Distribution Days in the Dow

The Dow Jones Industrial Average is showing underlying signs of weakness as large institutions have been quietly unloading shares on strength. In his book, "The Successful Investor" William O'Neil writes about distribution days, a day when price declined and volume was heavier than the day before. He says that when 3-5 of these days occur within a month, there is a good chance that the market is getting ready to roll over.

In the past 4 weeks, we have seen 6 distribution days in the 12700-13000 price range. You can see a similar occurance when the market topped in October: there were 5 distribution days in a small price range, and then the market started its downtrend. I don't see a reason why it won't be the same now. This is more evidence that we could see another significant decline.


10-yr Treasury Note may lose more yield

I have not studied interest rates extensively, but I saw an interesting Elliot Wave pattern on TNX, the yield for the 10-year Treasury Note. Based solely on the pattern, I think TNX may have another decent drop, probably taking out the low set in January.

You can see a clear 5-wave drop, which has now been retraced by a 3-wave flat correction. The 3-3-5 subdivision of Waves A, B, and C matches the typical structure of these corrective waves. It looks like the last upmove in WaveC is an ending diagonal, so a break below the small trendline should kick off the next leg down.
Since October, TNX has been well correlated with SPX, so this lends additional evidence to my case for another decline in the stock market.

Another look at SPX

I last posted about SPX here. The market has made marginal new highs since then, but the structure is still bearish in my opinion. I still think we could see new bear market lows.

An alternate wave count from the 1576 high shows 5-waves down. 5-waves down is normally not a terminal pattern for a trend; instead, one can expect, at a minimum, another 5-wave decline. The rally that has ensued from the 1256 low has been very choppy, and has subdivided into 3-waves, which is corrective. This sets up the stage for another 5-wave decline.

Also, notice the MACD divergence: back in March, the confirmed divergence preceded a nice rally. Now, we are seeing bearish MACD divergence, which should precede a decline.

I am open to the possibility of a 1450-55 print, as this would be where Wave-c = Wave-a, as well as where the 61.8% fibo lies. However, given yesterday's strong hammer candle, followed by confirmation today, I think this scenario is unlikely.

The NYSE Advance/Decline numbers continue to diverge with the new trend highs in the SPX. Fewer stocks have been fueling the rally. In the past, this divergence has led to counter-trend moves. This is nice confirmation for my overall thesis.

Trade # 9: USD/JPY Short (update)

I last posted about this trade here. I have since canceled my order. I still think that the USD/JPY could drop further.


CNEH Update

I last posted about CNEH here. I think it is near another short term peak, and could correct to as low as $3.80.

On the 1-hr chart above, notice the clear 5-wave rally from the $2.75 low. I think this is Wave3 in the rally from the $1.61 low formed back in March, and now we should see Wave4 down.

Several indicators support this notion. First, there is MACD and RSI divergence, which is bearish. Second, the all-time high at $4.55 looms near and should act as resistance. Third, there are few catalysts remaining in the near-term that will continue to drive up price. Also, the fact that the price reacted rather midly to blow-out earnings on May 15th indicates that, on the short term, investors are pricing in the news beforehand.

$3.80 is the Wave-iv low and near the 38.2% fibo of the rally from $2.75-->$4.40. I think this should act as decent support.

Longer term, we may see a very significant rally. Since Wave3 and Wave1 are fairly equal in length, we could see an extended 5th wave rally. This could bring us into the $8 range. Time will tell.


Trade # 9: USD/JPY Short

I am placing an entry to short the USD/JPY @ 105.83, stop @ 106.08. If this trade is successful, I will trail my stop as price drops.

The bearish count is still valid, especially since the WaveA high was breached. This indicates that it cannot be labeled Wave1. However, WaveC is taking its time to complete, and appears primed to form a new trend high. The final upmove should be tempered by the trendline and 78.6% fibo.

The 1h chart shows that the decline from 105.70 was in 3-waves, indicating the ongoing correction was not complete. Now an impulsive wave has formed, with Wave-v about to start. My plan is to short as Wave-v finishes.

There are 4 layers of resistance in the 105.85 zone:

  • 105.89: Wave-v = Wave-i
  • 105.84: Approximate trendline region in 4-8 hrs time
  • 105.83: 78.6% fibo
  • 105.79: Weekly M4 pivot point

Thus, I am shorting @ 105.83 with a stop just above. I don't want to risk too much on this trade.


Trade # 8: USD/JPY Short (update)

Update @ 12:10am CDT: I closed out the trade for a +48 pip profit. I have canceled my secondary order as well.

It looks like the USD/JPY has formed 3-waves down from 105.58. I don't particularly like the strength of the rally, so while a profit exists, I will take it.


Trade # 8: USD/JPY Short (update)

Update @ 9:52am CDT: I moved my stop on this short trade to 103.72, locking in +15pips. This is just above Wave1, so it should hold as resistance. I still have a secondary order to short @ 104.45, stop @ 104.75.


Trade # 8: USD/JPY Short

I am short the USD/JPY @ 103.90, stop @ 104.15. I have a secondary order @ 104.50, stop @ 104.75. My target is at least 100.50.

USD/JPY Short potential (Update)

I last posted about the USD/JPY here. I am still expecting lower prices from here on out. If the trendline-breakout can hold on the daily chart, I will consider looking for a short entry.

You can see that price finally broke under the multi-week supporting trendline. I retested it succesfully, and then shot back down. I think this is very bearish, and since USD/JPY and SPX tend to correlate, it supports my view that the stock market will drop soon as well. As long as price closes below the trendline for the day, I will look to short.


Crude Oil Outlook (Update)

I last posted about crude oil here. Since then, a nice extended 5th wave rally has ensued. However, it may be near completion.

The chart above shows that Wave5 subdivided into 5-waves (extended). Since it is in Wave-v of Wave5, I am inclined to think that the rally is nearly over. The 1.618 extension of Wave1 (in percentage terms) would indicate a top at $98.96, so my plan here is to short with a stop above $100.


USD/JPY Short potential

The USD/JPY tends to follow SPX pretty closely. Since I think the stock market is fairly bearish, I took a look at the USD/JPY and saw that it too doesn't seem particularly strong.

The daily chart shows a leading diagonal (formed with the proper 5-3-5-3-5 pattern) followed by a shallow Wave2 correction. My guess is that Wave3 is now under way, of which Wave-i is complete and Wave-ii is nearly done. You can see that the 78.6% fibo is holding as resistance.

The 8-hour chart shows that the upward correction has been rather weak, forming in 3-wave ABC pattern (each of which subdivides into 3-waves). There is clear MACD and RSI divergence. If the SPX turns over strongly, it will take the USD/JPY with it, so I may consider shorting the USD/JPY on a break of the lower ascending trendline.

EUR/USD Bullish?

I was bearish on the EUR/USD here, but now the charts are telling me that there may be a rally in store.

This is the Daily chart that shows the Wave count from the 2005 low. Wave3 has finished and Wave4 is in progress. If you look back, you'd see that Wave2 was a simple 3-wave zig-zag. Since Wave2 and Wave4 typically alternate in structure, I wouldn't expect Wave 4 to be a zig-zag. Price bounced off the 38.2% retracement level pretty strongly, so I'm looking for a decent upmove. My guess is that there could be an irregular ABC correction at this point.

The 4-hour chart highlights the fact that the decline from 1.6018 has only been in 3-waves. I suppose a 5th wave could emerge if price stays below the Wave-a low, but given the MACD divergence, I think this is unlikely. Also, the strength and speed of the downmove convinced retailers to go short again. There are more shorts than longs at this point, which is bullish.

I may look to take a long trade in the near future.


Another bearish-looking chart (GOOG)

I noticed an interesting pattern on GOOG's chart today, and I think it may also be near a short to medium term top. I would consider shorting GOOG with a stop above $615 or so.

Back in December, it looks like GOOG finished its uptrend with an ending diagonal that could be a truncated 5th wave. Then, it started an impulse downtrend (i.e. in 5-waves). It has since retraced nearly 61.8% of that 5-wave move. This upward move could be counted in 5-waves, but I prefer the 3-wave perspective because Wave-a (412-->485) was in 3-waves.

A strong indicator for reversal is the "Dark Cloud Cover" candle pattern (circled). This highly reliable configuration occurs when the most recent candle opens above the previous candle's close, but then closes near the previous candle's open. Considering the higher volume, I am liking this setup for a short.


Why I'm bearish at the moment

As anyone reading this blog has guessed, I think stocks will drop some more. I believe a new trend low is possible from here.

The above chart shows an Elliot Wave count for the SPX, along with a chart of Advancing Issues. I think the rally from the January low is all part of an upward correction, as both up-legs are choppy. If a new bull market was starting, there would be a nice 5-wave up move to kick it off. WaveB seems to be forming as an irregular flat, where Wave-b undercuts the WaveA low, and Wave-c rallies above the Wave-a high.

The second indicator that points to a top is the Advancing issues chart. I first read about using this indicator at Carl Futia's blog. It shows the breadth of the market, i.e. whether the strength or weakness in the stock market is reflected across many or few stocks. Divergence occurs when the SPX makes a new trend high, but the Advancing issues chart does not. This indicates that the market is being propelled by fewer stocks, and that the move is probably not sustainable. You can see some other examples of divergences on the chart. Now, there is a fairly clear divergence forming, and I think this upmove is near an end.

Could AAPL's run be over?

My recent posts about tech being near a top haven't been too hot. See BIDU here, QQQQ here. Clearly, I have been going against the grain trying to call tops on these issues. I still believe they are near short term (if not not medium term) tops, but I have been early with my predictions.

Now I'll try calling another top. From it's $6.36 low in 2003, AAPL has increased by nearly 3200%, a 32-bagger. I'm going to go out on a limb and speculate that AAPL's run may be nearly over.

The chart above is the 10year chart with Weekly candles. There is a strikingly wave pattern from the $6.36 lows: we are in the 5th wave and final wave up. This fact alone tells me we are near a top.

The daily chart above is what makes me think $180-185 may be the last high we see for a while. The 5th wave seen on the Weekly chart has clearly subdivided into 5-waves. Thus, we are in the 5th of a 5th wave. It is possible for the long term 5th wave to be truncated, i.e. it doesn't break past the Wave3 top. As long as it subdivides into 5-waves, as we see here, truncation is a valid scenario.

The 1hr chart above shows the final evidence that we are closing in the on the top, where we can see the 5th of the 5th wave. The final wave in this run has also subdivided into 5-waves. Thus, to make it more confusing, the 5th of the 5th of the 5th wave is nearing completion.

This probably doesn't make too much sense to too many people. Essentially, since Elliot Waves are fractal, each long term wave breaks down into 5 medium term waves. The medium term waves also break down into 5 short term waves. My conclusion, therefore, is that we are close to a very significant top.

One caveat: the 5th wave on the Weekly chart could end up extending. If that were the case, we would like see a small correction at this point ($30-40), followed by a continuation of the uptrend into new highs. In order for this to happen, the correction from the $180-190 highs would have to occur in 3-waves.