was just another pause and recharge before the next leg up in stocks. Today the market surged up with a gap at the open. I was hoping that it would soon reverse and mark a nice spike and reversal which may mark a top for wave (ii). But the market has held up nicely all day, is now pushing higher towards the close (for now), and the internals of the market are very strong although volume still remains a bit light. So the bears appear to be back in their caves sleeping for the summer with a few bulls running around doing what they please.

I'm not fighting the bulls in light summer trading, and if we're in large wave 3s at two degrees of trend, then the market needs to prove it. And it certainly isn't doing it SO FAR. If the market can reverse and decline heavy tomorrow, and preferably reverse with a gap down to create an island reversal pattern, then the bears may still have a chance. But the market needs to move lower quickly to support the proposed wave count. As it stands right now, the entire rally the past two weeks can count as a 5 wave move, suggesting that the larger trend has turned up. So the bulls have certainly gained the advantage here, and the new surge of strong internals gives them the momentum to keep pushing higher in the short/medium term.

The bears definitely have work to do. The close today, and the follow-up action tomorrow will tell us a lot.


UPDATED INTERNALS AFTER THE CLOSE




So the market closed very strong with volume that kissed the 13 day moving average on the NYSE. I see no bearish signs in the market right now, and the bulls definitely gained the upper hand today. That can easily completely reverse tomorrow, but it's gonna have to if the bears want a chance still. I'll discuss tomorrow or Thursday the impact and moves going forward if the rally continues higher and makes it evident that the big wave 3 again remains ellusive.


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.

First Signs of Weakness Present; Now Need the Actual Rollover

The market is working hard to make any upward progress now, suggesting that the buying euphoria, or should I say the short covering euphoria, is almost over. The S&P has stalled hard right in the center of my reversal zone I mentioned early last week. The MACD has now crossed down on the hourly chart, and the daily RSI is in good territory to support another big down leg in the market. But we have no rollover or decline yet, so the market can easily shoot or grind higher from here. I can see a big shot higher tomorrow followed by a big reversal. That may be the shot the bears need to finally suck in the last of the bulls in the market before smacking them down with great bear force and numbers. We'll see. Any further rallying that gets into the 1185-1190 area would have me adding to my short positions with a stop just above 1131.23.








Although it appears we could easily get a sharp shot higher that will lead to a quick reversal, the divergence between the Dow and the other major indices left today is worth noting. Although it's by a very small margin, the Dow has made a new high today while the S&P and Nasdaq 100 has not. Now this divergence dwarfs in comparison to the big bullish divergence I pointed out July 2nd (click here) which led to the recent monster rally of wave '(ii)' we're currently in, but it's still a divergence and it's especially worth noting because Dow component Alcoa announced good earnings data tongiht which has the stock up over 3% after hours and might lead to the Dow rallying to new highs again tomorrow. This may further stretch the S&P and NDX's divergence from the Dow if they don't make new highs themselves. So I'll be watching that closely as a possible sign of an imminent top in the overall market.





So as I've said the past week, despite the market closing higher everyday, the internals continue to weaken every day as well. This is consistent with a correction. And although this can all be eliminated with a big up day tomorrow on strong internals, right now the data supports the recent move higher being a correction. Today the trend continued as the major indices squeaked out minor gains while internals actually turned negative as you can see above. Also, volume was well below the 13 day moving average at less than 1 billion shares on the NYSE. And the NYSE closed down today while the Dow closed up. This sometimes results in a sharp selloff the next day. So the market's rally has weakened severely, and the wave count, momentum and retracement indicators are ripe for a top and reversal at any moment. The market appears to be gearing up for a sharp move, and the current evidence suggests that move is to the downside. But just in case that move is to the upside, I hold that 1131.23 is the key level the bears need to hold.





Lastly I wanted to show the fractured nature of the market at what might be near topping levels. I interpret this sign after a sharp move in the preceding days as an exhaustion of that move. But last time all these indices were this mixed on light volume we had a monster rally the following day. Nothing is perfect, but I did want to point out the mixed nature of the overall market at this point in the rally. A big move appears imminent in the near future.


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.